As filed with the Securities and Exchange Commission on September 30, 1999.
File Nos.
811-7851
333-13601
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 4 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 (X)
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
DEBORAH R. GATZEK, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on December 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Prospectus
Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
CLASS A & C
INVESTMENT STRATEGY Growth & Income
DECEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
[insert page #] Information about the Underlying
Franklin Templeton Funds
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
THE FUNDS
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL Each fund's investment goal is the highest level of long-term total return
that is consistent with an acceptable level of risk. The following compares the
funds' levels of risk and return relative to one another.
CONSERVATIVE TARGET FUND is designed for investors seeking the highest level of
long-term total return that is consistent with a lower level of risk. This fund
may be most appropriate for investors with a shorter investment horizon.
MODERATE TARGET FUND is designed for investors seeking the highest level of
long-term total return that is consistent with a moderate level of risk. This
fund may be most appropriate for investors with an intermediate investment
horizon.
GROWTH TARGET FUND is designed for investors seeking the highest level of
long-term total return that is consistent with a higher level of risk. This fund
may be most appropriate for investors with a longer investment horizon.
[Begin callout]
The funds' assets are allocated among the broad asset classes of equity,
fixed-income and short-term investments through distinctly-weighted combinations
of Franklin Templeton mutual funds.
[End callout]
PRINCIPAL INVESTMENT STRATEGIES The manager allocates each fund's assets among
the broad asset classes of equity, fixed-income and short-term (e.g., money
market) investments by investing in a distinctly-weighted combination of
Franklin Templeton mutual funds ("underlying funds"). These underlying funds, in
turn, invest in a variety of U.S. and foreign equity, fixed-income and money
market securities. (See "Information about the Underlying Franklin Templeton
Funds.")
Following is a general guide the manager uses in allocating each of the fund's
assets among the broad asset classes. These percentages may be changed from time
to time by the funds' manager without the approval of shareholders.
SHORT-TERM FIXED-INCOME
INVESTMENTS EQUITY FUNDS FUNDS
- --------------------------------------------------------------------------------
Conservative Target Fund 20% 40% 40%
Moderate Target Fund 10% 55% 35%
Growth Target Fund 5% 80% 15%
When selecting equity funds, the manager considers the underlying funds' foreign
and domestic exposure, market capitalization ranges, and investment style
(growth vs. value). When selecting fixed-income funds, the manager's primary
focus is on obtaining a maximum amount of current income.
In evaluating the risk level of the underlying funds, the manager analyzes such
factors as: (a) relative and absolute performance, including correlations with
other underlying funds as well as corresponding benchmarks, and (b) their
volatility (the variability of returns from one period to the next).
The manager attempts to invest the assets of each fund in the same underlying
funds and will vary the underlying funds' allocation percentages based upon each
fund's risk/return level. No more than 25% of each fund's assets may be invested
in any one underlying fund, except that each of the funds may invest up to 50%
of its total assets in Franklin Short-Intermediate U.S. Government Securities
Fund and Franklin U.S. Government Securities Fund.
OTHER INVESTMENT STRATEGIES Each fund may invest up to 5% of its assets directly
in the types of securities in which the underlying funds may invest. The funds
may also engage directly in the types of investment strategies employed by the
underlying funds. The manager may invest in futures and related options for the
purpose of managing the desired effective asset allocation of the funds. In
addition, each fund may hedge its investments to protect the fund against a
decline in market value. No fund intends to commit more than 5% of its assets to
these investment strategies.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
it believes the securities trading markets or the economy are experiencing
excessive volatility or a prolonged general decline, or adverse conditions
exist. Each fund may invest up to 100% of its assets temporarily in the same
types of securities that the underlying funds may invest in for temporary
purposes. Under these circumstances, a fund may be unable to pursue its
investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
The value of an investment in a fund is based primarily on the performance of
and its allocation among the underlying funds. Because the prices of the
underlying funds' securities fluctuate with market conditions (the range of
fluctuation depends upon the types of securities an underlying fund owns and the
markets in which they trade), the value of your investment will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
ASSET ALLOCATION A fund's ability to achieve its investment goal depends upon
the manager's skill in determining the appropriate asset allocation mix. There
is the possibility that the manager's evaluations and assumptions regarding
asset classes and underlying funds will not successfully anticipate market
trends.
EQUITY FUNDS If a fund invests in an underlying stock fund, its returns will
fluctuate with changes in the stock market. Stocks and other equity securities
are subject to market risks (the chance that stock prices in general will
decline over short or even long periods; the stock market tends to be cyclical,
with periods when stock prices generally rise and periods when stock prices
generally decline) and fluctuations in value due to earnings, economic
conditions and other factors.
FIXED-INCOME FUNDS If a fund invests in an underlying bond fund, its returns
will fluctuate with changes in interest rates. When interest rates rise, debt
security prices fall. The opposite is also true: debt security prices rise when
interest rates fall. Other factors may affect the market price and yield of
income securities, including investor demand, changes in the financial condition
of issuers of securities, and domestic and worldwide economic conditions.
FUND OF FUNDS Because each fund pursues its goal by investing in other mutual
funds, rather than directly in individual securities, you will bear not only
your proportionate share of a fund's operating expenses, but also, indirectly,
the operating expenses of the underlying funds in which it invests.
DIVERSIFICATION Because they may invest in a limited number of mutual funds,
each of the funds is considered a non-diversified fund. That is, they may invest
a greater portion of their assets in the securities of one issuer than a
diversified fund. A fund may be more sensitive to economic, business, political
or other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of a fund's shares. The funds, however, intend
to meet certain tax diversification requirements.
DERIVATIVE SECURITIES Options and futures are considered derivative investments,
since their value depends on the value of the underlying asset to be purchased
or sold. The fund's investment in derivatives may involve a small investment
relative to the amount of risk assumed. To the extent the fund enters into these
transactions, their success will depend on the manager's ability to predict
market movements.
More detailed information about the funds and their policies can be found in the
funds' Statement of Additional Information (SAI). More detailed information
about the underlying funds and their associated risks may be found under
"Information about the Underlying Franklin Templeton Funds" in this prospectus
and in the SAI.
[Begin callout]
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.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
The bar charts and tables show the volatility of each fund's returns, which is
one indicator of the risks of investing in a fund. The bar charts show changes
in each fund's returns from year to year over the past 3 calendar years. The
tables show how each fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CONSERVATIVE TARGET FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
11.55% 2.98%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q2 '97 5.85%
WORST QUARTER:
Q3 '98 -5.38%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (12/31/96)
- ----------------------------------------------------------------
Franklin Templeton Conservative
Target Fund - Class A 2 -2.91% 4.05%
S&P 500 Index 3 28.58% 30.95%
Lehman Brothers
Government/Corporate Bond Index 4 9.47% 9.62%
MSCI EAFE (Net Dividends) 5 20.00% 10.51%
U.S. Treasury Bills 6 5.36% 5.33%
SINCE
INCEPTION
1 YEAR (12/31/96)
- ----------------------------------------------------------------
Franklin Templeton Conservative
Target Fund - Class C 2 0.17% 5.69%
S&P 500 Index 3 28.58% 30.95%
Lehman Brothers
Government/Corporate Bond Index 4 9.47% 9.62%
MSCI EAFE (Net Dividends) 5 20.00% 10.51%
U.S. Treasury Bills 6 5.36% 5.33%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1999, the fund's year-to-date return was x.xx% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged index of fixed-rate U.S.
government and foreign and domestic corporate bonds that are rated investment
grade or higher and have maturities of one year or more and at least $50 million
outstanding. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
5. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Europe
Australia/Asia Far East (EAFE) Index tracks the performance of approximately
1000 securities in 20 countries. It includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the fund's
portfolio.
6. Source: Standard & Poor's(R) Micropal. The Payden & Rygel United States 90
day Treasury Bill is a total return index based on a constant maturity
instrument. Payden&Rygel includes both accrued interest and change in market
price in its monthly total return calculations. End of month yield levels are
obtained from the Federal Reserve H15 publication and used to calculate change
in price. One cannot invest directly in an index, nor is an index representative
of the fund's portfolio.
MODERATE TARGET FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
14.28% 0.15%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q2 '97 7.27%
WORST QUARTER:
Q3 '98 -10.19%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (12/31/96)
- -----------------------------------------------------------
Franklin Templeton Moderate
Target Fund - Class A 2 -5.58% 3.86%
S&P 500 Index 3 28.58% 30.95%
Lehman Brothers
Government/Corporate Bond Index 4 9.47% 9.62%
MSCI EAFE (Net Dividends) 5 20.00% 10.51%
U.S. Treasury Bills 6 5.36% 5.33%
SINCE
INCEPTION
1 YEAR (12/31/96)
- -----------------------------------------------------------
Franklin Templeton Moderate
Target Fund - Class C 2 -2.75% 5.31%
S&P 500 Index 3 28.58% 30.95%
Lehman Brothers
Government/Corporate Bond Index 4 9.47% 9.62%
MSCI EAFE (Net Dividends) 5 20.00% 10.51%
U.S. Treasury Bills 6 5.36% 5.33%
1. Figures do not reflect sales charges. If they did, returns would be lower. As
of September 30, 1999, the fund's year-to-date return was x.xx% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged index of fixed-rate U.S.
government and foreign and domestic corporate bonds that are rated investment
grade or higher and have maturities of one year or more and at least $50 million
outstanding. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
5. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Europe
Australia/Asia Far East (EAFE) Index tracks the performance of approximately
1000 securities in 20 countries. It includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the fund's
portfolio.
6. Source: Standard & Poor's(R) Micropal. The Payden & Rygel United States 90
day Treasury Bill is a total return index based on a constant maturity
instrument. Payden&Rygel includes both accrued interest and change in market
price in its monthly total return calculations. End of month yield levels are
obtained from the Federal Reserve H15 publication and used to calculate change
in price. One cannot invest directly in an index, nor is an index representative
of the fund's portfolio.
GROWTH TARGET FUND - CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
13.05% -0.11%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q2 '97 8.42%
WORST QUARTER:
Q3 '98 -12.57%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (12/31/96)
- -----------------------------------------------------------
Franklin Templeton Growth
Target Fund - Class A 2 -5.84% 3.17%
S&P 500 Index 3 28.58% 30.95%
Lehman Brothers
Government/Corporate Bond Index 4 9.47% 9.62%
MSCI EAFE (Net Dividends)5 20.00% 10.51%
U.S. Treasury Bills 6 5.36% 5.33%
SINCE
INCEPTION
1 YEAR (12/31/96)
- -----------------------------------------------------------
Franklin Templeton Growth
Target Fund - Class C 2 -2.72% 5.07%
S&P 500 Index 3 28.58% 30.95%
Lehman Brothers
Government/Corporate Bond Index 4 9.47% 9.62%
MSCI EAFE (Net Dividends 5 20.00% 10.51%
U.S. Treasury Bills 6 5.36% 5.33%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 1999, the fund's year-to-date return was x.xx% for Class
A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The Lehman Brothers
Government/Corporate Bond Index is an unmanaged index of fixed-rate U.S.
government and foreign and domestic corporate bonds that are rated investment
grade or higher and have maturities of one year or more and at least $50 million
outstanding. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
5. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Europe
Australia/Asia Far East (EAFE) Index tracks the performance of approximately
1000 securities in 20 countries. It includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the fund's
portfolio.
6. Source: Standard & Poor's(R) Micropal. The Payden & Rygel United States 90
day Treasury Bill is a total return index based on a constant maturity
instrument. Payden&Rygel includes both accrued interest and change in market
price in its monthly total return calculations. End of month yield levels are
obtained from the Federal Reserve H15 publication and used to calculate change
in price. One cannot invest directly in an index, nor is an index representative
of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of a fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS C 1
- ------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 1.99%
Load imposed on purchases 5.75% 1.00%
Maximum deferred sales charge (load) None 2 0.99% 3
Exchange fee 4 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
Conservative Moderate Growth
Target Target Target
Fund Fund Fund
- ----------------------------------------------------------
CLASS A 1
Asset allocation
fees 0.25% 0.25% 0.25%
Distribution and
service
(12b-1) fees 0.25% 0.25% 0.25%
Other expenses 0.34% 0.36% 0.36%
Management fees
of the underlying
investments 0.38% 0.41% 0.46%
Other expenses of
the underlying
investments 0.26% 0.27% 0.31%
------------------------------------
Total annual fund
operating expenses 1.48% 1.54% 1.63%
====================================
Sweep money
fund management
fee waiver -0.01% -0.01% 0.00%
------------------------------------
Net annual fund
operating expenses 1.47% 5 1.53% 6 1.63% 7
====================================
Conservative Moderate Growth
Target Target Target
Fund Fund Fund
- ----------------------------------------------------------
CLASS C 1
Asset allocation
fees 0.25% 0.25% 0.25%
Distribution and
service
(12b-1) fees 1.00% 1.00% 1.00%
Other expenses 0.34% 0.36% 0.36%
Management fees
of the underlying
investments 0.38% 0.41% 0.46%
Other expenses of
the underlying
investments 0.26% 0.27% 0.31%
------------------------------------
Total annual fund
operating expenses 2.23% 2.29% 2.38%
====================================
Sweep money
fund management
fee waiver -0.01% -0.01% 0.00%
------------------------------------
Net annual fund
operating expenses 2.22% 5 2.28%6 2.38% 7
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page [#])and purchases by
certain retirement plans without an initial sales charge.
3. This is equivalent to a charge of 1% based on net asset value.
4. This fee is only for market timers (see page [#]).
5. For the fiscal year ended July 31, 1999, the manager had agreed in advance to
waive its fees. The manager also agreed to reduce its fees to reflect reduced
services resulting from the fund's investment in the Sweep Money Fund. With this
reduction, management (administration) fees were 0.16% and net annual fund
operating expenses were 0.75% and 1.50% for Class A and Class C, respectively.
6. For the fiscal year ended July 31, 1999, the manager had agreed in advance to
reduce its fees to reflect reduced services resulting from the fund's investment
in the Sweep Money Fund.
7. For the fiscal year ended July 31, 1999, the manager had agreed in advance to
waive its fees. With this reduction, management (administration) fees were 0.14%
and net annual fund operating expenses were 0.75% and 1.50% for Class A and
Class C, respectively.
EXAMPLE
This example can help you compare the cost of investing in a fund with the cost
of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
Conservative Moderate Growth
Target Target Target
Fund Fund Fund
- -------------------------------------------------------
CLASS A
1 Year 1 716 722 731
3 Years 1,013 1,031 1,060
5 Years 1,332 1,361 1,411
10 Years 2,231 2,294 2,397
CLASS C
1 Year 2 422 428 438
3 Years 787 805 835
5 Years 1,278 1,308 1,358
10 Years 2,629 2,689 2,789
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment in the Conservative Target Fund, Moderate
Target Fund and Growth Target Fund, your costs would be $323, $329 and $339,
respectively, if you did not sell your shares at the end of the first year. Your
costs for the remaining periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is each fund's investment manager. Together, Advisers and its affiliates
manage over $225 billion in assets.
The fund's lead portfolio manager responsible for each fund's management is:
MARK BOYADJIAN CFA, Portfolio manager of ADVISERS
Mr. Boyadjian has been a manager of the fund since 1999. He joined the Franklin
Templeton Group in 1998. Previously, he was a portfolio manager for Scudder,
Stevens & Clark.
INVESTMENT ADVISORY AND ASSET ALLOCATION AGREEMENT Under the investment advisory
and asset allocation agreement, the manager provides general advisory services.
Such services include monitoring the underlying Franklin Templeton funds in
order to determine whether they are investing their assets in a manner that is
consistent with the asset classes targeted for investment for each fund by the
manager. The manager also provides asset allocation advice and administrative
services to each fund under the investment advisory and asset allocation
agreement. While the manager provides general investment advisory and
administrative services to each fund without charge, it provides asset
allocation services to each fund for a monthly fee equivalent to an annual rate
of 0.25% of the average daily net assets of each fund. The fee is computed at
the close of business on the last business day of each month.
ASSET ALLOCATION FEES During the fiscal year ended July 31, 1999, asset
allocation fees, before any advance waiver, totaled 0.25% of the average monthly
net assets of each fund. Total direct operating expenses were 0.83% for
Conservative Target Fund - Class A, 1.58% for Conservative Target Fund - Class
C, 0.85% for Moderate Target Fund - Class A, 1.60% for Moderate Target Fund -
Class C, 0.86% for Growth Target Fund - Class A and 1.61% for Growth Target Fund
- - Class C. Under an agreement by the manager to limit its fees and to reduce its
fees to reflect reduced services resulting from the Conservative Target fund's
investment in a Franklin Templeton money fund, the fund paid 0.16% of its
average net assets to the manager. und paid 0.14% of its average net assets to
the manager. The manager may end this arrangement at any time upon notice to the
fund's Board of Trustees.The manager, however, is required by the fund's Board
of Trustees and an order by the Securities and Exchange Commission to reduce its
fees if the fund invests in a Franklin Templeton money fund.
Each fund, as a shareholder in the underlying Franklin Templeton funds, will
indirectly bear its proportionate share of any management fees and other
expenses paid by the underlying Franklin Templeton funds. The investment manager
and the management fee of each of the underlying Franklin Templeton funds (as an
annual percentage rate of the fund's net assets) are set forth below:
<TABLE>
<CAPTION>
UNDERLYING FRANKLIN TEMPLETON FUND MANAGER FEE RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Franklin Advisers, Inc. ("Advisers") 0.625% 1
Growth Advisers 0.625% 2
Utilities Advisers 0.625% 2
Small Cap Advisers 0.625% 3
Value Franklin Advisory Services, Inc. 0.750% 4
("Advisory Services")
Real Estate Advisers 0.625% 3
Mutual Shares Franklin Mutual Advisers, Inc. 0.60%
("Franklin Mutual")
Discovery Franklin Mutual 0.80%
European Franklin Mutual 0.80%
Aggressive Growth Advisers 0.50% 5
Large Cap Growth Advisers 0.50% 5
Bond Fund Advisers; TICI (sub-adviser) 0.425% 6,*
Short-Intermediate Advisers 0.625% 1
Government Securities Advisers 0.625% 2
AGE Advisers 0.625% 1
Templeton Foreign Templeton Global Advisors Limited 0.75% 7
("TGAL")
Developing Markets Templeton Asset Management Ltd. - 1.25%
Hong Kong Branch
Smaller Companies Templeton Investment Counsel, Inc. 0.75%
("TICI")
Foreign Smaller Advisers; TICI (sub-adviser) 1.00% 8,*
International TGAL 0.75%
Pacific Growth Advisers; TICI (sub-adviser) 1.00% 8,*
Latin America TGAL 1.25%
Hard Currency Advisers; TICI (sub-adviser) 0.65%*
Global Bond TICI 0.50% 9
Global Government Advisers; TICI (sub-adviser) 0.625% 1,*
Gold Advisers 0.625% 1
Natural Resources Advisers 0.625% 3
Strategic Income Advisers; TICI (sub-adviser) 0.625% 1,*
</TABLE>
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. .40% of the value of net assets over $500 million up to and including $1
billion; .35% of the value of net assets over $1 billion up to and including
$1.5 billion; .30% of the value of net assets over $1.5 billion up to and
including $6.5 billion; .275% of the value of net assets over $6.5 billion up to
and including $11.5 billion; .25% of the value of net assets over $11.5 billion
up to and including $16.5 billion; .24% of the value of net assets over $16.5
billion up to and including $19 billion; .23% of the value of net assets over
$19 billion up to and including $21.5 billion; and .22% of the value of net
assets in excess of $21.5 billion.
6. .425% of the value of its average daily net assets up to and including $500
million; .325% of the value of its average daily net assets over $500 million up
to and including $1 billion; and .280% of the value of its average daily net
assets over $1 billion up to and including $1.5 billion; and .235% of the value
of its average daily net assets over $1.5 billion up to and including $6.5
billion; .215% of the value of its average daily net assets over $6.5 billion up
to and including $11.5 billion; and .200% of the value of its average daily net
assets over $11.5 billion up to and including $16.5 billion; and .190% of the
value of its average daily net assets over $16.5 billion up to and including $19
billion; .180% of the value of its average daily net assets over $19 billion up
to and including $21.5 billion; and .170% of the value of its average daily net
assets over $21.5 billion.
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
Franklin Templeton funds to Advisers. As to Foreign Smaller and Pacific Growth,
TICI receives from Advisers a fee equal to an annual rate of the value of each
fund's average daily net assets as follows: .50% of such assets up to $100
million; .40% of such assets over $100 million up through $250 million; .30% of
such assets over $250 million up through $500 million; and .25% of such assets
over $500 million. As to Hard Currency, TICI receives from Advisers a fee equal
to an annual rate of .25% of the value of each fund's average daily net assets.
As to Global Government, TICI receives from Advisers a fee equal to an annual
rate of the value of the fund's assets as follows: .35% of such assets up to
$100 million; .25% of such assets over $100 million up through $250 million; and
.20% of such assets over $250 million. As to Bond Fund, TICI receives 25% of the
investment advisory fee paid to Advisers by the fund.
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide network
of computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a leap year may
create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the funds'
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker-dealers or foreign markets are not ready for
Year 2000.
The funds' manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the funds' ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the funds and their manager may have no control.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund intends to pay a dividend at
least quarterly representing its net investment income. Capital gains, if any,
may be distributed annually. The amount of these distributions will vary and
there is no guarantee the funds will pay dividends.
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains a fund distributes are taxable to you as long-term capital gains no matter
how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends on your marginal tax rate and on how
long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult your tax advisor about
the federal, state, local or foreign tax consequences of your investment in a
fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents each fund's financial performance since their inception.
This information has been audited by PricewaterhouseCoopers LLP.
CONSERVATIVE TARGET FUND
CLASS A YEAR ENDED JULY 31,
- ---------------------------------------------------------------------------
1999 4 1998 1997 3
- ---------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 11.00 10.87 10.00
-----------------------------------
Net investment income .41 .39 .12
Net realized and unrealized
gains (.08) .18 .80
-----------------------------------
Total from investment operations .33 .57 .92
-----------------------------------
Distributions from net
investment income (.41) (.38) (.05)
Distributions from net
realized gains (.19) (.06)
-----------------------------------
Total distributions (.60) (.44) (.05)
-----------------------------------
Net asset value, end of year 10.73 11.00 10.87
===================================
Total return (%) 1 3.23 5.41 9.21
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 14,850 11,637 1,609
Ratios to average net
assets: (%)
Expenses .75 .76 .59 2
Expenses excluding waiver
and payments by affiliate .83 1.07 3.64 2
Net investment income 3.83 3.88 3.93 2
Portfolio turnover rate (%) 218.87 141.96 33.30
CONSERVATIVE TARGET FUND
CLASS C
- ---------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.92 10.81 10.00
-----------------------------------
Net investment income .33 .33 .10
Net realized and unrealized
gains (losses) (.08) .15 .75
-----------------------------------
Total from investment operations
.25 .48 .85
-----------------------------------
Distributions from net
investment income (.33) (.31) (.04)
Distributions from net
realized gains (.19) (.06) --
-----------------------------------
Total distributions (.52) (.37) (.04)
-----------------------------------
Net asset value, end of year 10.65 10.92 10.81
===================================
Total return (%) 1 2.49 4.56 8.48
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 10,611 10,218 3,010
Ratios to average net
assets: (%)
Expenses 1.50 1.50 1.48 2
Expenses excluding waiver and
payments by affiliate 1.58 1.81 4.53 2
Net investment income 3.13 3.27 3.04 2
Portfolio turnover rate (%) 218.87 141.96 33.30
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period December 31, 1996 (effective date) to July 31, 1997.
4. Based on average shares outstanding.
MODERATE TARGET GROWTH
CLASS A YEAR ENDED JULY 31,
- ---------------------------------------------------------------------------
1999 4 1998 1997 3
- ---------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.77 11.26 10.00
-----------------------------------
Net investment income .33 .37 .17
Net realized and unrealized
gains (losses) (.17) .01 1.13
-----------------------------------
Total from investment operations
.16 .38 1.30
-----------------------------------
Distributions from net
investment income (.31) (.38) (.04)
Distributions from net
realized gains (.18) (.49) --
-----------------------------------
Total distributions (.49) (.87) (.04)
-----------------------------------
Net asset value, end of year 10.44 10.77 11.26
===================================
Total return (%) 1 1.74 3.71 13.05
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 28,694 23,028 6,498
Ratios to average net
assets: (%)
Expenses .85 .77 .67 2
Expenses excluding waiver and
payments by affiliate .85 .94 1.26 2
Net investment income 3.23 3.37 2.69 2
Portfolio turnover rate (%) 202.78 124.87 264.78
MODERATE TARGET FUND
CLASS C
- ---------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.65 11.16 10.00
-----------------------------------
Net investment income .25 .30 .07
Net realized and unrealized
gains (losses) (.17) -- 1.11
-----------------------------------
Total from investment operations
.08 .30 1.18
-----------------------------------
Distributions from net
investment income (.24) (.32) (.02)
Distributions from net
realized gains (.18) (.49) --
-----------------------------------
Total distributions (.42) (.81) (.02)
-----------------------------------
Net asset value, end of year 10.31 10.65 11.16
===================================
Total return (%) 1 .88 2.98 11.84
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 24,419 19,501 4,695
Ratios to average net
assets: (%)
Expenses 1.60 1.50 1.50 2
Expenses excluding waiver and
payments by affiliate 1.60 1.68 2.09 2
Net investment income 2.51 2.75 1.86 2
Portfolio turnover rate (%) 202.78 124.87 264.78
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period December 31, 1996 (effective date) to July 31, 1997.
4. Based on average shares outstanding.
GROWTH TARGET FUND
CLASS A YEAR ENDED JULY 31,
- ---------------------------------------------------------------------------
1999 4 1998 1997 3
- ---------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 11.16 11.33 10.00
-----------------------------------
Net investment income .28 .33 .05
Net realized and unrealized
gains .11 (.05) 1.28
-----------------------------------
Total from investment operations
.39 .28 1.33
-----------------------------------
Distributions from net
investment income (.25) (.30) --
Distributions from net
realized gains (.29) (.15) --
-----------------------------------
Total distributions (.54) (.45) --
-----------------------------------
Net asset value, end of year 11.01 11.16 11.33
===================================
Total return (%) 1 3.91 2.63 13.30
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 40,839 27,042 9,638
Ratios to average net
assets: (%)
Expenses .75 .75 .73 2
Expenses excluding waiver and
payments by affiliate .86 .98 2.19 2
Net investment income 2.61 2.80 2.65 2
Portfolio turnover rate (%) 207.65 118.19 65.52
GROWTH TARGET FUND
CLASS C
- ---------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 11.08 11.30 10.00
-----------------------------------
Net investment income .21 .24 .04
Net realized and unrealized
gains (losses) .10 (.05) 1.26
-----------------------------------
Total from investment operations
.31 .19 1.30
-----------------------------------
Distributions from net
investment income (.18) (.26) --
Distributions from net
realized gains (.29) (.15) --
-----------------------------------
Total distributions (.47) (.41) --
-----------------------------------
Net asset value, end of year 10.92 11.08 11.30
===================================
Total return (%) 1 3.12 1.84 13.00
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 21,902 20,752 4,733
Ratios to average net
assets: (%)
Expenses 1.50 1.50 1.49 2
Expenses excluding waiver and
payments by affiliate 1.61 1.73 2.95 2
Net investment income 2.00 1.97 1.89 2
Portfolio turnover rate (%) 207.65 118.19 65.52
1. Total return does not include sales charges, and is not annualized.
2. Annualized.
3. For the period December 31, 1996 (effective date) to July 31, 1997.
4. Based on average shares outstanding.
INFORMATION ABOUT THE UNDERLYING FRANKLIN TEMPLETON FUNDS
The following briefly describes the investment goals and strategies of the
underlying Franklin Templeton funds. The manager may recommend additional
underlying funds for investment (without the approval of shareholders).
UNDERLYING EQUITY FUNDS
FRANKLIN AGGRESSIVE GROWTH FUND - The fund seeks capital appreciation by
investing primarily in equity securities of companies demonstrating accelerating
growth, increasing profitability, or above-average growth or growth potential as
compared with the overall economy. The fund expects to have significant
positions in particular sectors including, for example, technology, health care,
consumer products, and consumer services.
FRANKLIN EQUITY FUND - The fund principally seeks capital appreciation;
secondarily it seeks to provide current income return through the receipt of
dividends or interest from its investments. The fund invests primarily in equity
securities of companies that trade on a securities exchange or in the
over-the-counter market. The manager focuses on companies it believes have
strong future growth prospects and whose securities are undervalued relative to
those growth prospects.
FRANKLIN GOLD FUND - The fund principally seeks capital appreciation;
secondarily it seeks to provide current income through dividends or interest
received from its investments. The fund invests primarily in equity securities
of companies that mine, process, or deal in gold, including gold mining finance
companies as well as operating companies with long-, medium-, or short-life
mines.
FRANKLIN GROWTH FUND - The fund seeks capital appreciation by investing
primarily in the equity securities of companies that are leaders in their
industries. In selecting securities, the manager considers factors such as
historical and potential growth in revenues and earnings; assessment of strength
and quality of management; and determination of a company's strategic
positioning in its industry, among others. The manager considers the tax
consequences of its investment decisions, including capital gains or income that
may result in taxable distributions to shareholders.
FRANKLIN LARGE CAP GROWTH FUND - The fund seeks long-term capital appreciation
by investing at least 80% of its total assets in equity securities of large cap
growth companies located in the U.S. For purposes of the fund's investments,
large cap growth COMPANIES include well-established companies with a market
capitalization of $8.5 billion or more that are expected to have revenue growth
in excess of the economy as a whole either through above-average industry
expansion or market share gains. The fund expects to have significant positions
in the technology, health care and financial services industries.
FRANKLIN NATURAL REOURCES FUND - The fund seeks to provide high total return by
investing primarily in the equity and debt securities of U.S. and foreign
companies in the natural resources sector. For the fund" investment purposes,
the natural resources sector includes companies that own, produce, refine,
process, and market natural resources and companies that provide related
services. The sector includes the following industries: integrated oil, oil and
gas exploration and production, gold and other 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.
FRANKLIN REAL ESTATE SECURITIES FUND - The fund seeks to maximize total return
by investing primarily in equity securities of companies operating in the real
estate industry. For purposes of the fund's investments, companies operating in
the real estate induSTRY include: those qualifying as real estate investment
trusts (REITs) for federal income tax purposes; and those that have at least 50%
of their assets or revenues attributable to the ownership, construction,
management or sale of residential, commercial or industrial real estate (such as
homebuilders and developers).
FRANKLIN SMALL CAP GROWTH FUND - The fund seeks long-term capital growth by
investing primarily in equity securities of small cap growth companies. For
purposes of the fund's investments, small cap growth companies generally include
companies that have market capitalization of less than $1.5 billion at the time
of the fund's investments that the manager believes are positioned for rapid
growth in revenues or earnings and assets.
FRANKLIN UTILITIES FUND - The fund seeks capital appreciation and current income
by investing substantially all of its assets in the equity securities of public
utilities companies. These are companies that provide electricity, natural gas,
water, and communications services to the public and companies that provide
services to public utilities companies. The manager expects that more than 50%
of the fund's assets will be invested in electric utility securities.
FRANKLIN VALUE FUND - The fund seeks to attain long-term total return by
investing primarily in the equity securities of companies that the manager
believes are undervalued. In choosing investments that are undervalued, the
manager focuses on companies that have: low price to earnings ratio relative to
the market, including industry group or earnings growth; low price relative to
book value or cash flow; or suffered sharp price declines but in the manager's
opinion still have significant potential ("fallen angels"). In addition, the
fund may consider a variety of other factors, such as ownership of valuable
franchises, trademarks or trade names, control of distribution networks and
market share for particular products, and other factors that may identify the
issuer as a potential turnaround candidate or takeover target.
MUTUAL DISCOVERY FUND - The fund seeks capital appreciation by investing
primarily in equity securities of companies that the manager believes are
available at prices less than their actual value based on certain recognized or
objective criteria (intrinsic value). Following this value-oriented strategy,
the fund invests primarily in undervalued stocks, reorganizing companies and
distressed companies. The fund may invest most of its assets in foreign
securities and generally invests a substantial portion of its assets in
securities of companies with smaller market capitalization values.
MUTUAL EUROPEAN FUND - The fund principally seeks capital appreciation, which
may occasionally be short-term; its secondary goal is income. The fund invests
primarily in foreign equity securities of companies located in European
countries that the manager believes are available at prices less than their
actual value based on certain recognized or objective criteria (intrinsic
value). Following this value-oriented strategy, the fund invests primarily in
undervalued stocks, reorganizing companies and distressed companies. 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.
MUTUAL SHARES FUND - The fund principally seeks capital appreciation, which may
occasionally be short-term; its secondary goal is income. The fund invests
primarily in domestic and foreign equity securities of companies that the
manager believes are available at prices less than their actual value based on
certain recognized or objective criteria (intrinsic value). Following this
value-oriented strategy, the fund invests primarily in undervalued stocks,
reorganizing companies and distressed companies.
TEMPLETON DEVELOPING MARKETS TRUST - The fund seeks long-term capital
appreciation by investing primarily in equity securities of developing or
emerging market issuers. For purposes of the fund's investments, developing or
emerging market countries include: countries that are generally considered low
or middle income countries by the World Bank and the International Finance
Corporation; or countries that are classified by the United Nations or otherwise
regarded by their authorities as developing; or countries with a stock market
capitalization of less than 3% of the Morgan Stanley Capital International World
Index.
TEMPLETON FOREIGN FUND - The fund seeks long-term capital growth by investing
primarily in the equity securities of companies located outside the U.S.,
including in emerging markets.
TEMPLETON FOREIGN SMALLER COMPANIES FUND - The fund seeks long-term capital
growth by investing primarily in equity securities of smaller companies located
outside the U.S., including in emerging markets. Smaller companies generally are
those with market capitalizations of less than $1 billion.
TEMPLETON GLOBAL SMALLER COMPANIES FUND - The fund seeks long-term capital
growth by investing primarily in the equity securities of smaller companies
located anywhere in the world, including emerging markets. For purposes of this
fund's investments, smaller companies generally are those with market
capitalizations that would place them in the lowest 20% size class of companies
whose equity securities are listed on a U.S. securities exchange or traded on
the National Association of Securities Dealers Automated Quotations (NASDAQ)
system. Based upon recent U.S. share prices, these companies typically have
market capitalizations of between $50 million and $1 billion.
TEMPLETON INTERNATIONAL FUND - The fund seeks long-term capital appreciation by
investing primarily in the equity securities of companies located in any
developed country outside the U.S. The manager will consider for investment
companies located in the following areas: Western Europe, Australia, Canada, New
Zealand, Hong Kong, Japan and Singapore.
TEMPLETON LATIN AMERICA FUND - The fund seeks long-term capital appreciation by
investing primarily in the equity and debt securities of Latin American
companies. For purposes of the fund's investments, Latin American countries
include Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba,
Ecuador, El Salvador, French Guyana, Guatemala, Guyana, Honduras, Mexico,
Nicaragua, Panama, Paraguay, Peru, Surinam, Trinidad/Tobago, Uruguay and
Venezuela. The fund may make significant investments in securities of issuers
located in Brazil and Mexico.
TEMPLETON PACIFIC GROWTH FUND - The fund seeks long-term capital growth by
investing primarily in equity securities that trade on Pacific Rim markets and
are issued by companies that have their principal activities in the Pacific Rim.
For purposes of the fund's investments, Pacific Rim countries include Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea and Thailand.
UNDERLYING FIXED-INCOME FUNDS
FRANKLIN'S AGE HIGH INCOME FUND - The fund principally seeks to earn a high
level of income; its secondary goal is to seek capital appreciation to the
extent it is possible and consistent with the fund's principal goal. The fund
invests primarily in high yield, lower rated debt securities. Companies that
issue high yield debt securities often: lack the financial strength needed to
receive an "investment grade" rating; do not have the track record needed to
receive an investment grade rating (including companies in relatively new
industries such as the telecommunications sector); have borrowed to finance
acquisitions or to expand their operations; are seeking to refinance their debt
at lower rates; or have been downgraded due to financial difficulties.
Investment grade debt securities are issues rated in the top four rating
categories by independent rating agencies such as Standard & Poor's Corporation
or Moody's Investors Services, Inc.
FRANKLIN BOND FUND - The fund principally seeks to provide a high level of
current income consistent with the preservation of capital; secondarily it seeks
capital appreciation over the long term. The fund invests primarily in
investment grade fixed-income securities from various market sectors. The fund
focuses on government and corporate debt securities and mortgage and
asset-backed securities.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - The fund seeks to provide high current
income, consistent with preservation of capital, with capital appreciation as a
secondary consideration. The fund invests primarily in government securities of
at least 3 different countries, one of which may be the United States.
Government securities include fixed-income securities issued or guaranteed by
domestic and foreign governments and their political subdivisions. The fund
invests principally within Australia, Canada, Japan, New Zealand, the U.S. and
Western Europe.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND - The fund seeks to
provide as high a level of current income as is consistent with prudent
investing while seeking preservation of shareholder's capital. The fund invests
primarily in U.S. government securities, which include obligations either issued
or guaranteed by the U.S. government and its agencies or instrumentalities. In
addition to direct obligations of the U.S. Treasury, the fund invests in U.S.
government agency securities, including mortgage-backed securities. The fund
normally maintains the average dollar-weighted maturity of its portfolio in a
range of two to five years; it emphasizes an average dollar-weighted maturity of
3 1/2 years or less.
FRANKLIN STRATEGIC INCOME FUND - The fund principally seeks to earn a high level
of current income; secondarily it seeks capital appreciation over the long-term.
The fund invests primarily in U.S. and foreign debt securities. The fund shifts
its investments among the following general asset classes: high yield corporate
bonds and preferred stock; emerging market bonds; international bonds;
convertible securities, including bonds and preferred stocks; mortgage
securities and other asset-backed securities; U.S. government bonds.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND - The fund seeks income by investing in
a portfolio limited to U.S. government securities. These include U.S. Treasury
bonds, notes and bills, U.S. Treasury STRIPS and securities issued by U.S.
government agencies. Other than investments in short-term government securities
and cash, substantially all of the fund's investments are currently held in
Government National Mortgage Association obligations (Ginnie Maes).
FRANKLIN TEMPLETON HARD CURRENCY FUND - The fund seeks to protect against
depreciation of the U.S. dollar relative to other currencies by investing
primarily in high-quality, short-term money market instruments denominated in
foreign major currencies that historically have experienced low rates of
inflation and, in the manager's opinion, follow economic policies favorable to
continued low inflation rates and currency appreciation versus the U.S. dollar
over the long-term. The fund tries to expose 100% of its net assets to foreign
currencies; but will not expose more than 50% of its total assets to any one
foreign currency. Major currencies include the Australian dollar, Belgian franc,
British pound sterling, Canadian dollar, Danish krone, Netherlands guilder, the
euro, French franc, German mark, Greek drachma, Irish punt, Italian lira,
Japanese yen, New Zealand dollar, Norwegian krona, Spanish peseta, Swedish
krona, Swiss franc and U.S. dollar.
TEMPLETON GLOBAL BOND FUND - The fund seeks current income with capital
appreciation and growth of income. The fund invests primarily in the debt
securities of companies, governments and government agencies located anywhere in
the world. While the fund may buy securities rated in any category, it focuses
on "investment grade" debt securities. These are issues rated in the top four
rating categories by independent rating agencies such as Standard & Poor's
Corporation or Moody's Investors Services, Inc.
RISKS OF INVESTING IN THE UNDERLYING FRANKLIN TEMPLETON FUNDS
The following sections describe some of the risks associated with certain of the
underlying Franklin Templeton funds.
STOCKS While this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies, industries or the
securities market as a whole.
SMALLER COMPANIES Investing in securities of small companies may involve greater
risk than investing in large company securities.
Historically, small company securities have been more volatile in price than
large company securities, especially over the short-term. Among the reasons for
the greater price volatility are the less certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such securities, and
the greater sensitivity of smaller companies to changing economic conditions.
In addition, these companies may lack depth of management, they may be unable to
generate funds necessary for growth or development, or they may be developing or
marketing new products or services for which markets are not yet established and
may never become established.
Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and should be considered speculative.
FIXED INCOME SECURITIES
INTEREST RATE. When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities are more sensitive to these price changes.
INCOME. Since an underlying fund can only distribute what it earns, its
distributions to shareholders may decline when interest rates fall.
CREDIT. There is the possibility that an issuer will be unable to make interest
payments and repay principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value and, thus, impact an
underlying fund's performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds," generally have more credit risk than higher-rated
securities.
Companies issuing high yield, fixed-income securities are not as strong
financially as those issuing securities with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained period
of rising interest rates, that could affect their ability to make interest and
principal payments. If an issuer stops making interest and/or principal
payments, payments on the securities may never resume. These securities may be
worthless and an underlying fund could lose its entire investment.
The prices of high yield, fixed-income securities fluctuate more than
higher-quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
rating agencies. Prices often are closely linked with the company's stock prices
and typically rise and fall in response to factors that affect stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, stock market activity,
large sustained sales by major investors, a high-profile default, or other
factors.
High yield securities generally are less liquid than higher-quality securities.
Many of these securities do not trade frequently, and when they do their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the underlying fund's ability to sell securities in response to specific
economic events or to meet redemption requests.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Mortgage securities differ from
conventional debt securities because principal is paid back over the life of the
security rather than at maturity. The underlying fund may receive unscheduled
prepayments of principal before the security's maturity date due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans. To the
underlying fund this means a loss of anticipated interest, and a portion of its
principal investment represented by any premium the fund may have paid. Mortgage
prepayments generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities and
extend their life. This could cause the price of the mortgage securities and the
underlying fund's share price to fall and would make the mortgage securities
more sensitive to interest rate changes.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided to
support the securities, if any, may be inadequate to protect investors in the
event of default. Like mortgage securities, asset-backed securities are subject
to prepayment and extension risks.
FOREIGN SECURITIES A number of the underlying funds invest in foreign
securities. Securities of companies and governments located outside the U.S. may
involve risks that can increase the potential for losses in a fund.
COUNTRY. General securities market movements in any country where an underlying
fund has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the underlying
fund's share price and fund performance.
The political, economic and social structures of some countries a fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, currency devaluations, foreign ownership limitations,
expropriation, restrictions on removal of currency and other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks.
A fund's investments in developing or emerging markets are subject to all of the
risks of foreign investing generally, and have additional heightened risks due
to a lack of established legal, political, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the U.S. While
short-term volatility in these markets can be disconcerting, declines of more
than 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Foreign stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. A fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in foreign
courts than with respect to U.S. companies in U.S. courts.
CURRENCY To the extent the underlying funds' investments are denominated in
foreign currencies, changes in foreign currency exchange rates will affect the
value of what the underlying fund owns and its share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not possible
to predict the impact of the euro on the business or financial condition of
European issuers which an underlying fund may hold in its portfolio, and their
impact on the fund's performance. To the extent an underlying fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be exposed
to currency risk due to fluctuations in those currencies versus the U.S. dollar.
CONCENTRATION If an underlying fund has a policy to concentrate (invests 25% or
more of its assets) in a particular industry or sector or geographic region, its
performance is largely dependent on the industry or sector or region's
performance and, therefore, it will be subject to greater risks and may
experience greater volatility than a fund that is more broadly diversified
across industries, sectors or geographic regions.
DIVERSIFICATION Some of the underlying funds are classified as non-diversified
funds (that means they may invest a greater portion of their assets in the
securities of one issuer than a diversified fund could), and as such they may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. This may result in greater fluctuation in the
value of the underlying fund's shares.
DERIVATIVE SECURITIES To the extent an underlying fund participates in the
following derivative transactions: option transactions, foreign currency
exchange transactions, futures contracts, swap agreements and collateralized
mortgage obligations, its investment may involve a small investment relative to
the amount of risk assumed. To the extent the underlying fund enters into these
transactions, their success will depend on the manager's ability to predict
market movements.
YEAR 2000 When evaluating current and potential portfolio positions, Year 2000
is one of the factors the underlying fund managers consider.
The managers will rely upon public filings and other statements made by issuers
about their Year 2000 readiness. Issuers in countries outside the U.S.,
particularly in emerging markets, may be more susceptible to Year 2000 risks and
may not be required to make the same level of disclosure about Year 2000
readiness as is required in the U.S. The manager, of course, cannot audit each
issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which an underlying fund is invested is adversely affected by
Year 2000 problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the underlying
fund's portfolio holdings will have a similar impact on the underlying fund's
performance. Please see page [#] for more information.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] 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. Your investment representative
can help you decide.
CLASS A CLASS C
- -----------------------------------------------------------
o Initial sales charge o Initial sales
of 5.75% or less charge of 1%
o Deferred sales o Deferred sales
charge of 1% on charge of 1% on shares
purchases of $1 million you sell within 18
or more sold within 12 months
months
o Lower annual o Higher annual
expenses than Class C expenses than Class A
due to lower due to higher
distribution fees distribution fees.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II.
<TABLE>
<CAPTION>
SALES CHARGES - CLASS A
THE SALES CHARGE MAKES
UP THIS % OF THE WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT OFFERING PRICE YOUR NET INVESTMENT
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows each fund to pay distribution fees of up
to 0.25% per year to those who sell and distribute Class A shares and provide
other services to shareholders. Because these fees are paid out of Class A's
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
<TABLE>
<CAPTION>
SALES CHARGES - CLASS C
THE SALES CHARGE MAKES
UP THIS % OF THE WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT OFFERING PRICE YOUR NET INVESTMENT
- -----------------------------------------------------------------------------------
<S> <C> <C>
Under $1 million 1.00 1.01
</TABLE>
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution and other
fees of up to 0.75% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
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.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page [#]
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days. The
CDSC for each class also may be waived for certain redemptions and
distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call Retirement
Plan Services at 1-800/527-2020. A list of available sales charge waivers also
may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of a paper with lines and someone writing]
BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or
Roth IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees
and directors of Franklin Templeton
entities, and their immediate family
members $100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will place your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see the
next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic the fund. the fund. Include your
of envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
a fund by automatically transferring money from your checking or savings account
each month to buy shares. The minimum investment to open an account with an
automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class A
shares of a fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class* of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class C shareholders may reinvest their distributions in Class A shares of any
Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into Class A without any sales charge. Advisor Class shareholders of another
Franklin Templeton Fund also may exchange into Class A without any sales charge.
Advisor Class shareholders who exchange their shares for Class A shares and
later decide they would like to exchange into another fund that offers Advisor
Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares 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.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
SELLING SHARES
- --------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates) to
BY MAIL Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure to
include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- --------------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or less,
phone] you do not hold share certificates and you have not
BY PHONE changed your address by phone within the last 15 days,
you can sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- --------------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption proceeds sent
three lightning bolts] to a bank account. See the policies above for selling
shares by mail or phone.
Before requesting to have redemption proceeds sent to a
bank account, please make sure we have your bank
BY ELECTRONIC FUNDS account information on file. If we do not have this
TRANSFER (ACH) information, you will need to send written instructions
with your bank's name and address, a voided check or
savings account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts are
different.
If we receive your request in proper form by 1:00 p.m.
pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- --------------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you are
arrows pointing in considering.
opposite directions]
Call Shareholder Services at the number below or our
BY EXCHANGE automated TeleFACTS system, or send signed written
instructions. See the policies above for selling shares
TeleFACTS(R) by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need to return
access) them to the fund before your exchange can be processed.
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive statements that show your account
transactions. You also will receive the funds' financial reports every six
months. To reduce fund expenses, we try to identify related shareholders in a
household and send only one copy of the financial reports. If you need
additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The funds may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (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, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower its minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer
would be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
CLASS A CLASS C
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COMMISSION (%) --- 2.00
Investment under $50,000 5.00 ---
$50,000 but under $100,000 3.75 ---
$100,000 but under $250,000 2.80 ---
$250,000 but under $500,000 2.00 ---
$500,000 but under $1 million 1.60 ---
$1 million or more up to 1.00 1 ---
12B-1 FEE TO DEALER 0.25 1.00 2
CLASS A CLASS C
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COMMISSION (%) --- 2.00
Investment under $100,000 4.00 ---
$100,000 but under $250,000 3.25 ---
$250,000 but under $500,000 2.25 ---
$500,000 but under $1 million 1.85 ---
$1 million or more up to 0.75 1 ---
12B-1 FEE TO DEALER 0.75 0.65 2
A dealer commission of up to 1% may be paid on Class A NAV purchases by certain
retirement plans1 and up to 0.25% on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
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.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
D.C. 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-7851 FAS P 12/99
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND
CLASS A & C
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated December 1, 1999, which we may amend from time to time,
contains the basic information you should know before investing in the funds.
You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended July 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Information about the Underlying
Franklin Templeton Funds
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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GOAL AND STRATEGIES
- --------------------------------------------------------------------------------
Each fund's investment goal is the highest level of long-term total return that
is consistent with an acceptable level of risk. This goal is fundamental, which
means it may not be changed without shareholder approval.
Each fund pursues its investment goal by investing primarily in a combination of
Franklin Templeton funds ("underlying funds"). Each fund may also invest up to
5% of its assets directly in the types of securities in which the underlying
funds invest and may engage directly in the types of investment strategies
employed by the underlying funds. For more information on how the underlying
funds invest their assets, see "Information about the Underlying Franklin
Templeton Funds."
Each fund may invest without limitation in repurchase agreements and securities
issued or backed by the full faith and credit of the U.S. government. U.S.
government securities include U.S. Treasury bills, notes, and bonds. Securities
backed by the full faith and credit of the U.S. government include those issued
by the Government National Mortgage Association.
The funds invest only in Class Z shares of Mutual Discovery Fund, Mutual
European Fund and Mutual Shares Fund and Advisor Class shares of 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 the
underlying funds.
REPURCHASE AGREEMENTS The funds generally will have a portion of their assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of their assets, the funds may enter into repurchase agreements.
Under a repurchase agreement, a fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon a
fund's ability to sell the underlying securities. The funds will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of fund's outstanding shares or (ii) 67% or more
of the fund's shares present at a shareholder meeting if more than 50% of the
fund's outstanding shares are represented at the meeting in person or by proxy,
whichever is less.
Each fund may not:
1. Borrow money or mortgage or pledge any of its assets, except it may borrow up
to 33 1/3% of its total assets (including the amount borrowed) to meet
redemption requests that might otherwise require the untimely disposition of
portfolio securities or for other temporary or emergency purposes and may pledge
its assets in connection with these borrowings. The fund may (a) borrow in
connection with short sales and "short sales against the box;" (b) borrow from
banks or other persons to the extent permitted by applicable law; (c) enter into
reverse repurchase agreements; (d) obtain short-term credit necessary for the
clearance of purchases and sales of its portfolio securities; and (e) make
margin payments in connection with futures, options and currency transactions.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests, except that the fund could own real estate directly as a result of a
default on debt securities it owns. This restriction does not preclude
investments in marketable securities of issuers engaged in these activities.
4. Loan money, except as is consistent with the fund's investment goal, and
except that the fund may (a) buy a portion of an issue of publicly distributed
bonds, debentures, notes and other evidences of indebtedness, (b) enter into
repurchase agreements, (c) lend its portfolio securities, and (d) participate in
an interfund lending program with other Franklin Templeton Funds to the extent
permitted by the Investment Company Act of 1940, as amended ("1940 Act"), and
any rules or orders thereunder.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that the fund may borrow as permitted by these
restrictions.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
Notwithstanding the foregoing investment restrictions, the underlying funds have
adopted certain investment restrictions which may be more or less restrictive
than those listed above, thereby permitting the fund to engage in investment
strategies indirectly that are prohibited under the investment restrictions
listed above. The investment restrictions of the underlying funds are located in
their respective SAI.
Pursuant to an exemptive order issued by the SEC (Investment Company Act Release
No. IC-22022, June 17, 1996) each fund may (i) purchase more than 3% of the
outstanding voting securities of any underlying fund, (ii) invest more than 5%
of its assets in any one underlying fund and (iii) invest substantially all of
its assets in the underlying funds.
INFORMATION ABOUT THE UNDERLYING FRANKLIN TEMPLETON FUNDS
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The following gives more detailed information about the underlying funds'
investment policies and the types of securities that they may buy along with
their associated risks.
HIGH YIELD, FIXED-INCOME 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.
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 Internal Revenue Code of 1986, as amended (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.
Some of the underlying funds 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.
Some of the underlying funds 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.
OPTIONS ON SECURITIES AND SECURITIES INDICES
CALL AND PUT OPTIONS ON SECURITIES. Certain underlying funds may write covered
put and call options and purchase put and call options that are listed on
domestic or foreign securities exchanges or traded in the over-the-counter
market.
WRITING CALL AND PUT OPTIONS. A call option gives the option holder the right to
buy the underlying securities from the option writer at a stated exercise price.
A put option gives the option holder the right to sell the underlying security
at the option exercise price at any time during the option period.
A call option written by an underlying fund is "covered" if the fund owns the
underlying security that is subject to the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the fund holds a call on the same security and in the
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the fund in cash and securities in a segregated account with its
custodian bank. A put option written by the fund is "covered" if the fund
maintains cash and securities with a value equal to the exercise price in a
segregated account with its custodian bank, or else holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount, of course, may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill the obligation to buy the underlying security at the
exercise price, which will usually exceed the then current market value of the
underlying security. The writer of an option who wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option of the same series as the option previously written. The effect
of the purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction will be available to be effected at the
time desired by the fund.
Effecting a closing transaction in the case of a written call option will permit
the fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or securities. Also,
effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
fund investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price and the fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
BUYING CALL AND PUT OPTIONS. Certain of the underlying funds may buy call
options. Prior to its expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on whether the amount
received is more or less than the premium paid for the call option plus the
related transaction costs.
The underlying fund, for example, may buy put options on particular securities
in order to protect against a decline in the market value of the underlying
security below the exercise price less the premium paid for the option. The
ability to buy put options will allow the fund to protect the unrealized gain in
an appreciated security in its portfolio without actually selling the security.
In addition, the fund will continue to receive interest or dividend income on
the security. When the underlying fund sells a put option that it has previously
purchased prior to the sale of the securities underlying such option, such sales
will result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid for
the put option that is sold. Such gain or loss may be wholly or partially offset
by a change in the value of the underlying security which the fund owns or has
the right to acquire.
OPTIONS ON STOCK INDICES. Certain of the underlying funds may also buy and write
call and put options on stock indices. Call and put options on stock indices are
similar to options on securities except that, rather than the right to buy or
sell particular securities at a specified price, options on a stock index give
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the underlying stock index is greater than (or less
than, in the case of puts) the exercise price of the option. This amount of cash
is equal to the difference between the closing price of the index and the
exercise price of the option expressed in dollars multiplied by a specified
number. Thus, unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
When the underlying fund writes an option on a stock index, it will establish a
segregated account with its custodian bank in an amount at least equal to the
market value of the underlying stock index and will maintain the account while
the option is open or it will otherwise cover the transaction.
OVER-THE-COUNTER ("OTC") OPTIONS. Certain of the underlying funds may write
covered put and call options and purchase put and call options which trade in
the over-the-counter market. Just as with exchange traded options, OTC call
options give the option holder the right to buy an underlying security from an
option writer at a stated exercise price; OTC put options give the holder the
right to sell an underlying security to an option writer at a stated exercise
price. OTC options differ from exchange traded options in certain material
respects. OTC options are arranged directly with dealers and not, as is the case
with exchange traded options, with a clearing corporation. Thus, there is the
risk of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities and in a wider range
of expiration dates and exercise prices than exchange traded options; and the
writer of an OTC option is paid a premium in advance by the dealer. (For
additional risks relating to OTC options, see "Risk Factors and Considerations
Regarding Options, Futures and Options on Futures").
FORWARD CONVERSIONS. Certain of the underlying funds may engage in forward
conversions. In a forward conversion, the underlying fund buys securities and
writes call options and buys put options on such securities. By purchasing puts,
the fund protects the underlying security from depreciation in value. By selling
or writing calls on the same security, the fund receives premiums which may
offset part or all of the cost of purchasing the puts while forgoing the
opportunity for appreciation in the value of the underlying security.
The use of options in connection with forward conversions is intended to hedge
against fluctuations in the market value of the underlying security. Although it
is generally intended that the exercise price of put and call options would be
identical, situations might occur in which some option positions are acquired
with different exercise prices. Therefore, the fund's return may depend in part
on movements in the price of the underlying security because of the different
exercise prices of the call and put options. Such price movements may also
affect the fund's total return if the conversion is terminated prior to the
expiration date of the option. In such event, the fund's return on forward
conversions may be greater or less than it would have been if it had hedged the
security only by purchasing put options.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, the
underlying fund buys and writes a put or buys and writes a call on the same
underlying security with the options having different exercise prices and/or
expiration dates. In "straddles," the underlying fund purchases or writes
combinations of put and call options on the same security. When the fund engages
in spread and straddle transactions, it seeks to profit from differentials in
the option premiums paid and received and in the market prices of the related
options positions when they are closed out or sold. Because these transactions
require the fund to buy and/or write more than one option simultaneously, the
fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the fund was to
buy or sell a single option. Similarly, costs incurred by the fund in connection
with these transactions will in many cases be greater than if the fund was to
buy or sell a single option.
FUTURES TRANSACTIONS
Certain of the underlying funds may purchase or sell (i) financial futures
contracts; (ii) interest rate futures contracts; (iii) options on interest rate
futures contracts; (iv) stock and bond index futures contracts; and (v) options
on stock and bond index futures contracts (collectively, "Futures
Transactions"). The fund may enter into such Futures Transactions on domestic
exchanges and, to the extent such transactions have been approved by the CFTC
for sale to customers in the U.S., on foreign exchanges.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian, cash or U.S. Treasury obligations equal
to a specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the value
of the futures contract decline relative to the fund's position, the fund will
be required to pay to the futures commission merchant an amount equal to such
change in value. In the event the fund has insufficient cash, it may have to
sell portfolio securities at a time when it may be disadvantageous to do so in
order to meet such daily variation margins.
A futures contract may generally be described as an agreement between two
parties to buy and sell particular financial instruments for an agreed price
during a designated month (or to deliver the final cash settlement price, in the
case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, each fund can
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
the fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market when they
affect anticipated purchases. Similarly, the fund can sell futures contracts on
a specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. The fund
can purchase futures contracts on foreign currency to fix the price in U.S.
dollars or a security denominated in such currency that the fund has acquired or
expects to acquire.
Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying securities or the cash value of the index, in most
cases the contractual obligation is fulfilled before the date of the contract
without having to make or take such delivery. The contractual obligation is
offset by buying (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels the
obligation to make or take delivery of the securities or the cash value of the
index underlying the contractual obligations. The fund may incur brokerage fees
when it purchases or sells futures contracts.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or loss. While each fund's futures contracts on securities or currency
will usually be liquidated in this manner, the fund may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for it to do so. A clearing corporation associated
with the exchange on which futures on securities or currency are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures
contracts will give the fund the right (but not the obligation), for a specified
price, to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, the fund obtains the benefit of the futures position if prices move in
a favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
FINANCIAL FUTURES CONTRACTS. Financial futures are contracts that obligate the
holder to take or make delivery of a specified quantity of a financial
instrument, such as a U.S. Treasury security or foreign currency, during a
specified future period at a specified price. A "sale" of a financial futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
A "purchase" of a financial futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date.
INTEREST RATE FUTURES AND OPTIONS. 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 depends primarily on prevailing
interest rates.
The fund may, for example, enter into interest rate futures contracts in order
to protect its portfolio securities from fluctuations in interest rates without
necessarily buying or selling the underlying fixed-income securities. For
example, if the fund owns bonds, and interest rates are expected to increase, it
might sell futures contracts on debt securities having characteristics similar
to those held in the portfolio. Such a sale would have much the same effect as
selling an equivalent value of the bonds owned by the fund. If interest rates
did increase, the value of the debt securities in the portfolio would decline,
but the value of the futures contract to the fund would increase at
approximately the same rate, thereby keeping the net asset value of the fund
from declining as much as it otherwise would have.
STOCK INDEX FUTURES CONTRACTS. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement was made. Open futures contracts are valued on a daily
basis, and the fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
For example, the underlying fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of its equity securities that might otherwise result. When the fund
is not fully invested in stocks and it anticipates a significant market advance,
it may buy stock index futures in order to gain rapid market exposure that may
in part or entirely offset increases in the cost of stocks that it intends to
buy.
OPTIONS ON STOCK INDEX FUTURES. Certain of the underlying funds may buy and sell
call and put options on stock index futures. Call and put options on stock index
futures are similar to options on securities except that, rather than the right
to buy stock at a specified price, options on stock index futures give the
holder the right to receive cash. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date.
BOND INDEX FUTURES AND OPTIONS ON SUCH FUTURES. Certain of the underlying funds
may buy and sell futures contracts based on an index of debt securities and
options on such futures contracts to the extent they currently exist and, in the
future, may be developed. These funds reserve the right to conduct futures and
options transactions based on an index that may be developed in the future to
correlate with price movements in certain categories of debt securities. The
underlying fund's investment strategy in employing futures contracts based on an
index of debt securities may be similar to that used by it in other financial
futures transactions. Certain of the underlying funds may also buy and write put
and call options on such index futures and enter into closing transactions with
respect to such options.
FUTURE DEVELOPMENTS. Certain of the underlying funds may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments that are not presently
contemplated for use by the underlying funds or which are not currently
available but that may be developed, to the extent such opportunities are both
consistent with the underlying fund's investment goals and legally permissible
for the fund.
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.
CURRENCY TRANSACTIONS
Certain of the underlying funds may enter into forward currency exchange
contracts and currency futures contracts and options on such futures contracts,
as well as purchase put or call options and write covered put and call options
on currencies traded in U.S. or foreign markets.
FORWARD CURRENCY EXCHANGE CONTRACTS AND CURRENCY FUTURES CONTRACTS. A forward
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks).
An underlying fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the fund's investment manager (or sub-adviser)
determines that there is a pattern of correlation between the two currencies.
Certain of the underlying funds may also purchase and sell forward contracts (to
the extent they are not deemed "commodities") for non-hedging purposes when the
investment manager (or sub-adviser) anticipates that the foreign currency will
appreciate or depreciate in value, but securities denominated in that currency
do not present attractive investment opportunities and are not held in a fund's
portfolio.
The fund's custodian will place cash or securities into a segregated account of
each fund in an amount equal to the value of the fund's total assets committed
to the forward foreign currency exchange contracts requiring each fund to
purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or securities is placed in the
account on a daily basis so that the value of the account equals the amount of
each fund's commitments with respect to such contracts. The segregated account
is marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate these contracts. In such event, a
fund's ability to utilize forward foreign currency exchange contracts may be
restricted.
While an underlying fund may enter into forward contracts to reduce currency
exchange rate risks, transactions in forward contracts involve certain other
risks. Thus, while a fund may benefit from such transactions, unanticipated
changes in currency prices may result in a poorer overall performance for a fund
than if it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between a fund's portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by the
fund. Such imperfect correlation may cause a fund to sustain losses which will
prevent the fund from achieving a complete hedge or expose the fund to risk of
foreign exchange loss.
CURRENCY FUTURES CONTRACTS AND OPTIONS THEREON. Certain of the underlying funds
will also engage in futures contracts on foreign currencies and related options
transactions. A currency futures contract is a standardized contract for the
future delivery of a specified amount of currency at a future date at a price
set at the time of the contract. The fund may enter into currency futures
contracts traded on regulated commodity exchanges, including non-U.S. exchanges.
The underlying funds may either accept or make delivery of the currency
specified at the maturity of a forward or futures contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
Certain of the underlying funds may enter into forward currency exchange
contracts and currency futures contracts in several circumstances. For example,
when the fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency (or options contracts with respect to such
futures contracts), or when the fund anticipates the receipt in a foreign
currency of dividends or interest payments on such a security that it holds, it
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. In
addition, when the investment manager (or sub-adviser) believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward or futures contract to sell, for a
fixed amount of U.S. dollars, the amount of that currency approximating the
value of some or all of the fund's portfolio securities denominated in such
currency. The precise matching of the forward contract amounts and the value of
the securities involved is not generally possible because the future value of
such securities in foreign currencies changes as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which each fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of each fund's foreign
assets.
Writing and Purchasing Currency Call and Put Options. Certain of the underlying
funds may write covered put and call options and purchase put and call options
on foreign currencies. The underlying funds may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency with a pattern
of correlation. In addition, the fund may purchase call options on currency for
non-hedging purposes when the investment manager (or sub-adviser) anticipates
that the currency will appreciate in value, but the securities denominated in
that currency do not present attractive investment opportunities and are not
included in the fund's portfolio.
A call option written by the fund obligates the fund to sell specified currency
to the holder of the option at a specified price at any time before the
expiration date. A put option written by the fund would obligate the fund to
purchase specified currency from the option holder at a specified time before
the expiration date. The writing of currency options involves risk that the fund
will, upon exercise of the option, be required to sell currency subject to a
call at a price that is less than the currency's market value or be required to
purchase currency subject to a put at a price that exceeds the currency's market
value.
The fund may terminate its obligations under a call or put option by purchasing
an option identical to the one it has written. This purchase is referred to as
"closing purchase transaction." The fund would also be able to enter into a
closing sale transaction in order to realize a gain or minimize a loss on an
option purchased by the fund.
The purchase of a call option would entitle the fund, in return for the premium
paid, to purchase specified currency at a specified price during the option
period. The fund would ordinarily realize a gain if, during the option period,
the value of the currency exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise the fund would realize either no gain or a
loss on the purchase of the call option. The fund may forfeit the entire amount
of the premium plus related transaction costs if exchange rates move in a manner
adverse to the fund's position.
The underlying fund may, for example, purchase put options in anticipation of a
decline in the dollar value of currency in which securities in its portfolio are
denominated ("protective puts"). The purchase of a put option would entitle the
fund, in exchange for the premium paid, to sell specific currency at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the dollar value of the fund's
portfolio securities due to currency exchange rate fluctuations. The fund would
ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of the underlying currency. Foreign currency options to be
written or purchased by the fund will be traded on U.S. or foreign exchanges or
over-the-counter.
Buyers and sellers of currency futures and options thereon are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
FOREIGN CURRENCY SWAPS
Some funds 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.
RISK FACTORS AND CONSIDERATIONS REGARDING OPTIONS, FUTURES AND OPTIONS ON
FUTURES
With respect to an underlying fund's hedging strategies, the fund bears the risk
that the prices of the securities being hedged will not move in the same amount
as the hedging instrument. It is also possible that there may be a negative
correlation between the index, securities or currencies underlying the hedging
instrument and the hedged securities which would result in a loss on both such
securities and the hedging instrument. In addition, it is not possible to hedge
fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is also likely to fluctuate as a result of independent factors not
related to currency fluctuations. Therefore, perfect correlation between the
fund's futures positions and portfolio positions will be impossible to achieve.
Accordingly, successful use by the fund of options on stock or bond indices,
financial and currency futures contracts and related options, and currency
options will be subject to the investment manager's ability to predict correctly
movements in the direction of the securities and currency markets generally or
of a particular segment. If the underlying fund's investment manager is not
successful in employing such instruments in managing the fund's investments, the
fund's performance will be worse than if it did not employ such strategies. In
addition, the fund will pay commissions and other costs in connection with the
investments, which may increase the fund's expenses and reduce the return. In
writing options on futures, the fund's loss is potentially unlimited and may
exceed the amount of the premium received.
In certain cases, the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed more effectively and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. There are, however, risks involved
in these transactions as discussed above.
Positions in stock index options, stock and bond index futures contracts,
financial futures contracts, foreign currency futures contracts, related options
on futures and options on currencies may be closed out only on an exchange which
provides a secondary market. There can be no assurance that a liquid secondary
market will exist for any particular option, futures contract or option thereon
at any specific time. Thus, it may not be possible to close such an option or
futures position. The inability to close options or futures positions could have
an adverse impact on the fund's ability to effectively hedge its securities or
foreign currency exposure.
When trading options on foreign exchanges or in the OTC market many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
In the case of OTC options, there can be no assurance that a continuous liquid
secondary market will exist for any particular OTC option at any specific time.
Consequently, the fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale transaction with
the dealer that issued it. Similarly, when the fund writes an OTC option, it
generally can close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to which the fund originally
wrote the option. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires or
the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for other
investment purposes while it is obligated as a put writer. Similarly, a
purchaser of such put or call option might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.
The ability to terminate OTC options is more limited than with exchange traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. Until such time as the staff of
the SEC changes its position, each fund will treat purchased OTC options and all
assets used to cover written OTC options as illiquid securities, except that
with respect to options written with primary dealers in U.S. government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the staff of the SEC.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange of the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
In the case of futures, the CFTC and the various exchanges have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
contract. Trading limits are imposed on the maximum number of contracts which
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The fund does not believe that these
trading and positions limits will have an adverse impact on the fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the investment manager may
still not result in a successful transaction.
CONVERTIBLE SECURITIES
Certain of the underlying funds may invest in convertible securities. As with a
straight fixed-income security, a convertible security tends to increase in
market value when interest rates decline and decrease in value when interest
rates rise. Like a common stock, the value of a convertible security also tends
to increase as the market value of the underlying stock rises, and it tends to
decrease as the market value of the underlying stock declines. Because its value
can be influenced by both interest rate and market movements, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share price as its underlying
stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
A preferred stock is subordinated to all debt obligations in the event of
insolvency, and an issuer's failure to make a dividend payment is generally not
an event of default entitling the preferred shareholder to take action. A
preferred stock generally has no maturity date, so that its market value is
dependent on the issuer's business prospects for an indefinite period of time.
In addition, distributions from preferred stock are dividends, rather than
interest payments, and are usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. Some of the underlying funds 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.
Some of the 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. A fund may have difficulty
disposing of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the fund's ability to dispose of particular
securities, when necessary, to meet its liquidity needs or in response to a
specific economic event, such as the deterioration in the credit worthiness of
an issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the underlying 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. Some funds 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.
INVESTMENTS IN FOREIGN SECURITIES
Securities which are acquired by an underlying fund outside the U.S. and which
are publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market are not considered by the fund to be illiquid assets
so long as the fund acquires and holds the securities with the intention of
reselling the securities in the foreign trading market, the fund reasonably
believes it can readily dispose of the securities for cash in the U.S. or
foreign market and current market quotations are readily available. Investments
may be in securities of foreign issuers, whether located in developed or
undeveloped countries.
Investments in foreign securities where delivery takes place outside the U.S.
will have to be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes of governmental administrations or of economic or monetary
policies, in the U.S. or abroad, or changed circumstances in dealings between
nations or currency convertibility or exchange rates could result in investment
losses for the fund. Investments in foreign securities may also subject the fund
to losses due to nationalization, expropriation or differing accounting
practices and treatments. Moreover, investors should recognize that foreign
securities are often traded with less frequency and volume, and therefore may
have greater price volatility, than is the case with many U.S. securities.
Investments by the underlying funds in the securities of foreign issuers may
tend to increase the risks with respect to the liquidity of the fund's portfolio
and the fund's ability to meet a large number of shareholders' redemption
requests should there be economic or political turmoil in a country in which the
fund has a substantial portion of its assets invested or should relations
between the U.S. and foreign countries deteriorate markedly. Furthermore, the
reporting and disclosure requirements applicable to foreign issuers may differ
from those applicable to domestic issuers, and there may be difficulties in
obtaining or enforcing judgments against foreign issuers.
INVESTMENTS IN EASTERN EUROPE AND RUSSIA. Certain Eastern European countries,
which do not have market economies, are characterized by an absence of developed
legal structures governing private and foreign investments and private property.
Certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment of foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals.
Governments in certain Eastern European countries may require that a
governmental or quasi-governmental authority act as custodian of the fund's
assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act,
to act as foreign custodians of the fund's cash and securities, the fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
Certain of the underlying funds may invest a portion of their assets in Russian
securities, subject to the availability of an eligible foreign subcustodian
approved by a fund's board of directors or trustees, as the case may be, in
accordance with Rule 17f-5 under the 1940 Act. There can be no assurance that
appropriate sub-custody arrangements will be available to the funds if and when
one or more of the funds seeks to invest a portion of its assets in Russian
securities.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include: (i)
delays in settling portfolio transactions and risk of loss arising out of
Russia's system of share registration and custody; (ii) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce a
judgment; (iii) pervasiveness of corruption and crime in the Russian economic
system; (iv) currency exchange rate volatility and the lack of available
currency hedging instruments; (v) higher rates of inflation (including the risk
of social unrest associated with periods of hyperinflation); (vi) controls on
foreign investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and dividends, and on
the fund's ability to exchange local currencies for U.S. dollars; (vii) the risk
that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (viii) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (ix)
dependency on exports and the corresponding importance of international trade;
(x) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (xi) possible
difficulty in identifying a purchaser of securities held by the fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositories that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the fund to lose its
registration through fraud, negligence or even mere oversight. While the
underlying fund will endeavor to ensure that its interest continues to be
appropriately recorded either itself or through a custodian or other agent
inspecting the share register and by obtaining extracts of share registers
through regular confirmations, these extracts have no legal enforceability and
it is possible that subsequent illegal amendment or other fraudulent act may
deprive the fund of its ownership rights or improperly dilute its interests. In
addition, while applicable Russian regulations impose liability on registrars
for losses resulting from their errors, it may be difficult for the fund to
enforce any rights it may have against the registrar or issuer of the securities
in the event of loss of share registration. Furthermore, although a Russian
public enterprise with more than 1,000 shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity that meets certain criteria, in practice this regulation has not always
been strictly enforced. Because of this lack of independence, management of a
company may be able to exert considerable influence over who can purchase and
sell the company's shares by illegally instructing the registrar to refuse to
record transactions in the share register. This practice may prevent the
underlying fund from investing in the securities of certain Russian companies
deemed suitable by its investment manager. Further, this could cause a delay in
the sale of Russian company securities by the fund if a potential purchaser is
deemed unsuitable, which may expose the fund to potential loss on the
investment.
INVESTMENTS IN LATIN AMERICA. Investing in Latin American issuers involves a
high degree of risk and special considerations not typically associated with
investing in the U.S. and other more developed securities markets, and should be
considered highly speculative. Such risks include: (i) restrictions or controls
on foreign investment and limitations on repatriation of invested capital and
Latin America's ability to exchange local currencies for U.S. dollars; (ii)
higher and sometimes volatile rates of inflation (including risk of social
unrest associated with periods of hyper-inflation); (iii) the risk that certain
Latin American countries, which are among the largest debtors to commercial
banks and foreign governments and which have experienced difficulty in servicing
sovereign debt obligations in the past, may negotiate to restructure sovereign
debt obligations; (iv) the risk that it may be impossible or more difficult than
in other countries to obtain and/or enforce a judgment; (v) currency exchange
rate fluctuations and the lack of available currency hedging instruments; (vi)
more substantial government involvement in and control over the local economies;
and (vii) dependency on exports and the corresponding importance of
international trade.
Latin American countries may be subject to a greater degree of economic,
political, and social instability than is the case in the U.S., Japan, or
Western European countries. Such instability may result from, among other
things, the following: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in governmental
control through extra-constitutional means; (ii) popular unrest associated with
demands for improved political, economic, and social conditions; (iii) internal
insurgencies and terrorist activities; (iv) hostile relations with neighboring
countries; (v) ethnic, religious and racial disaffection; and (vi) drug
trafficking.
FOREIGN 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.
EURO RISK
On January 1, 1999, the European Monetary Union (EMU) introduced a new single
currency, the euro, which will replace the national currency for participating
member countries. The transition and the elimination of currency risk among EMU
countries may change the economic environment and behavior of investors,
particularly in European markets. While the implementation of the euro could
have a negative effect on the fund, the fund's manager and its affiliated
services providers are taking steps they believe are reasonably designed to
address the euro issue.
GOLD BULLION
As a means of seeking its principal goal of capital appreciation and when it is
felt to be appropriate as a possible hedge against inflation, Franklin Gold Fund
may invest a portion of its assets in gold bullion and may hold a portion of its
cash in foreign currency in the form of gold coins. The fund has not used these
techniques recently but may use them if it determines that they could help the
fund achieve its goals. There is, of course, no assurance that such investments
will provide capital appreciation or a hedge against inflation. The fund's
ability to invest in gold bullion is restricted by the diversification
requirements which the fund must meet in order to qualify as a regulated
investment company under the Code, as well as the diversification requirements
of the 1940 Act.
The fund will invest in gold bullion when the prospects of these investments
are, in the opinion of the fund's investment manager, attractive in relation to
other possible investments. The basic trading unit for gold bullion is a gold
bar weighing approximately 100 troy ounces with a purity of at least 995/1000,
although gold bullion is also sold in much smaller units. Gold bars and wafers
are usually numbered and bear an indication of purity and the stamp or assay
mark of the refinery or assay office which certifies the bar's purity. Bars of
gold bullion historically have traded primarily in the New York, London, and
Zurich gold markets. In terms of volume, these gold markets have been the major
markets for trading in gold bullion. Prices in the Zurich gold market generally
correspond to the prices in the London gold market. Since the ownership of gold
bullion became legal in the U.S. on December 31, 1974, U.S. markets for trading
gold bullion have developed. It is anticipated that transactions in gold will
generally be made in U.S. markets, although these transactions may be made in
foreign markets when it is deemed to be in the best interest of the fund.
Transactions in gold bullion by the fund are negotiated with principal bullion
dealers unless, in the investment manager's opinion, more favorable prices
(including the costs and expenses described below) are otherwise obtainable.
Prices at which gold bullion is purchased or sold include dealer mark-ups or
mark-downs, insurance expenses, assay charges and shipping costs for delivery to
a custodian bank. These costs and expenses may be a greater or lesser percentage
of the price from time to time, depending on whether the price of gold bullion
decreases or increases. Since gold bullion does not generate any investment
income, the only source of return to the fund on such an investment will be from
any gains realized upon its sale, and negative return will be realized, of
course, to the extent the fund sells its gold bullion at a loss.
WARRANTS
A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If the underlying fund does not exercise or dispose
of a warrant prior to its expiration, it will expire worthless.
INVESTMENT COMPANY SECURITIES
Some 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.
SHORT-SELLING
In a short sale, the underlying fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete the
transaction, the fund must borrow the security to make delivery to the buyer.
The fund is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. Until the security is replaced, the
fund must pay the lender any dividends or interest that accrues during the
period of the loan. To borrow the security, the fund may also be required to pay
a premium, which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
The underlying fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the fund replaces the borrowed security, and the fund will realize a gain
if the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
any premium, dividends or interest the fund is required to pay in connection
with the short sale.
In addition to the short sales discussed above, certain of the underlying funds
may also make short sales "against the box." A short sale is "against the box"
to the extent that the fund contemporaneously owns or has the right to obtain at
no added cost securities identical to those sold short.
The underlying fund will place in a segregated account with its custodian bank
an amount equal to the difference between (a) the market value of the securities
sold short at the time they were sold short and (b) any cash or securities
required to be deposited as collateral with the broker in connection with the
short sale (not including the proceeds from the short sale). The segregated
account will be marked-to-market daily and at no time will the amount deposited
in the segregated account and with the broker as collateral be less than the
market value of the securities at the time they sold short.
REVERSE REPURCHASE AGREEMENTS
A number of the underlying funds 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.
EQUIPMENT RELATED INSTRUMENTS
Some of the underlying funds 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).
STANDBY COMMITMENT AGREEMENTS
Franklin Natural Resources Fund 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
Some of the underlying funds 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.
U.S. TREASURY ROLLS
Some of the underlying funds 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, the fund 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.
LOANS OF PORTFOLIO SECURITIES
Franklin Equity Fund, Franklin Growth Fund, Franklin Utilities Fund, Franklin
Small Cap Growth Fund, Franklin Value Fund, Franklin Natural Resources Fund,
Franklin Real Estate Securities, Franklin Bond Fund, Franklin Short-Intermediate
U.S. Government Securities Fund, Franklin's AGE High Income Fund, Mutual Shares
Fund, Mutual Discovery Fund, Mutual European Fund, Templeton International Fund,
Templeton Developing Markets Trust, Templeton Latin America Fund, Franklin
Templeton Hard Currency Fund, Templeton Global Bond Fund, Templeton Pacific
Growth Fund, Templeton Foreign Smaller Companies Fund and Franklin Gold Fund 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 Franklin Short-Intermediate U.S. Government
Securities Fund's, Franklin Equity Fund's, Franklin Growth Fund's, Franklin Real
Estate Securities Fund's, Franklin Utilities Fund's, Franklin's AGE High Income
Fund's and Franklin Gold Fund's total assets, 20% of Franklin Small Cap Growth
Fund's total assets, 25% of Franklin Value Fund's total assets, 30% of Franklin
Global Government Income Fund's and Franklin Templeton Hard Currency Fund's
total assets, 33% of Franklin Natural Resources Fund's total assets and, 33 1/3%
of Franklin Bond Fund's, Templeton International Fund's, Templeton Pacific
Growth Fund's, Templeton Foreign Smaller Companies Fund's, Templeton Latin
America Fund's, Templeton Global Bond Fund's, Franklin Aggressive Growth Fund,
Franklin Large Cap Growth Fund and Templeton Developing Markets Trust's total
assets. Mutual Shares Fund, Mutual Discovery Fund and Mutual European Fund
intend to limit such borrowing to 5% of their respective total assets at the
time of the most recent loan.
Consistent with procedures approved by their boards, each of the underlying
funds (except Franklin U.S. Government Securities Fund) may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed applicable limits.
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 Franklin Short-Intermediate U.S. Government Securities
Fund and Franklin Global Government Income Fund). 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.
Templeton Developing Markets Trust, Templeton International Fund and Templeton
Latin America Fund retain the right to terminate their loans at any time and
obtain the return of the securities loaned within five business days.
ILLIQUID SECURITIES
Generally, an "illiquid security" is any security that cannot be disposed of
promptly (e.g., within seven days) and in the ordinary course of business at
approximately the amount at which the fund has valued the instrument. Subject to
this limitation, the boards have authorized certain underlying funds to invest
in certain restricted securities where such investment is consistent with the
fund's investment goals and has authorized such securities to be considered
liquid to the extent the investment manager determines that there is a liquid
institutional or other market for such securities, such as restricted securities
that may be freely transferred among qualified institutional buyers pursuant to
Rule 144A under the 1933 Act, as amended, and for which a liquid institutional
market has developed. The fund boards will review periodically any determination
by the investment manager to treat a restricted security as liquid, including
the investment manager's assessment of current trading activity and the
availability of reliable price information. 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.
BORROWING
As a fundamental investment restriction, the underlying funds (except Franklin
Value Fund, Mutual Shares Fund, Mutual Discovery Fund, Mutual European Fund,
Templeton Developing Markets Trust, Templeton Global Bond Fund, Templeton
International Fund and Templeton Latin America Fund) may not borrow money,
except for temporary or emergency purposes up to the following amounts: Franklin
Equity Fund, Franklin Growth Fund, Franklin Utilities Fund, Franklin
Short-Intermediate U.S. Government Securities Fund, Franklin U.S. Government
Securities Fund, Franklin's AGE High Income Fund, Franklin Gold Fund - 5% of
total assets; Templeton Foreign Smaller Companies and Templeton Foreign Fund -
5% of total assets for purposes of redeeming their shares for cancellation;
Franklin Small Cap Growth Fund, Franklin Real Estate Securities Fund, Templeton
Pacific Growth Fund, Templeton Foreign Smaller Companies Fund - 10% of total
assets; Franklin Global Government Income Fund and Franklin Bond Fund - 30% of
total assets; Franklin Natural Resources Fund - 33% of total assets; and
Franklin Templeton Hard Currency Fund - 33 1/3% of total assets.
Franklin Aggressive Growth Fund, Franklin Large Cap Growth Fund, Franklin Value
Fund, Templeton Developing Markets Trust, Templeton International Fund and
Templeton Latin America Fund may borrow money in an amount not exceeding 33 1/3%
of their net assets; Templeton Global Bond Fund 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 Fund, Mutual
Discovery Fund and Mutual European Fund may borrow up to 33 1/3% of their assets
(plus 5% for emergency or short-term purposes).
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 24 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin Templeton Services,
Inc.; officer and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc. and of 49 of the investment
companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin
Advisory Services, LLC; Director, Franklin/Templeton Investor Services, Inc.;
and officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be, of
27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Director, Fischer Imaging Corporation (medical imaging systems),
Digital Transmission Systems, Inc. (wireless communications) and Quarterdeck
Corporation (software firm), and General Partner, Peregrine Associates, which
was the General Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 52 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, LLC and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some of
the other subsidiaries of Franklin Resources, Inc.; and officer and/or director
or trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
The trust pays noninterested board members $130 per month plus $110 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services.
The fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to board
members who serve on other boards within the Franklin Templeton Group of Funds.
The following table provides the total fees paid to noninterested board members
by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TRUST 1 TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME ($) FUNDS 2 ($) SERVES 3
- --------------------------------------------------------------------------------
Frank H. Abbott, III 166,614 27
Harris J. Ashton 361,157 48
S. Joseph Fortunato 367,835 50
Edith E. Holiday 211,400 24
Frank W. T. LaHaye 171,536 27
Gordon S. Macklin 361,157 48
1. For the fiscal year ended July 31, 1999.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 161 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
INVESTMENT ADVISORY,
ASSET ALLOCATION AND OTHER SERVICES
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin
Advisers, Inc. The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for each fund to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of each fund. Similarly, with respect to each
fund, the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the funds' code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
ASSET ALLOCATION FEES The manager receives no fees from the funds for the
services provided under the investment advisory and administrative services
agreement, except for the asset allocations services, which are provided to each
fund for a monthly fee equivalent to an annual rate of 0.25% of the average
daily net assets of each fund. The fee is computed at the close of business on
the last business day of each month according to the terms of the management
agreement. Each class of the fund's shares pays its proportionate share of the
fee.
For the last two fiscal years ended July 31, the each paid the following asset
allocation fees:
ASSET ALLOCATION SERVICE FEES PAID ($)
- ----------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------
Conservative Target Fund 1 41,900 0
Moderate Target Fund 2 121,408 18,841
Growth Target Fund 3 77,012 5,952
1. For the fiscal years ended July 31, 1999 and 1998, asset allocation fees,
before any advanced waiver, totaled $63,967 and $31,017, respectively for the
Conservative Target Fund. Under an agreement by the manager to limit its fees,
the funds paid the asset allocation fees shown.
2. For the fiscal years ended July 31, 1999 and 1998, asset allocation fees,
before any advanced waiver, totaled $124,983 and $62,386, respectively for the
Moderate Target Fund. Under an agreement by the manager to limit its fees, the
funds paid the asset allocation fees shown.
3. For the fiscal years ended July 31, 1999 and 1998, asset allocation fees,
before any advanced waiver, totaled $141,910 and $76,453, respectively for the
Growth Target Fund. Under an agreement by the manager to limit its fees, the
funds paid the asset allocation fees shown.
INVESTMENT ADVISORY AND ASSET ALLOCATION AGREEMENT. The investment advisory and
asset allocation agreement is in effect until February 28, 1999. It may continue
in effect for successive annual periods if its continuance is specifically
approved at least annually by a vote of the Board or by a vote of the holders of
a majority of the fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the investment
advisory and asset allocation agreement or interested persons of any such party
(other than as members of the Board), cast in person at a meeting called for
that purpose. The investment advisory and asset allocation agreement may be
terminated without penalty at any time by the Board or by a vote of the holders
of a majority of the fund's outstanding voting securities on 60 days' written
notice to the manager or by the manager on 60 days' written notice to the fund,
and will automatically terminate in the event of its assignment, as defined in
the 1940 Act.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with each fund to provide certain administrative
services and facilities for each fund. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is each fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. Each fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Investors Services, in its capacity as the transfer agent for the
underlying Franklin Templeton funds, effectively acts as each fund's custodian
and holds the fund's shares of the underlying Franklin Templeton funds on its
books. Bank of New York, Mutual Funds Division, 90 Washington Street, New York,
NY 10286, acts as custodian of each fund's securities and other assets. The
custodians do not participate in decisions relating to the purchase and sale of
portfolio securities.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the funds' independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Orders for the purchase and sale of shares of the underlying Franklin Templeton
funds will be placed directly with Distributors, which also acts as principal
underwriter for shares of the underlying Franklin Templeton funds. The following
discussion addresses circumstances where a fund directly purchases securities or
engages in certain investment strategies.
The manager selects brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Most fixed-income securities purchases by the funds are principal transactions
at net prices, and the funds incur little or no brokerage costs. Each fund deals
directly with the selling or buying principal or market maker without incurring
charges for the services of a broker on its behalf, unless it is determined that
a better price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The funds seek to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the funds'
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, also may be considered a factor in the selection of broker-dealers to
execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the funds,
any portfolio securities tendered by the funds will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by the manager, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
During the last three fiscal years ended July 31, the funds paid the following
brokerage commissions:
BROKERAGE COMMISSIONS ($)
-------------------------------
1999 1998 1997
- --------------------------------------------------------------
Conservative Target Fund 15 0 0
Moderate Target Fund 30 0 0
Growth Target Fund 30 0 0
As of July 31, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The underlying Franklin Templeton funds calculate dividends and capital gains
the same way for each class. The amount of any income dividends per share will
differ, however, generally due to the difference in the distribution and service
(Rule 12b-1) fees of each class. Distributions are subject to approval by the
board. The funds do not pay "interest" or guarantee any fixed rate of return on
an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund earns income and gains on its
investments in the underlying Franklin Templeton funds. The underlying Franklin
Templeton funds receive income generally in the form of interest and other
income on their investments. This income, less expenses incurred in the
operation of the underlying Franklin Templeton funds is paid to a fund as
ordinary dividend income. The ordinary dividend income received from the
underlying Franklin Templeton funds, less expenses incurred in the operation of
a fund, constitutes a fund's net investment income from which dividends may be
paid to you. Any distributions by a fund from such income will be taxable to you
as ordinary income, whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The underlying Franklin Templeton funds may
realize capital gains from sales or dispositions of their securities. These
capital gains are distributed to a fund as capital gain distributions. A fund
may also derive capital gains and losses in connection with sales or other
dispositions of shares in the underlying Franklin Templeton funds. Distributions
from net short-term capital gains will be taxable to you as ordinary income.
Distributions from net long-term capital gains, including capital gain
distributions received from the underlying Franklin Templeton funds, will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares in a fund. Any net capital gains realized by a fund generally will
be distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on a fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
underlying Franklin Templeton funds. When these gains are distributed to a fund
and subsequently are distributed to you, they will be treated as ordinary
income. Similarly, foreign exchange losses realized by the underlying Franklin
Templeton funds on the sale of debt securities are generally treated as ordinary
losses by the underlying Franklin Templeton funds. This treatment could increase
or reduce the underlying Franklin Templeton funds' income available for
distribution to a fund, and, in turn, a fund's distributions of ordinary income
to you. This may cause some or all of a fund's previously distributed income to
be classified as a return of capital.
An underlying Franklin Templeton fund may also be subject to foreign withholding
taxes on income from certain of its foreign securities. These taxes will
decrease the amount of income available for distribution to you.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, a fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in such fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
a fund. In doing so, all or a portion of the sales charge that you paid for your
original shares in a fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government. It is
anticipated, however, that no portion of a fund's distributions to you will
qualify for exemption from state and local income tax as dividends paid from
interest earned on direct obligations of the U.S. government. Even if the
underlying Franklin Templeton funds invest in direct obligations of the U.S.
government, a fund does so only indirectly by investing in shares of the
underlying Franklin Templeton funds.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that a portion of the dividends paid by a fund may
qualify for the corporate dividends-received deduction. The amount so qualified
depends upon the aggregate amount of dividends received by the underlying
Franklin Templeton funds from domestic (U.S.) corporations. In some
circumstances, you will be allowed to deduct these qualified dividends, thereby
reducing the tax that you would otherwise be required to pay on these dividends.
The dividends-received deduction will be available only with respect to
dividends designated by a fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative taxable
income calculation.
INVESTMENT IN COMPLEX SECURITIES The underlying Franklin Templeton funds may
invest in complex securities. These investments may be subject to numerous
special and complex tax rules. These rules could affect whether gains and losses
recognized by the underlying Franklin Templeton funds are treated as ordinary
income or capital gain, accelerate the recognition of income to the underlying
Franklin Templeton funds and/or defer the underlying Franklin Templeton funds'
ability to recognize losses, and, in limited cases, subject the underlying
Franklin Templeton funds to U.S. federal income tax on income from certain of
their foreign securities. These rules may affect the amount, timing or character
of the income distributed to a fund by the underlying Franklin Templeton funds,
and, in turn, the amount, timing or character of the income distributed to you
by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The funds are non-diversified series of Franklin Templeton Fund Allocator
Series, an open-end management investment company, commonly called a mutual
fund. The trust was organized as a Delaware business trust on October 2, 1995,
and is registered with the SEC.
Each fund currently offers two classes of shares, Class A, Class C. Before
January 1, 1999, Class A shares were designated Class I and Class C shares were
designated Class II. The funds may offer additional classes of shares in the
future. The full title of each class is:
o Franklin Templeton Conservative Target Fund - Class A
o Franklin Templeton Conservative Target Fund - Class C
o Franklin Templeton Moderate Target Fund - Class A
o Franklin Templeton Moderate Target Fund - Class C
o Franklin Templeton Growth Target Fund - Class A
o Franklin Templeton Growth Target Fund - Class C
Shares of each class represent proportionate interests in each fund's assets. On
matters that affect eacg fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes 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. Additional series may be
offered in the future.
The trust has noncumulative voting rights. For board member elections, 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. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its discretion.
As of September 8, 1999, the principal shareholders of the funds, beneficial or
of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ----------------------------------------------------------------
CONSERVATIVE TARGET FUND
FTTC TTEE for ValuSelect Class A 12.01
WL Hailey & Company Inc.
P.O. Box 2438
Rancho Cordova, CA 95741-2438
Patrick Gribbon Per Rep Class A 5.01
Est Henry J. Jubinville
7700 N. Kendall Drive Suite 505
Miami, FL 33156
FTTC TTEE for ValuSelect Class A 5.59%
Central Parking System
P.O. Box 2438
Rancho Cordova, CA 95741-2438
GROWTH TARGET FUND
FTTC TTEE for ValuSelect Class A 5.59%
DPRA Incorporated
P.O. Box 2438
Rancho Cordova, CA 95741-2438
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
As of September 13, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., 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.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A and
1% for Class C.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account 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. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are these plans entitled to receive retroactive adjustments in
price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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 generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the fund's Class A
shares. This waiver category also applies to Class C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o 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.
o 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 CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously 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.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
Each fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the fund's
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of Class A shares by certain retirement plans without an initial sales charge.
These payments may be made in the form of contingent advance payments, which may
be recovered from the securities dealer or set off against other payments due to
the dealer if shares are sold within 12 months of the calendar month of
purchase. Other conditions may apply. All terms and conditions may be imposed by
an agreement between Distributors, or one of its affiliates, and the securities
dealer.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to securities dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares and/or total assets with the Franklin Templeton Group of Funds.
The amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
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, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset
value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
each fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
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. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. 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 also may be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
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. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. Redemptions in kind are taxable transactions.
The fund does not intend to redeem illiquid securities in kind. If this happens,
however, you may not be able to recover your investment in a timely manner.
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.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the funds on behalf
of numerous beneficial owners for recordkeeping operations performed with
respect to such owners. For each beneficial owner in the omnibus account, the
fund may reimburse Investor Services an amount not to exceed the per account fee
that the fund normally pays Investor Services. These financial institutions also
may charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
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.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. Each fund values over-the-counter portfolio securities
within the range of the most recent quoted bid and ask prices. If portfolio
securities trade both in the over-the-counter market and on a stock exchange,
each fund values them according to the broadest and most representative market
as determined by the manager.
Each fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the funds hold is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Each fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, each
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- --------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended July 31:
AMOUNT RECEIVED
TOTAL IN CONNECTION
COMMISSIONS AMOUNT RETAINED WITH REDEMPTIONS
RECEIVED BY DISTRIBUTORS AND REPURCHASES
($) ($) ($)
-------------------------------------------------------------------------------
1999
Conservative Target Fund 71,945 5,701 10,752
Moderate Target Fund 200,020 10,886 18,508
Growth Target Fund 275,906 26,215 23,089
1998
Conservative Target Fund 149,891 7,184 3,273
Moderate Target Fund 313,481 15,897 5,498
Growth Target Fund 402,330 24,771 9,605
1997
Conservative Target Fund 51,508 2,301 1,164
Moderate Target Fund 100,721 6,491 2,377
Growth Target Fund 127,175 9,421 500
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may 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.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by each fund under the Class A plan may not exceed
0.25% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have incurred
them.
The Class A plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS C PLAN. Under the Class C plan, each fund pays Distributors up to
0.75% per year of the class's average daily net assets, payable quarterly, to
pay Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund also may pay a servicing fee of
up to 0.25% per year of the class's average daily net assets, payable quarterly.
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 expenses relating to the Class C plan also are used to pay Distributors for
advancing the commission costs to securities dealers with respect to the initial
sale of Class C shares.
THE CLASS A AND C PLANS. In addition to the payments that Distributors or others
are entitled to under each plan, each plan also provides that to the extent the
fund, the manager or Distributors or other parties on behalf of the fund, the
manager or Distributors make payments that are deemed to be for the financing of
any activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then
such payments shall be deemed to have been made pursuant to the plan. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm also may terminate their respective distribution or service
agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended July 31, 1999, Distributors' eligible expenditures for
advertising, printing, payments to underwriters and broker-dealers and other
expenses pursuant to the plans and the amounts the funds paid Distributors under
the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID
EXPENSES ($) BY THE
FUND ($)
--------------------------------------------------------------------
Conservative Target Fund - Class A 80,360 34,729
Conservative Target Fund - Class C 138,507 117,174
Moderate Target Fund - Class A 138,095 66,182
Moderate Target Fund - Class C 322,415 235,151
Growth Target Fund - Class A 175,912 87,067
Growth Target Fund - Class C 282,315 219,614
PERFORMANCE
- --------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the funds are based on the
standardized methods of computing performance mandated by the SEC. Performance
figures reflect Rule 12b-1 fees from the date of the plan's implementation. An
explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the fund. The average
annual total returns for the indicated periods ended July 31, 1999, were:
SINCE
INCEPTION
1 YEAR (%) (12/31/96) (%)
- -------------------------------------------------------------------------
Conservative Target Fund Class A -2.70 4.49
Moderate Target Fund Class A -4.13 4.65
Growth Target Fund Class A -2.06 5.17
SINCE
INCEPTION
1 YEAR (%) (12/31/96) (%)
- -------------------------------------------------------------------------
Conservative Target Fund Class C 0.50 5.60
Moderate Target Fund Class C -1.11 5.58
Growth Target Fund Class C 1.13 6.45
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, income dividends and capital gain distributions are reinvested
at net asset value, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. Cumulative total
return, however, is based on the actual return for a specified period rather
than on the average return over the periods indicated above. The cumulative
total returns for the indicated periods ended July 31, 1999, were:
SINCE
INCEPTION
1 YEAR (%) (12/31/96) (%)
- -------------------------------------------------------------------------
Conservative Target Fund Class A -2.70 12.00
Moderate Target Fund Class A -4.13 12.43
Growth Target Fund Class A -2.06 13.88
SINCE
INCEPTION
1 YEAR (%) (12/31/96) (%)
- -------------------------------------------------------------------------
Conservative Target Fund Class A 0.50 15.10
Moderate Target Fund Class A -1.11 15.05
Growth Target Fund Class A 1.13 17.49
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS The funds also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of the fund as a potential investment for
IRAs, business retirement plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which it is presumed
no federal income tax applies.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in a fund may satisfy
your investment goal, advertisements and other materials about each fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials also may compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
o Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
o Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
(i) unmanaged indices so that you may compare the fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment goals and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, the fund and the manager also may refer to the following
information:
o The manager's and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
o The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a
similar financial organization.
o The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley Capital
International(R) or a similar financial organization.
o The geographic and industry distribution of the fund's portfolio and the
fund's top ten holdings.
o The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
o To assist investors in understanding the different returns and risk
characteristics of various investments, the fund may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o The fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar,
Inc.
o A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type
of stocks or other securities.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
- --------
* Sir John Templeton sold the Templeton organization to Franklin Resources,
Inc. in October 1992 and resigned from the board on April 16, 1995. He is
no longer involved with the investment management process.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to fall. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 4 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $225 billion in assets under management for more than 7 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 110 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the fund are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
File Nos. 811-7851 &
333-13601
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
The following exhibits are incorporated by reference to the previously filed
documents indicated below, except as noted:
(a) Agreement and Declaration of Trust
(i) Agreement and Declaration of Trust of Franklin Templeton Fund
Manager dated September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(ii) Certificate of Amendment of Agreement and Declaration of Trust
of Franklin Templeton Fund Manager dated September 17, 1996
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(iii)Certificate of Trust dated September 18, 1995
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(iv) Certificate of Amendment to the Certificate of Trust of
Franklin Templeton Fund Manager dated September 17, 1996
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(b) By-Laws
(i) By-Laws
Filing: Registration Statement on Form N-1A
File No. 333-13601
Filing Date: October 7, 1996
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Investment Advisory and Asset Allocation Agreement between
Registrant and Franklin Advisers, Inc. dated November 19, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(e) Underwriting Contracts
(i) Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc. dated November 19, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(ii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers dated March 1, 1999
(iii)Amendment of Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc. dated January 12, 1999
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 1 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: June 30, 1997
(iii)Amendment dated February 27, 1998 to Exhibit A of the Master
Custody Agreement between the Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 3 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: September 21, 1998
(iv) Amendment to Master Custody Agreement between Registrant and
Bank of New York dated May 7, 1997
Filing: Post-Effective Amendment No. 3 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: September 21, 1998
(v) Foreign Custody Manager Agreement between Registrant and Bank
of New York made as of July 30, 1998, effective as of February
27, 1998
Filing: Post-Effective Amendment No. 3 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: September 21, 1998
(h) Other Material Contracts
(i) Administration Agreement between Registrant and Franklin
Templeton Services, Inc. dated November 19, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated September 15, 1998
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: September 21, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Subscription Agreement between Registrant and Franklin
Resources, Inc. dated December 19, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(m) Rule 12b-1 Plan
(i) Class I Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc. dated
December 31, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(ii) Class II Distribution Plan pursuant to Rule 12b-1 between
Registrant and Franklin/Templeton Distributors, Inc. dated
December 31, 1996
Filing: Pre-Effective Amendment No. 2 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: December 27, 1996
(o) Rule 18f-3 Plan
(i) Multiple Class Plan dated November 19, 1996
Filing: Post-Effective Amendment No. 1 to Registration
Statement on Form N-1A
File No. 333-13601
Filing Date: June 30, 1997
(p) Power of Attorney
(i) Power of Attorney dated May 19, 1998
Filing: Post-Effective Amendment No. 3 to
Registration Statement on Form N-1A
File No. 333-13601
Filing Date: September 21, 1998
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the Declaration of Trust, By-Laws, Management, and Distribution
Agreements, previously filed as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said By-Laws shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group of
Funds. In addition, Mr. Charles B. Johnson was formerly a director of General
Host Corporation. For additional information please see Part B and Schedules A
and D of Form ADV of the Funds' Investment Manager (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors of
the Investment Manager and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as principal
underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
c) Not Applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 30th day of September,
1999.
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
(Registrant)
By: /S/ LEIANN NUZUM*
---------------------
Leiann Nuzum
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
CHARLES B. JOHNSON* Chairman of the Board and Trustee
Charles B. Johnson Dated: September 30, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: September 30, 1999
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: September 30, 1999
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: September 30, 1999
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: September 30, 1999
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: September 30, 1999
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: September 30, 1999
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: September 30, 1999
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: September 30, 1999
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: September 30, 1999
*By: /S/ LEIANN NUZUM
---------------------
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.a(i) Agreement and Declaration of Trust *
of Franklin Templeton Fund Manager
dated September 18, 1995
EX-99.a(ii) Certificate of Amendment of *
Agreement and Declaration of Trust
of Franklin Templeton Fund Manager
dated September 17, 1996
EX-99.a(iii) Certificate of Trust dated *
September 18, 1995
EX-99.a(iv) Certificate of Amendment to the *
Certificate of Trust of Franklin
Templeton Fund Manager dated
September 17, 1996
EX-99.b(i) By-Laws *
EX-99.d(i) Investment Advisory and Asset *
Allocation Agreement between
Registrant and Franklin Advisers,
Inc. dated November 19, 1996
EX-99.e(i) Distribution Agreement between *
Registrant and Franklin/Templeton
Distributors, Inc. dated November
19, 1996
EX-99.e(ii) Forms of Dealer Agreements between Attached
Franklin/Templeton Distributors,
Inc. and Securities Dealers dated
March 1, 1999
EX-99.e(iii) Amendment of Distribution Agreement Attached
between Registrant and
Franklin/Templeton Distributors,
Inc. dated January 12, 1999
EX-99.g(i) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(ii) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.g(iii) Amendment dated February 27, 1998 *
to Exhibit A of the Master Custody
Agreement between the Registrant
and Bank of New York dated February
16, 1996
EX-99.g(iv) Amendment to Master Custody *
Agreement between Registrant and
Bank of New York dated May 7, 1997
EX-99.g(v) Foreign Custody Manager Agreement *
between Registrant and Bank of New
York made as of July 30, 1998,
effective as of February 27, 1998
EX-99.h(i) Administration Agreement between *
Registrant and Franklin Templeton
Services, Inc. dated November 19,
1996
EX-99.i(i) Opinion and Consent of Counsel *
dated September 15, 1998
EX-99.j(i) Consent of Independent Auditors Attached
EX-99.l(i) Subscription Agreement between *
Registrant and Franklin Resources,
Inc. dated December 19, 1996
EX-99.m(i) Class I Distribution Plan pursuant *
to Rule 12b-1 between Registrant
and Franklin/Templeton
Distributors, Inc. dated December
31, 1996
EX-99.m(ii) Class II Distribution Plan pursuant *
to Rule 12b-1 between Registrant
and Franklin/Templeton
Distributors, Inc. dated December
31, 1996
EX-99.o(i) Multiple Class Plan dated November *
19, 1996
EX-99.p(i) Power of Attorney dated May 19, 1998 *
* Incorporated by Reference
DEALER AGREEMENT
Effective: March 1, 1998
Dear Securities Dealer:
Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to
participate in the distribution of shares of the Franklin Templeton
investment companies (the "Funds") for which we now or in the future serve as
principal underwriter, subject to the terms of this Agreement. We will notify
you from time to time of the Funds which are eligible for distribution and
the terms of compensation under this Agreement. This Agreement supersedes any
prior dealer agreements between us, as stated in Section 18, below.
1. LICENSING.
(a) You represent that you are (i) a member in good standing of the
National Association of Securities Dealers, Inc. ("NASD") and are presently
licensed to the extent necessary by the appropriate regulatory agency of each
jurisdiction in which you will offer and sell shares of the Funds, or (ii) a
broker, dealer or other company licensed, registered or otherwise qualified to
effect transactions in securities in a country (a "foreign country") other than
the United States of America (the "U.S.") where you will offer or sell shares of
the Funds. You agree that termination or suspension of such membership with the
NASD, or of your license to do business by any regulatory agency having
jurisdiction, at any time shall terminate or suspend this Agreement forthwith
and shall require you to notify us in writing of such action. If you are not a
member of the NASD but are a broker, dealer or other company subject to the laws
of a foreign country, you agree to conform to the Conduct Rules of the NASD.
This Agreement is in all respects subject to the Conduct Rules of the NASD,
particularly Conduct Rule 2830 of the NASD, which shall control any provision to
the contrary in this Agreement.
(b) You agree to notify us immediately in writing if at any time you are
not a member in good standing of the Securities Investor Protection Corporation
("SIPC").
2. SALES OF FUND SHARES. You may offer and sell shares of each Fund and class of
each Fund only at the public offering price which shall be applicable to, and in
effect at the time of, each transaction. The procedures relating to all orders
and the handling of them shall be subject to the terms of the applicable then
current prospectus and statement of additional information (hereafter, the
"prospectus") and new account application, including amendments, for each such
Fund and each class of such Fund, and our written instructions from time to
time. This Agreement is not exclusive, and either party may enter into similar
agreements with third parties.
3. DUTIES OF DEALER: You agree:
(a) To act as principal, or as agent on behalf of your customers, in all
transactions in shares of the Funds except as provided in Section 4 hereof. You
shall not have any authority to act as agent for the issuer (the Funds), for the
Principal Underwriter, or for any other dealer in any respect, nor will you
represent to any third party that you have such authority or are acting in such
capacity.
(b) To purchase shares only from us or from your customers.
(c) To enter orders for the purchase of shares of the Funds only from us
and only for the purpose of covering purchase orders you have already received
from your customers or for your own bona fide investment.
(d) To maintain records of all sales, redemptions and repurchases of shares
made through you and to furnish us with copies of such records on request.
(e) To distribute prospectuses and reports to your customers in compliance
with applicable legal requirements, except to the extent that we expressly
undertake to do so on your behalf.
(f) That you will not withhold placing customers' orders for shares so as
to profit yourself as a result of such withholding or place orders for shares in
amounts just below the point at which sales charges are reduced so as to benefit
from a higher sales charge applicable to an amount below the breakpoint.
(g) That if any shares confirmed to you hereunder are repurchased or
redeemed by any of the Funds within seven business days after such confirmation
of your original order, you shall forthwith refund to us the full concession,
allowed to you on such orders, including any payments we made to you from our
own resources as provided in Section 6(b) hereof with respect to such orders. We
shall forthwith pay to the appropriate Fund the share, if any, of the sales
charge we retained on such order and shall also pay to such Fund the refund of
the concession we receive from you as herein provided (other than the portion of
such concession we paid to you from our own resources as provided in Section
6(b) hereof). We shall notify you of such repurchase or redemption within a
reasonable time after settlement. Termination or suspension of this Agreement
shall not relieve you or us from the requirements of this subsection.
(h) That if payment for the shares purchased is not received within the
time customary or the time required by law for such payment, the sale may be
canceled without notice or demand and without any responsibility or liability on
our part or on the part of the Funds, or at our option, we may sell the shares
which you ordered back to the Funds, in which latter case we may hold you
responsible for any loss to the Funds or loss of profit suffered by us resulting
from your failure to make payment as aforesaid. We shall have no liability for
any check or other item returned unpaid to you after you have paid us on behalf
of a purchaser. We may refuse to liquidate the investment unless we receive the
purchaser's signed authorization for the liquidation.
(i) That you shall assume responsibility for any loss to the Funds caused
by a correction made subsequent to trade date, provided such correction was not
based on any error, omission or negligence on our part, and that you will
immediately pay such loss to the Funds upon notification.
(j) That if on a redemption which you have ordered, instructions in proper
form, including outstanding certificates, are not received within the time
customary or the time required by law, the redemption may be canceled forthwith
without any responsibility or liability on our part or on the part of any Fund,
or at our option, we may buy the shares redeemed on behalf of the Fund, in which
latter case we may hold you responsible for any loss to the Fund or loss of
profit suffered by us resulting from your failure to settle the redemption.
(k) To obtain from your customers all consents required by applicable
privacy laws to permit us, any of our affiliates or the Funds to provide you
either directly or through a service established for that purpose with
confirmations, account statements and other information about your customers'
investments in the Funds.
4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with orders for the
purchase of shares on behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone, or wire, you
shall act as agent for the custodian or trustee of such plans (solely with
respect to the time of receipt of the application and payments), and you shall
not place such an order until you have received from your customer payment for
such purchase and, if such purchase represents the first contribution to such a
plan, the completed documents necessary to establish the plan and enrollment in
the plan. You agree to indemnify us and Franklin Templeton Trust Company and/or
Templeton Funds Trust Company as applicable for any claim, loss, or liability
resulting from incorrect investment instructions received from you which cause a
tax liability or other tax penalty.
5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from you any conditional
orders for shares of any of the Funds. Delivery of certificates or confirmations
for shares purchased shall be made by the Funds only against constructive
receipt of the purchase price, subject to deduction for your concession and our
portion of the sales charge, if any, on such sale. No certificates for shares of
the Funds will be issued unless specifically requested.
6. DEALER COMPENSATION.
(a) On each purchase of shares by you from us, the total sales charges and
your dealer concessions shall be as stated in each Fund's then current
prospectus, subject to NASD rules and applicable laws. Such sales charges and
dealer concessions are subject to reductions under a variety of circumstances as
described in the Funds' prospectuses. For an investor to obtain these
reductions, we must be notified at the time of the sale that the sale qualifies
for the reduced charge. If you fail to notify us of the applicability of a
reduction in the sales charge at the time the trade is placed, neither we nor
any of the Funds will be liable for amounts necessary to reimburse any investor
for the reduction which should have been effected.
(b) In accordance with the Funds' prospectuses, we or our affiliates may,
but are not obligated to, make payments to you from our own resources as
compensation for certain sales which are made at net asset value ("Qualifying
Sales"). If you notify us of a Qualifying Sale, we may make a contingent advance
payment up to the maximum amount available for payment on the sale. If any of
the shares purchased in a Qualifying Sale are repurchased or redeemed within
twelve months of the month of purchase, we shall be entitled to recover any
advance payment attributable to the repurchased or redeemed shares by reducing
any account payable or other monetary obligation we may owe to you or by making
demand upon you for repayment in cash. We reserve the right to withhold advances
to you, if for any reason we believe that we may not be able to recover unearned
advances from you. Termination or suspension of this Agreement shall not relieve
you or us from the requirements of this subsection.
7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of shares of the Funds
will be made at the net asset value of such shares, less any applicable deferred
sales or redemption charges, in accordance with the applicable prospectuses.
Except as permitted by applicable law, you agree not to purchase any shares from
your customers at a price lower than the net asset value of such shares next
computed by the Funds after the purchase (the "Redemption/Repurchase Price").
You shall, however, be permitted to sell shares of the Funds for the account of
the record owner to the Funds at the Redemption/Repurchase Price for such
shares.
8. EXCHANGES. Telephone exchange orders will be effective only for
uncertificated shares or for which share certificates have been previously
deposited and may be subject to any fees or other restrictions set forth in the
applicable prospectuses. Exchanges from a Fund sold with no sales charge to a
Fund which carries a sales charge, and exchanges from a Fund sold with a sales
charge to a Fund which carries a higher sales charge may be subject to a sales
charge in accordance with the terms of the applicable Fund's prospectus. You
will be obligated to comply with any additional exchange policies described in
the applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
9. TRANSACTION PROCESSING. All orders are subject to acceptance by us and by the
Fund or its transfer agent, and become effective only upon confirmation by us.
If required by law, each transaction shall be confirmed in writing on a fully
disclosed basis and if confirmed by us, a copy of each confirmation shall be
sent simultaneously to you if you so request. All sales are made subject to
receipt of shares by us from the Funds. We reserve the right in our discretion,
without notice, to suspend the sale of shares of the Funds or withdraw the
offering of shares of the Funds entirely. Orders will be effected at the
price(s) next computed on the day they are received if, as set forth in the
applicable Fund's current prospectus, the orders are received by us, an agent
appointed by us or the Funds prior to the time the price of the Fund's shares is
calculated. Orders received after that time will be effected at the price(s)
computed on the next business day. All orders must be accompanied by payment in
U.S. Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a
U.S. bank, for the full amount of the investment.
10. MULTIPLE CLASSES. We may from time to time provide to you written compliance
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of shares (each, a "Class") with different sales charges and
distribution related operating expenses. In addition, you will be bound by any
applicable rules or regulations of government agencies or self-regulatory
organizations generally affecting the sale or distribution of shares of
investment companies offering multiple classes of shares.
11. RULE 12B-1 PLANS. You are invited to participate in all distribution plans
(each, a "Plan") adopted for a Class of a Fund or for a Fund that has only a
single Class (each, a "Plan Class") pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act").
To the extent you provide administrative and other services, including, but
not limited to, furnishing personal and other services and assistance to your
customers who own shares of a Plan Class, answering routine inquiries regarding
a Fund or Class, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, we shall pay you
a Rule 12b-1 servicing fee. To the extent that you participate in the
distribution of Fund shares that are eligible for a Rule 12b-1 distribution fee,
we shall also pay you a Rule 12b-1 distribution fee. All Rule 12b-1 servicing
and distribution fees shall be based on the value of shares attributable to
customers of your firm and eligible for such payment, and shall be calculated on
the basis and at the rates set forth in the compensation schedule then in effect
for the applicable Plan (the "Schedule"). Without prior approval by a majority
of the outstanding shares of a particular Class of a Fund which has a Plan, the
aggregate annual fees paid to you pursuant to such Plan shall not exceed the
amounts stated as the "annual maximums" in such Plan Class' prospectus, which
amount shall be a specified percent of the value of such Plan Class' net assets
held in your customers' accounts which are eligible for payment pursuant to this
Agreement (determined in the same manner as such Plan Class uses to compute its
net assets as set forth in its effective prospectus).
You shall furnish us and each Fund that has a Plan Class (each, a "Plan
Fund") with such information as shall reasonably be requested by the Board of
Directors, Trustees or Managing General Partners (hereinafter referred to as
"Directors") of such Plan Fund with respect to the fees paid to you pursuant to
the Schedule of such Plan Fund. We shall furnish to the Boards of Directors of
the Plan Funds, for their review on a quarterly basis, a written report of the
amounts expended under the Plans and the purposes for which such expenditures
were made.
Each Plan and the provisions of any agreement relating to such Plan must be
approved annually by a vote of the Directors of the Fund that has such Plan,
including such persons who are not interested persons of such Plan Fund and who
have no financial interest in such Plan or any related agreement ("Rule 12b-1
Directors"). Each Plan or the provisions of this Agreement relating to such Plan
may be terminated at any time by the vote of a majority of the Rule 12b-1
Directors, or by a vote of a majority of the outstanding shares of the Class
that has such Plan, on sixty (60) days' written notice, without payment of any
penalty. A Plan or the provisions of this Agreement may also be terminated by
any act that terminates the Underwriting Agreement between us and the Fund that
has such Plan, and/or the management or administration agreement between
Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and such Plan Fund. In the event of the termination of a Plan for any
reason, the provisions of this Agreement relating to such Plan will also
terminate.
Continuation of a Plan and provisions of this Agreement relating to such
Plan are conditioned on Rule 12b-1 Directors being ultimately responsible for
selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, a Plan Fund is permitted to implement or continue a Plan or the
provisions of this Agreement relating to such Plan from year-to-year only if,
based on certain legal considerations, the Board of Directors of such Plan Fund
is able to conclude that such Plan will benefit the Plan Class. Absent such
yearly determination, such Plan and the provisions of this Agreement relating to
such Plan must be terminated as set forth above. In addition, any obligation
assumed by a Fund pursuant to this Agreement shall be limited in all cases to
the assets of such Fund and no person shall seek satisfaction thereof from
shareholders of a Fund. You agree to waive payment of any amounts payable to you
by us under a Fund's Plan until such time as we are in receipt of such fee from
the Fund.
The provisions of the Plans between the Plan Funds and us shall control
over the provisions of this Agreement in the event of any inconsistency.
12. REGISTRATION OF SHARES. Upon request, we shall notify you of the states or
other jurisdictions in which each Fund's shares are currently noticed,
registered or qualified for offer or sale to the public. We shall have no
obligation to make notice filings of, register or qualify, or to maintain notice
filings of, registration of or qualification of, Fund shares in any state or
other jurisdiction. We shall have no responsibility, under the laws regulating
the sale of securities in any U.S. or foreign jurisdiction, for the
registration, qualification or licensed status of persons offering or selling
Fund shares or for the manner of offering or sale of Fund shares. If it is
necessary to file notice of, register or qualify Fund shares in any foreign
jurisdictions in which you intend to offer the shares of any Funds, it will be
your responsibility to arrange for and to pay the costs of such notice filing,
registration or qualification; prior to any such notice filing, registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such notice
filing, registration or qualification without the written consent of the
applicable Funds and of ourselves. Except as stated in this section, we shall
not, in any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by us in this Agreement shall
be implied. Nothing in this Agreement shall be deemed to be a condition,
stipulation or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations of the U.S. Securities and Exchange
Commission, or any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offer or sale of shares of the Funds, or to relieve the parties hereto from any
liability arising under such laws, rules and regulations.
13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13 relates solely to
shares of Funds that represent a beneficial interest in the Franklin Floating
Rate Trust and shares issued by any other continuously offered closed-end
investment company registered under the 1940 Act for which we or an affiliate of
ours serve as principal underwriter and that periodically repurchases its shares
(each, a "Trust"). Shares of a Trust that are offered to the public will be
registered under the 1933 Act, and are expected to be offered during an offering
period that may continue indefinitely ("Continuous Offering Period"). There is
no guarantee that such a continuous offering will be maintained by a Trust. The
Continuous Offering Period, shares of a Trust and certain of the terms on which
such shares are offered shall be as described in the prospectus of the Trust.
As set forth in a Trust's then current prospectus, we may, but are not
obligated to, provide you with appropriate compensation for selling shares of
the Trust. In addition, you may be entitled to a fee for servicing your clients
who are shareholders in a Trust, subject to applicable law and NASD Conduct
Rules. You agree that any repurchases of shares of a Trust that were originally
purchased as Qualifying Sales shall be subject to Subsection 6(b) hereof.
You expressly acknowledge and understand that, notwithstanding anything to
the contrary in this Agreement:
(a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or
have any obligation to pay, any compensation directly or indirectly to
you.
(b) Shares of a Trust will not be repurchased by either the Trust (other
than through repurchase offers by the Trust from time to time, if any)
or by us and no secondary market for such shares exists currently, or
is expected to develop. Any representation as to a repurchase or
tender offer by a Trust, other than that set forth in the Trust's then
current prospectus, notification letters, reports or other related
material provided by the Trust, is expressly prohibited.
(c) An early withdrawal charge payable by shareholders of a Trust to us
may be imposed on shares accepted for repurchase by the Trust that
have been held for less than a stated period, as set forth in the
Trust's then current Prospectus.
(d) In the event your customer cancels his or her order for shares of a
Trust after confirmation, such shares will not be repurchased,
remarketed or otherwise disposed of by or though us.
14. FUND INFORMATION. No person is authorized to give any information or make
any representations concerning shares of any Fund except those contained in the
Fund's then current prospectus or in materials issued by us as information
supplemental to such prospectus. We will supply reasonable quantities of
prospectuses, supplemental sales literature, sales bulletins, and additional
information as issued by the Fund or us. You agree not to use other advertising
or sales material relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by us in
advance of such use. Such approval may be withdrawn by us in whole or in part
upon notice to you, and you shall, upon receipt of such notice, immediately
discontinue the use of such sales literature, sales material and advertising.
You are not authorized to modify or translate any such materials without our
prior written consent.
15. INDEMNIFICATION. You agree to indemnify, defend and hold harmless us, the
Funds, and the respective officers, directors and employees of the Funds and us
from any and all losses, claims, liabilities and expenses arising out of (1) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the U.S. or any state or foreign country) or
any alleged tort or breach of contract, in or related to the offer or sale by
you of shares of the Funds pursuant to this Agreement (except to the extent that
our negligence or failure to follow correct instructions received from you is
the cause of such loss, claim, liability or expense), (2) any redemption or
exchange pursuant to telephone instructions received from you or your agents or
employees, or (3) the breach by you of any of the terms and conditions of this
Agreement. This Section 15 shall survive the termination of this Agreement.
16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party to this Agreement
may terminate its participation in this Agreement by giving written notice to
the other parties. Such notice shall be deemed to have been given and to be
effective on the date on which it was either delivered personally to the other
parties or any officer or member thereof, or was mailed postpaid or delivered by
electronic transmission to the other parties' chief legal officers at the
addresses shown herein or in the most recent NASD Manual. This Agreement shall
terminate immediately upon the appointment of a Trustee under the Securities
Investor Protection Act or any other act of insolvency by you. The termination
of this Agreement by any of the foregoing means shall have no effect upon
transactions entered into prior to the effective date of termination. A trade
placed by you subsequent to your voluntary termination of this Agreement will
not serve to reinstate the Agreement. Reinstatement, except in the case of a
temporary suspension of a dealer, will be effective only upon written
notification by us to you. This Agreement will terminate automatically in the
event of its assignment by us. For purposes of the preceding sentence, the word
"assignment" shall have the meaning given to it in the 1940 Act. This Agreement
may not be assigned by you without our prior written consent. This Agreement may
be amended by us at any time by written notice to you and your placing of an
order or acceptance of payments of any kind after the effective date and receipt
of notice of any such Amendment shall constitute your acceptance of such
Amendment.
17. SETOFF; DISPUTE RESOLUTION. Should any of your concession accounts with us
have a debit balance, we may offset and recover the amount owed to us or the
Funds from any other account you have with us, without notice or demand to you.
In the event of a dispute concerning any provision of this Agreement, either
party may require the dispute to be submitted to binding arbitration under the
commercial arbitration rules of the NASD or the American Arbitration
Association. Judgment upon any arbitration award may be entered by any court
having jurisdiction. This Agreement shall be construed in accordance with the
laws of the State of California, not including any provision that would require
the general application of the law of another jurisdiction.
18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative and supersedes
any agreement previously in effect. It shall be binding upon the parties hereto
when signed by us and accepted by you. If you have a current dealer agreement
with us, your first trade or acceptance of payments from us after your receipt
of this Agreement, as it may be amended pursuant to Section 16, above, shall
constitute your acceptance of its terms. Otherwise, your signature below shall
constitute your acceptance of its terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
415/312-2000
700 Central Avenue
St. Petersburg, Florida 33701-3628
813/823-8712
- --------------------------------------------------------------------------------
Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.
__________________________________
DEALER NAME:
By _______________________________
(Signature)
Name:_____________________________
Title: ___________________________
Address: ______________________________
_______________________________________
_______________________________________
Telephone: _______________________
NASD CRD # _______________________
- --------------------------------------------------------------------------------
Franklin Templeton Dealer # ______________________
(Internal Use Only)
- --------------------------------------------------------------------------------
Version 12/31/97
232567.4
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
May 15, 1998
Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16
Dear Securities Dealer:
This letter constitutes notice of amendment of the current Dealer Agreement (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and
you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as
follows:
1. Defined terms in this amendment have the meanings as stated in the
Agreement unless otherwise indicated.
2. Section 6 is modified to add a subsection 6(c), as follows:
(c) The following limitations apply with respect to shares of each Trust as
described in Section 13 of this Agreement.
(1) Consistent with the NASD Conduct Rules, the total compensation to
be paid to us and selected dealers and their affiliates, including you and your
affiliates, in connection with the distribution of shares of a Trust will not
exceed the underwriting compensation limitation prescribed by NASD Conduct Rule
2710. The total underwriting compensation to be paid to us and selected dealers
and their affiliates, including you and your affiliates, may include: (i) at the
time of purchase of shares a payment to you or another securities dealer of 1%
of the dollar amount of the purchased shares by the Distributor; and (ii) a
quarterly payment at an annual rate of .50% to you or another securities dealer
based on the value of such remaining shares sold by you or such securities
dealer, if after twelve (12) months from the date of purchase, the shares sold
by you or such securities dealer remain outstanding.
(2) The maximum compensation shall be no more than as disclosed in the
section "Payments to Dealers" of the prospectus of the applicable Trust.
Pursuant to Section 16 of the Agreement, your placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute your acceptance of this amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
--------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
MUTUAL FUND PURCHASE AND SALES AGREEMENT
FOR ACCOUNTS OF BANK AND TRUST COMPANY CUSTOMERS
EFFECTIVE: APRIL 1, 1998
1. INTRODUCTION
The parties to this Agreement are the undersigned bank or trust company
("Bank") and Franklin/Templeton Distributors, Inc. ("FTDI"). This Agreement sets
forth the terms and conditions under which FTDI will execute purchases and
redemptions of shares of the Franklin or Templeton investment companies or
series of such investment companies for which FTDI now or in the future serves
as principal underwriter (each, a "Fund"), at the request of the Bank upon the
order and for the account of Bank's customers ("Customers"). In this Agreement,
"Customer" shall include the beneficial owners of an account and any agent or
attorney-in-fact duly authorized or appointed to act on the owners' behalf with
respect to the account; and "redemptions" shall include redemptions of shares of
Funds that are open-end management investment companies and repurchases of
shares of Funds that are closed-end investment companies by the Fund that is the
issuer of such shares. FTDI will notify Bank from time to time of the Funds
which are eligible for distribution and the terms of compensation under this
Agreement. This Agreement is not exclusive, and either party may enter into
similar agreements with third parties.
2. REPRESENTATIONS AND WARRANTIES OF BANK
Bank warrants and represents to FTDI and the Funds that:
a) Bank is a "bank" as defined in section 3(a)(6) of the Securities
Exchange Act of 1934, as amended (the "1934 Act");
b) Bank is authorized to enter into this Agreement as agent for the
Customers, and Bank's performance of its obligations and receipt of
consideration under this Agreement will not violate any law,
regulation, charter, agreement, or regulatory restriction to which
Bank is subject; and
c) Bank has received all regulatory agency approvals and taken all legal
and other steps necessary for offering the services Bank will provide
to Customers and receiving any applicable compensation in connection
with this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL UNDERWRITER
FTDI warrants and represents to Bank that:
a) FTDI is a broker/dealer registered under the 1934 Act; and
b) FTDI is the principal underwriter of the Funds.
4. COVENANTS OF BANK
a) For each purchase or redemption transaction under this Agreement
(each, a "Transaction"), Bank will:
1) be authorized to engage in the Transaction;
2) act as agent for the Customer, unless Bank is the Customer;
3) act solely at the request of and for the account of the Customer,
unless Bank is the Customer;
4) not submit an order unless Bank has already received the order
from the Customer, unless Bank is the Customer;
5) not offer to sell shares of Fund(s) or submit a purchase order
unless Bank has already delivered to the Customer a copy of the
then current prospectuses for the Fund(s) whose shares are
offered or are to be purchased;
6) not withhold placing any Customer's order for the purpose of
profiting from the delay or place orders for shares in amounts
just below the point at which sales charges are reduced so as to
benefit from a higher Fee (as defined in Paragraph 5(e) below)
applicable to a Transaction in an amount below the breakpoint;
7) have no beneficial ownership of the securities in any purchase
Transaction (the Customer will have the full beneficial
ownership), unless Bank is the Customer (in which case, Bank will
not engage in the Transaction unless the Transaction is legally
permissible for Bank);
8) not accept or withhold any Fee (as defined in Paragraph 5(e) of
this Agreement) otherwise allowed under Paragraphs 5(d) and (e)
of this Agreement, if prohibited by the Employee Retirement
Income Security Act of 1974, as amended, or trust or similar laws
to which Bank is subject, in the case of Transactions of Fund
shares involving retirement plans, trusts, or similar accounts;
9) maintain records of all Transactions of Fund shares made through
Bank and furnish FTDI with copies of such records on request; and
10) distribute prospectuses, statements of additional information and
reports to Customers in compliance with applicable legal
requirements, except to the extent that FTDI expressly undertakes
to do so on behalf of Bank.
b) While this Agreement is in effect, Bank will:
1) not purchase any Fund shares from any person at a price lower
than the redemption or repurchase price as applicable next
determined by the applicable Fund;
2) repay FTDI the full Fee received by Bank under Paragraphs 5(d)
and (e) of this Agreement, and any payments FTDI or its
affiliates made to Bank from their own resources under Paragraph
5(e) of this Agreement ("FTDI Payments"), for any Fund shares
purchased under this Agreement which are redeemed or repurchased
by the Fund within 7 business days after the purchase; in turn,
FTDI shall pay to the Fund the amount repaid by Bank (other than
any portion of such repayment that is a repayment of FTDI
Payments) and will notify Bank of any such redemption within a
reasonable time (termination or suspension of this Agreement
shall not relieve Bank or FTDI from the requirements of this
subparagraph);
3) in connection with orders for the purchase of Fund shares on
behalf of an Individual Retirement Account, Self-Employed
Retirement Plan or other retirement accounts, by mail, telephone,
or wire, act as agent for the custodian or trustee of such plans
(solely with respect to the time of receipt of the application
and payments) and shall not place such an order until Bank has
received from its Customer payment for such purchase and, if such
purchase represents the first contribution to such a plan, the
completed documents necessary to establish the plan and
enrollment in the plan (Bank agrees to indemnify FTDI and
Franklin Templeton Trust Company and/or Templeton Funds Trust
Company as applicable for any claim, loss, or liability resulting
from incorrect investment instructions received from Bank which
cause a tax liability or other tax penalty);
4) be responsible for compliance with all laws and regulations,
including those of the applicable federal and state bank and
securities regulatory authorities, with regard to Bank and Bank's
Customers; and
5) obtain from its Customers any consents required by applicable
federal and/or state privacy laws to permit FTDI, any of its
affiliates or the Funds to provide Bank with confirmations,
account statements and other information about Customers'
investments in the Funds.
5. TERMS AND CONDITIONS FOR TRANSACTIONS
a) Price
Purchase orders for Fund shares received from Bank will be accepted only at
the public offering price and in compliance with procedures applicable to each
purchase order as set forth in the then current prospectus and statement of
additional information (hereinafter, collectively, "prospectus") for the
applicable Fund. All purchase orders must be accompanied by payment in U.S.
Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a U.S.
bank, for the full amount of the investment. All sales are made subject to
receipt of shares by FTDI from the Funds. FTDI reserves the right in its
discretion, without notice, to suspend the sale of shares or withdraw the
offering of shares entirely.
b) Orders and Confirmations
All orders are subject to acceptance or rejection by FTDI and by the Fund
or its transfer agent at their sole discretion, and become effective only upon
confirmation by FTDI. Transaction orders shall be made using the procedures and
forms required by FTDI from time to time. Orders received by FTDI or an agent
appointed by FTDI or the Funds on any business day after the time for
calculating the price of Fund shares as set forth in each Fund's current
prospectus will be effected at the price determined on the next business day. No
order will be accepted unless Bank or the Customer shall have provided FTDI with
the Customer's full name, address and other information normally required by
FTDI to open a customer account, and FTDI shall be entitled to rely on the
accuracy of the information provided by Bank. A written confirming statement
will be sent to Bank and to Customer upon settlement of each Transaction.
c) Multiple Class Guidelines
FTDI may from time to time provide to Bank written compliance guidelines or
standards relating to the sale or distribution of Funds offering multiple
classes of shares (each, a "Class") with different sales charges and
distribution-related operating expenses. Bank will comply with FTDI's written
compliance guidelines and standards, as well as with any applicable rules or
regulations of government agencies or self-regulatory organizations generally
affecting the sale or distribution of investment companies offering multiple
classes of shares, whether or not Bank deems itself otherwise subject to such
rules or regulations.
d) Payments by Bank for Purchases
On the settlement date for each purchase, Bank shall either (i) remit the
full purchase price by wire transfer to an account designated by FTDI, or (ii)
following FTDI's procedures, wire the purchase price less the Fee allowed by
Paragraph 5(e) of this Agreement. Twice monthly, FTDI will pay Bank Fees not
previously paid to or withheld by Bank. Each calendar month, FTDI, as
applicable, will prepare and mail an activity statement summarizing all
Transactions.
e) Fees and Payments
Where permitted by the prospectus for a Fund, a charge, concession, or fee
(each of the foregoing forms of compensation, a "Fee") may be paid to Bank,
related to services provided by Bank in connection with Transactions in shares
of such Fund. The amount of the Fee, if any, is set by the relevant prospectus.
Adjustments in the Fee are available for certain purchases, and Bank is solely
responsible for notifying FTDI when any purchase or redemption order is
qualified for such an adjustment. If Bank fails to notify FTDI of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither FTDI nor any of the Funds will be liable for amounts necessary
to reimburse any Customer for the reduction which should have been effected.
In accordance with the Funds' prospectuses, FTDI or its affiliates may, but
are not obligated to, make payments from their own resources to Bank as
compensation for certain sales that are made at net asset value ("Qualifying
Sales"). If Bank notifies FTDI of a Qualifying Sale, FTDI may make a contingent
advance payment up to the maximum amount available for payment on the sale. If
any of the shares purchased in a Qualifying Sale are redeemed or repurchased
within twelve months of the month of purchase, FTDI shall be entitled to recover
any advance payment attributable to the redeemed or repurchased shares by
reducing any account payable or other monetary obligation FTDI may owe to Bank
or by making demand upon Bank for repayment in cash. FTDI reserves the right to
withhold any one or more advances, if for any reason FTDI believes that FTDI may
not be able to recover unearned advances. Termination or suspension of this
Agreement does not relieve Bank from the requirements of this paragraph.
f) Rule 12b-1 Plans
Bank is also invited to participate in all distribution plans (each, a
"Plan") adopted for a Class of a Fund or for a Fund that has only a single Class
(each, a "Plan Class") pursuant to Rule 12b-1 under the Investment Company Act
of 1940, as amended (the "1940 Act").
To the extent Bank provides administrative and other services, including,
but not limited to, furnishing personal and other services and assistance to
Customers who own shares of a Plan Class, answering routine inquiries regarding
a Fund or Class, assisting in changing account designations and addresses,
maintaining such accounts or such other services as a Fund may require, to the
extent permitted by applicable statutes, rules, or regulations, FTDI shall pay
Bank a Rule 12b-1 servicing fee. To the extent that Bank participates in the
distribution of Fund shares that are eligible for a Rule 12b-1 distribution
fee,FTDI shall also pay Bank a Rule 12b-1 distribution fee. All Rule 12b-1
servicing and distribution fees shall be based on the value of shares
attributable to Customers and eligible for such payment, and shall be calculated
on the basis and at the rates set forth in the compensation schedule then in
effect for the applicable Plan (the "Schedule"). Without prior approval by a
majority of the outstanding shares of a particular Class of a Fund, the
aggregate annual fees paid to Bank pursuant to such Plan shall not exceed the
amounts stated as the "annual maximums" in such Plan Class' prospectus, which
amount shall be a specified percent of the value of such Plan Class' net assets
held in Customers' accounts which are eligible for payment pursuant to this
Agreement (determined in the same manner as such Plan Class uses to compute its
net assets as set forth in its effective Prospectus).
Bank shall furnish FTDI and each Fund that has a Plan Class (each, a "Plan
Fund") with such information as shall reasonably be requested by the Board of
Directors, Trustees or Managing General Partners (hereinafter referred to as
"Directors") of such Plan Fund with respect to the fees paid to Bank pursuant to
the Schedule of such Plan Fund. FTDI shall furnish to the Boards of Directors of
the Plan Funds, for their review on a quarterly basis, a written report of the
amounts expended under the Plans and the purposes for which such expenditures
were made.
Each Plan and the provisions of any agreement relating to such Plan must be
approved annually by a vote of the Directors of the Fund that has such Plan,
including such persons who are not interested persons of such Plan Fund and who
have no financial interest in such Plan or any related agreement ("Rule 12b-1
Directors"). Each Plan or the provisions of this Agreement relating to such Plan
may be terminated at any time by the vote of a majority of Rule 12b-1 Directors
of the Fund that has such Plan, or by a vote of a majority of the outstanding
shares of the Class that has such Plan on sixty (60) days' written notice,
without payment of any penalty. A Plan or the provisions of this Agreement may
also be terminated by any act that terminates the Underwriting Agreement between
FTDI and the Fund that has such Plan, and/or the management or administration
agreement between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc.
or their affiliates and such Plan Fund. In the event of the termination of a
Plan for any reason, the provisions of this Agreement relating to such Plan will
also terminate.
Continuation of a Plan and the provisions of this Agreement relating to
such Plan are conditioned on Rule 12b-1 Directors being ultimately responsible
for selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1,
Directors of any of the Plan Funds have a duty to request and evaluate, and
persons who are party to any agreement related to a Plan have a duty to furnish,
such information as may reasonably be necessary to an informed determination of
whether the Plan or any agreement should be implemented or continued. Under Rule
12b-1, a Plan Fund is permitted to implement or continue a Plan or the
provisions of this Agreement relating to such Plan from year-to-year only if,
based on certain legal considerations, the Board of Directors of such Plan Fund
is able to conclude that the Plan will benefit the Plan Class. Absent such
yearly determination, a Plan and the provisions of this Agreement relating to
such Plan must be terminated as set forth above. In addition, any obligation
assumed by a Fund pursuant to this Agreement shall be limited in all cases to
the assets of such Fund and no person shall seek satisfaction thereof from
shareholders of a Fund. Bank agrees to waive payment of any amounts payable to
Bank by FTDI under a Fund's Plan until such time as FTDI is in receipt of such
fee from the Fund.
The provisions of the Plans between the Plan Funds and FTDI shall control
over the provisions of this Agreement in the event of any inconsistency.
g) Other Distribution Services
From time to time, FTDI may offer telephone and other augmented services in
connection with Transactions under this Agreement. If Bank uses any such
service, Bank will be subject to the procedures applicable to the service,
whether or not Bank has executed any agreement required for the service.
h) Conditional Orders; Certificates
FTDI will not accept any conditional Transaction orders. Delivery of
certificates or confirmations for shares purchased shall be made by a Fund only
against constructive receipt of the purchase price, subject to deduction of any
Fee and FTDI's portion of the sales charge, if any, on such sale. No
certificates for shares of the Funds will be issued unless specifically
requested.
i) Cancellation of Orders
If payment for shares purchased is not received within the time customary
or the time required by law for such payment, the sale may be canceled without
notice or demand, and neither FTDI nor the Fund(s) shall have any responsibility
or liability for such a cancellation; alternatively, at FTDI's option, the
unpaid shares may be sold back to the Fund, and Bank shall be liable for any
resulting loss to FTDI or to the Fund(s). FTDI shall have no liability for any
check or other item returned unpaid to Bank after Bank has paid FTDI on behalf
of a purchaser. FTDI may refuse to liquidate the investment unless FTDI receives
the purchaser's signed authorization for the liquidation.
j) Order Corrections
Bank shall assume responsibility for any loss to a Fund(s) caused by a
correction made subsequent to trade date, provided such correction was not based
on any error, omission or negligence on FTDI's part, and Bank will immediately
pay such loss to the Fund(s) upon notification.
k) Redemptions; Cancellation
Redemptions or repurchases of shares will be made at the net asset value of
such shares, less any applicable deferred sales or redemption charges, in
accordance with the applicable prospectuses. If Bank sells shares for the
account of the record owner to the Funds, Bank shall be deemed to represent to
FTDI that Bank is doing so as agent for the Customer and that Bank is authorized
to do so in such capacity. Such sales to the Funds shall be at the redemption or
repurchase price then currently in effect for such shares. If on a redemption
which Bank has ordered, instructions in proper form, including outstanding
certificates, are not received within the time customary or the time required by
law, the redemption may be canceled forthwith without any responsibility or
liability on the part of FTDI or any Fund, or at the option of FTDI, FTDI may
buy the shares redeemed on behalf of the Fund, in which latter case FTDI may
hold Bank responsible for any loss to the Fund or loss of profit suffered by
FTDI resulting from Bank's failure to settle the redemption.
l) Exchanges
Telephone exchange orders will be effective only for uncertificated shares
or for which share certificates have been previously deposited and may be
subject to any fees or other restrictions set forth in the applicable
prospectuses. Exchanges from a Fund sold with no sales charge to a Fund which
carries a sales charge, and exchanges from a Fund sold with a sales charge to a
Fund which carries a higher sales charge may be subject to a sales charge in
accordance with the terms of the applicable Fund's prospectus. Bank will be
obligated to comply with any additional exchange policies described in the
applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
m) Qualification of Shares; Indemnification
Upon request, FTDI shall notify Bank of the states or other jurisdictions
in which each Fund's shares are currently noticed, registered or qualified for
offer or sale to the public. FTDI shall have no obligation to make notice
filings of, register or qualify, or to maintain notice filings of, registration
of or qualification of, Fund shares in any state or other jurisdiction. FTDI
shall have no responsibility, under the laws regulating the sale of securities
in any U.S. or foreign jurisdiction, for the registration, qualification or
licensed status of Bank or any of its agents or sub-agents in connection with
the purchase or sale of Fund shares or for the manner of offering, sale or
purchase of Fund shares. Except as stated in this paragraph, FTDI shall not, in
any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by FTDI in this Agreement
shall be implied. If it is necessary to file notice of, register or qualify
shares of any Fund in any country, state or other jurisdiction having authority
over the purchase or sale of Fund shares that are purchased by a Customer, it
will be Bank's responsibility to arrange for and to pay the costs of such notice
filing, registration or qualification; prior to any such notice filing,
registration or qualification, Bank will notify FTDI of its intent and of any
limitations that might be imposed on the Funds, and Bank agrees not to proceed
with such notice filing, registration or qualification without the written
consent of the applicable Funds and of FTDI. Nothing in this Agreement shall be
deemed to be a condition, stipulation, or provision binding any person acquiring
any security to waive compliance with any provision of the Securities Act of
1933, as amended (the "1933 Act"), the 1934 Act, the 1940 Act, the rules and
regulations of the U.S. Securities and Exchange Commission, or any applicable
laws or regulations of any government or authorized agency in the U.S. or any
other country having jurisdiction over the offer or sale of shares of the Funds,
or to relieve the parties hereto from any liability arising under such laws,
rules or regulations.
Bank further agrees to indemnify, defend and hold harmless FTDI, the Funds,
their officers, directors and employees from any and all losses, claims,
liabilities and expenses, arising out of (1) any alleged violation of any
statute or regulation (including without limitation the securities laws and
regulations of the United States of America or any state or foreign country) or
any alleged tort or breach of contract, in or related to any offer, sale or
purchase of shares of the Funds involving Bank or any Customer pursuant to this
Agreement (except to the extent that FTDI's negligence or failure to follow
correct instructions received from Bank is the cause of such loss, claim,
liability or expense), (2) any redemption or exchange pursuant to telephone
instructions received from Bank or its agents or employees, or (3) the breach by
Bank of any of the terms and conditions of this Agreement. This Paragraph 5(m)
shall survive the termination of this Agreement.
n) Prospectus and Sales Materials; Limit on Advertising
No person is authorized to give any information or make any representations
concerning shares of any Fund except those contained in the Fund's current
prospectus or in materials issued by FTDI as information supplemental to such
prospectus. FTDI will supply prospectuses, reasonable quantities of supplemental
sale literature, sales bulletins, and additional information as issued. Bank
agrees not to use other advertising or sales material or other material or
literature relating to the Funds except that which (a) conforms to the
requirements of any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offering or sale of shares of the Funds, and (b) is approved in writing by FTDI
in advance of such use. Such approval may be withdrawn by FTDI in whole or in
part upon notice to Bank, and Bank shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales material and
advertising. Bank is not authorized to modify or translate any such materials
without the prior written consent of FTDI.
o) Customer Information
1) DEFINITION. For purposes of this Paragraph 5(o), "Customer
Information" means customer names and other identifying
information pertaining to one or more Customers which is
furnished by Bank to FTDI in the ordinary course of business
under this Agreement. Customer Information shall not include any
information obtained from any sources other than the Customer or
the Bank.
2) PERMITTED USES. FTDI may use Customer Information to fulfill its
obligations under this Agreement, the Distribution Agreements
between the Funds and FTDI, the Funds' prospectuses, or other
duties imposed by law. In addition, FTDI or its affiliates may
use Customer Information in communications to shareholders to
market the Funds or other investment products or services,
including without limitation variable annuities, variable life
insurance, and retirement plans and related services. FTDI may
also use Customer Information if it obtains Bank's prior written
consent.
3) PROHIBITED USES. Except as stated above, FTDI shall not disclose
Customer Information to third parties, and shall not use Customer
Information in connection with any advertising, marketing or
solicitation of any products or services, provided that Bank
offers or soon expects to offer comparable products or services
to mutual fund customers and has so notified FTDI.
4) SURVIVAL; TERMINATION. The agreements described in this paragraph
5(o) shall survive the termination of this Agreement, but shall
terminate as to any account upon FTDI's receipt of valid
notification of either the termination of that account with Bank
or the transfer of that account to another bank or dealer.
6. CONTINUOUSLY OFFERED CLOSED-END FUNDS
This Paragraph 6 relates solely to shares of Funds that represent a
beneficial interest in the Franklin Floating Rate Trust or that are issued by
any other continuously offered closed-end investment company registered under
the 1940 Act for which FTDI or an affiliate of FTDI serves as principal
underwriter and that periodically repurchases its shares (each, a "Trust").
Shares of a Trust being offered to the public will be registered under the 1933
Act and are expected to be offered during an offering period that may continue
indefinitely ("Continuous Offering Period"). There is no guarantee that such a
continuous offering will be maintained by the Trust. The Continuous Offering
Period, shares of a Trust and certain of the terms on which such shares are
being offered are more fully described in the prospectus of the Trust.
As set forth in a Trust's then current prospectus, FTDI shall provide Bank
with appropriate compensation for purchases of shares of the Trust made by the
Bank for the account of Customers or by Customers. In addition, Bank may be
entitled to a fee for servicing Customers who are shareholders in a Trust,
subject to applicable law. Bank agrees that any repurchases of shares of a Trust
that were originally purchased as Qualifying Sales shall be subject to Paragraph
5(e) hereof.
Bank expressly acknowledges and understands that, notwithstanding anything
to the contrary in this Agreement:
a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or
have any obligation to pay, any compensation directly or indirectly to
Bank.
b) Shares of a Trust will not be repurchased by either the Trust (other
than through repurchase offers by the Trust from time to time, if any)
or by FTDI and no secondary market for such shares exists currently,
or is expected to develop. Any representation as to a repurchase or
tender offer by the Trust, other than that set forth in the Trust's
then current Prospectus, notification letters, reports or other
related material provided by the Trust, is expressly prohibited.
c) An early withdrawal charge payable by shareholders of a Trust to FTDI
may be imposed on shares accepted for repurchase by the Trust that
have been held for less than a stated period, as set forth in the
Trust's then current Prospectus.
d) In the event a Customer cancels his or her order for shares of a Trust
after confirmation, such shares will not be repurchased, remarketed or
otherwise disposed of by or though FTDI.
7. GENERAL
a) Successors and Assignments
This Agreement shall extend to and be binding upon the parties hereto and
their respective successors and assigns; provided that this Agreement will
terminate automatically in the event of its assignment by FTDI. For purposes of
the preceding sentence, the word "assignment" shall have the meaning given to it
in the 1940 Act. Bank may not assign this Agreement without the advance written
consent of FTDI.
b) Paragraph Headings
The paragraph headings of this Agreement are for convenience only, and
shall not be deemed to define, limit, or describe the scope or intent of this
Agreement.
c) Severability
Should any provision of this Agreement be determined to be invalid or
unenforceable under any law, rule, or regulation, that determination shall not
affect the validity or enforceability of any other provision of this Agreement.
d) Waivers
There shall be no waiver of any provision of this Agreement except a
written waiver signed by Bank and FTDI. No written waiver shall be deemed a
continuing waiver or a waiver of any other provision, unless the waiver
expresses such intention.
e) Sole Agreement
This Agreement is the entire agreement of Bank and FTDI and supersedes all
oral negotiations and prior writings.
f) Governing Law
This Agreement shall be construed in accordance with the laws of the State
of California, not including any provision which would require the general
application of the law of another jurisdiction, and shall be binding upon the
parties hereto when signed by FTDI and accepted by Bank, either by Bank's
signature in the space provided below or by Bank's first trade entered after
receipt of this Agreement.
g) Arbitration
Should Bank owe any sum of money to FTDI under or in relation to this
Agreement for the purchase, sale, redemption or repurchase of any Fund shares,
FTDI may offset and recover the amount owed by Bank to FTDI or the Funds from
any amount owed by FTDI to Bank or from any other account Bank has with FTDI,
without notice or demand to Bank. Either party may submit any dispute under this
Agreement to binding arbitration under the commercial arbitration rules of the
American Arbitration Association. Judgment upon any arbitration award may be
entered by any court having jurisdiction.
h) Amendments
FTDI may amend this Agreement at any time by depositing a written notice of
the amendment in the U.S. mail, first class postage pre-paid, addressed to
Bank's address given below. Bank's placement of any Transaction order or
acceptance of any payments after the effective date and receipt of notice of any
such amendment shall constitute Bank's acceptance of the amendment.
i) Term and Termination
This Agreement shall continue in effect until terminated and shall
terminate automatically in the event that Bank ceases to be a "bank" as set
forth in paragraph 2(a) of this Agreement. FTDI or Bank may terminate this
Agreement at any time by written notice to the other, but such termination shall
not affect the payment or repayment of Fees on Transactions prior to the
termination date. Termination also will not affect the indemnities given under
this Agreement.
j) Acceptance; Cumulative Effect
This Agreement is cumulative and supersedes any agreement previously in
effect. It shall be binding upon the parties hereto when signed by FTDI and
accepted by Bank. If Bank has a current agreement with FTDI, Bank's first trade
or acceptance of payments from FTDI after receipt of this Agreement, as it may
be amended pursuant to paragraph 7(h), above, shall constitute Bank's acceptance
of the terms of this Agreement.
Otherwise, Bank's signature below shall constitute Bank's acceptance of
these terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ Greg Johnson
-----------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal
notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, Florida 33716
813/299-8712
- --------------------------------------------------------------------------------
To the Bank or Trust Company: If you have not previously signed an agreement
with FTDI for the sale of mutual fund shares to your customers, please complete
and sign this section and return the original to us.
BANK OR TRUST COMPANY:
____________________________________
(Bank's name)
By: ____________________________________
(Signature)
Name: _________________________________
Title: _________________________________
Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
May 15, 1998
Re: Amendment of Mutual Fund Purchase and Sales Agreement for Accounts of
Bank and Trust Company Customers - Notice Pursuant to Paragraph 7(h)
Dear Bank or Trust Company:
This letter constitutes notice of amendment of the current Mutual Fund Purchase
and Sales Agreement for Accounts of Bank and Trust Company Customers (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("FTDI") and the bank
or trust company ("the Bank") pursuant to Paragraph 7(h) of the Agreement. The
Agreement is hereby amended as follows:
1. Defined terms in this amendment have the meanings as stated in the
Agreement unless otherwise indicated.
2. Paragraph 5(e) is modified to add the following language:
With respect to shares of each Trust as described in Paragraph 6 of this
Agreement, the total compensation to be paid to FTDI and selected dealers and
their affiliates, including the Bank and the Bank's affiliates, in connection
with the distribution of shares of a Trust will not exceed the underwriting
compensation limitation prescribed by NASD Conduct Rule 2710. The total
underwriting compensation to be paid to FTDI and selected dealers and their
affiliates, including the Bank and the Bank's affiliates, may include: (i) at
the time of purchase of shares a payment to the Bank or a securities dealer of
1% of the dollar amount of the purchased shares by FTDI; and (ii) a quarterly
payment at an annual rate of .50% to the Bank or a securities dealer based on
the value of such remaining shares sold by the Bank or such securities dealer,
if after twelve (12) months from the date of purchase, the shares sold by the
Bank or such securities dealer remain outstanding.
The maximum compensation shall be no more than as disclosed in the section
"Payments to Dealers" of the prospectus of the applicable Trust.
Pursuant to Paragraph 7(h) of the Agreement, the Bank's placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute the Bank's acceptance of this
amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ Greg Johnson
------------------------
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution
Agreement (the "Agreement") currently in effect between you and us. As used
herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to
you by a resolution of our Board passed at a meeting at which a majority of
Board members, including a majority who are not otherwise interested persons
of the Fund and who are not interested persons of our investment adviser, its
related organizations or of you or your related organizations, were present
and voted in favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into a
distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share shall
be earned when such Class B Share is sold and shall be payable from
time to time as provided in the Class B Plan. The distribution fee
payable to you as provided in the Class B Plan shall be payable
without offset, defense or counterclaim (it being understood by the
parties hereto that nothing in this sentence shall be deemed a
waiver by the Fund of any claim the Fund may have against you).
You may direct the Fund to cause our custodian to pay such
distribution fee to Lightning Finance Company Limited ("LFL") or
other persons providing funds to you to cover expenses referred to
in Section 2(a) of the Class B Plan and to cause our custodian to
pay the service fee to you for payment to dealers or others or
directly to others to cover expenses referred to in Section 2(b) of
the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL in
exchange for funds that you will use to cover expenses referred to
in Section 2(a) of the Class B Plan. In recognition that we will
benefit from your arrangement with LFL, we agree that, in addition
to the provisions of Section 7 (iii) of the Class B Plan, we will
not pay to any person or entity, other than LFL, any such assigned
distribution fees related to Class B Shares sold by you prior to
the termination of either the Agreement or the Class B Plan. We
agree that the preceding sentence shall survive termination of the
Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services agent
(the "Transfer Agent") to withhold from redemption proceeds payable
to holders of the Shares all contingent deferred sales charges
properly payable by such holders in accordance with the terms of
our then current prospectuses and statements of additional
information (each such sales charge, a "CDSC"). Upon receipt of an
order for redemption, the Transfer Agent shall direct our custodian
to transfer such redemption proceeds to a general trust account.
We shall then cause the Transfer Agent to pay over to you or your
assigns from the general trust account such CDSCs properly payable
by such holders as promptly as possible after the settlement date
for each such redemption of Shares. CDSCs shall be payable without
offset, defense or counterclaim (it being understood that nothing
in this sentence shall be deemed a waiver by us of any claim we may
have against you.) You may direct that the CDSCs payable to you be
paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN TEMPLETON FUND ALLOCATOR SERIES
By: /s/ Deborah R. Gatzek
--------------------------
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ Harmon E. Burns
------------------------
Harmon E. Burns
Executive Vice President
Dated: January 12, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
4 to the Registration Statement of Franklin Templeton Fund Allocator Series
on Form N-1A, File No. 333-13601, of our report dated August 30, 1999, on our
audit of the financial statements and financial highlights of Franklin
Templeton Fund Allocator Series, which report is included in the Annual
Report to Shareholders for the year ended July 31, 1999, filed with the
Securities and Exchange Commission pursuant to section 30(d) of the
Investment Company Act of 1940, which is incorporated by reference in the
Registration Statement. We also consent to the reference to our firm under
the captions "Financial Highlights" and "Auditor."
/s/ PricewaterhouseCoopers LLP
San Francisco, California
September 27, 1999