FRANKLIN
TEMPLETON
FUND ALLOCATOR
SERIES
CLASS A & C
INVESTMENT STRATEGY
GROWTH & INCOME
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND
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
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INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
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2 Goal and Strategies
4 Main Risks
6 Performance
12 Fees and Expenses
15 Management
19 Distributions and Taxes
20 Financial Highlights
23 Information about the Underlying
Franklin Templeton Funds
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
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35 Choosing a Share Class
39 Buying Shares
41 Investor Services
44 Selling Shares
46 Account Policies
49 Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT EACH FUND
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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.
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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.
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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 EQUITY FIXED-INCOME
INVESTMENTS 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, however, no fund intends to commit more
than 5% of its assets to these investment strategies. These strategies
include investments 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.
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
ASSET ALLOCATION A fund's ability to achieve its investment goal depends
upon the manager's skill in determining the fund's asset allocation mix.
There is the possibility that the manager's evaluations and assumptions
regarding asset classes and underlying funds will not successfully achieve
high long-term total return in view of actual market trends.
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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.
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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) and fluctuations in
value will occur due to earnings, economic conditions and other factors. The
stock market tends to be cyclical, with periods when stock prices generally
rise and periods when stock prices generally decline.
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.
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 non-diversified 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.
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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.
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[Insert graphic of bull and 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 2 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
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11.55% 2.98%
97 98
YEAR
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BEST
QUARTER:
Q2 '97
5.85%
WORST
QUARTER:
Q3 '98
- -5.38%
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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 3.41% 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
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14.28% 0.15%
97 98
YEAR
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BEST
QUARTER:
Q2 '97
7.27%
WORST
QUARTER:
Q3 '98
- -10.19%
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AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (12/31/96)
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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)
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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 4.23% 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
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13.05% -0.11%
97 98
YEAR
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BEST
QUARTER:
Q2 '97
8.42%
WORST
QUARTER:
Q3 '98
- -12.57%
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AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (12/31/96)
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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 7.52% 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. Because each fund pursues its goal by investing in
other mutual funds, rather than directly in individual securities, you will
bear your proportionate share of a fund's operating expenses, and also,
indirectly, the operating expenses of the underlying funds in which it
invests. All of these fees are described below.
SHAREHOLDER FEES (fees paid directly from your investment)
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CLASS A 1 CLASS C 1
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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 35 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)
CONSERVATIVE MODERATE GROWTH
CLASS A 1 TARGET FUND TARGET FUND TARGET FUND
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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
CLASS C 1 TARGET FUND TARGET FUND TARGET FUND
- --------------------------------------------------------------------------------
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 35) 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 47).
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, asset allocation fees were 0.16% and net annual
fund operating expenses were 0.75% for Class A and 1.50% for Class C. The
manager, however, is required by the fund's Board of Directors and an order
by the Securities and Exchange Commission to reduce its fees if the fund
invests in a Franklin Templeton money fund.
6. The manager had agreed in advance to reduce its fees to reflect reduced
services resulting from the fund's investment in a Franklin Templeton money
fund. This reduction is required by the fund's Board of Directors and an
order by the Securities and Exchange Commission.
7. For the fiscal year ended July 31, 1999, the manager had agreed in advance
to waive its fees. With this reduction, asset allocation fees were 0.14% and
net annual fund operating expenses were 0.75% for Class A and 1.50% for
Class Class C. The manager may end this arrangement at any time upon notice
to the fund's Board of Directors.
EXAMPLE
This example can help you compare the cost of investing in a fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o Each 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 FUND TARGET FUND TARGET 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
If you sell your shares at the end of the period:
1 Year 422 428 438
3 Years 787 805 835
5 Years 1,278 1,308 1,358
10 Years 2,629 2,689 2,789
CLASS C
If you do not sell your shares:
1 Year 323 329 339
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.
[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 $218 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 waive or limit
its fees and under an agreement to reduce fees resulting from the fund's
investment in money market funds managed by Advisers or its affiliates, the
Conservative Target Fund paid asset allocation fees totaling 0.16%. Under an
agreement by the manager to reduce fees resulting from the fund's investment
in money market funds managed by Advisers or its affiliates, the Moderate
Target Fund paid asset allocation fees totaling 0.24%. Under an agreement by
the manager to waive or limit its fees the Growth Target Fund paid asset
allocation fees totaling 0.14%. The Conservative Target Fund and the Growth
Target Fund paid direct operating expenses totaling 0.75% for Class A and
1.50% for Class C. The manager has ended this arrangement for Moderate Target
Fund and may end this arrangement at any time for Conservative Target Fund
and Growth Target Fund upon notice to the Board.
Each fund, as a shareholder in the underlying Franklin Templeton funds, will
indirectly bear its proportionate share of any management fees and other
expenses paid by the underlying Franklin Templeton funds. The investment
manager and the management fee of each of the underlying Franklin Templeton
funds (as an annual percentage rate of the fund's net assets) are set forth
below:
UNDERLYING
FRANKLIN TEMPLETON FUND MANAGER FEE RATE
- --------------------------------------------------------------------------------
Franklin Equity Franklin Advisers, Inc. 0.625% 1
("Advisers")
Franklin Growth Advisers 0.625% 2
Franklin Utilities Advisers 0.625% 2
Franklin Small Cap Advisers 0.625% 3
Franklin Value Franklin Advisory Services, Inc. 0.750% 4
("Advisory Services")
Franklin Real Estate Advisers 0.625% 3
Mutual Shares Franklin Mutual Advisers, Inc. 0.60%
("Franklin Mutual")
Mutual Discovery Franklin Mutual 0.80%
Mutual European Franklin Mutual 0.80%
Franklin Aggressive Growth Advisers 0.50% 5
Franklin Large Cap Growth Advisers 0.50% 5
Franklin Bond Fund Advisers; TICI (sub-adviser) 0.425% 6,*
Franklin Short-Intermediate Advisers 0.625% 1
Franklin Government Securities Advisers 0.625% 2
Franklin AGE Advisers 0.625% 1
Templeton Foreign Templeton Global Advisors Limited 0.75% 7
("TGAL")
Templeton Developing Markets Templeton Asset Management Ltd. 1.25%
Hong Kong Branch
Templeton Smaller Companies Templeton Investment Counsel, Inc. 0.75%
("TICI")
Templeton Foreign Smaller Advisers; TICI (sub-adviser) 1.00% 8,*
UNDERLYING
FRANKLIN TEMPLETON FUND MANAGER FEE RATE
- --------------------------------------------------------------------------------
Templeton International TGAL 0.75%
Templeton Pacific Growth Advisers; TICI (sub-adviser) 1.00% 8,*
Templeton Latin America TGAL 1.25%
Franklin Templeton Hard
Currency Advisers; TICI (sub-adviser) 0.65%*
Templeton Global Bond TICI 0.50% 9
Franklin Global Government Advisers; TICI (sub-adviser) 0.625% 1,*
Franklin Gold Advisers 0.625% 1
Franklin Natural Resources Advisers 0.625% 3
Franklin Strategic Income Advisers; TICI (sub-adviser) 0.625% 1,*
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 at least annually. The amount of these distributions
will vary and there is no guarantee the funds will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the funds' shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(R).
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 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 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 (losses) (.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 for the
periods less than one year.
2. Annualized.
3. For the period December 31, 1996 (effective date) to July 31, 1997.
4. Based on average shares outstanding.
MODERATE TARGET FUND
CLASS A YEAR ENDED JULY 31,
- --------------------------------------------------------------------------------
1999 4 1998 4 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 ($)
Net asset value, beginning of year 11.16 11.33 10.00
---------------------------------
Net investment income .28 .33 .05
Net realized and unrealized gains (losses) .11 (.05) 1.28
---------------------------------
Total from investment operations .39 .28 1.33
---------------------------------
Distributions from net investment income (.25) (.30) -
Distributions from net realized gains (.29) (.15) -
---------------------------------
Total distributions (.54) (.45) -
---------------------------------
Net asset value, end of year 11.01 11.16 11.33
=================================
Total return (%) 1 3.91 2.63 13.30
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ 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 RESOURCES 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's 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 U.S. 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 31/2 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 18 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 of 5.75% or o Initial sales charge of 1%
less
o Deferred sales charge of 1% on o Deferred sales charge of 1% on
purchases of $1 million or more shares you sell within 18 months
sold within 12 months
o Lower annual expenses than Class C o Higher annual expenses than Class
due to lower distribution fees A due to higher distribution fees.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- --------------------------------------------------------------------------------
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
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 37), 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 36).
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.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- --------------------------------------------------------------------------------
Under $1 million 1.00 1.01
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 1.00% 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. Certain investors also may buy Class C shares without an initial
sales charge. The CDSC for each class 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.
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 $100 $50
members
- --------------------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE
FOR SALE IN YOUR STATE OR JURISDICTION.
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 Contact your investment Contact your investment
shaking] representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable Make your check payable
envelope] to the fund. to the fund. Include
your account number on
BY MAIL Mail the check and your the check.
signed application to
Investor Services. Fill out the deposit
slip 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 three Call to receive a wire Call to receive a wire
lightning bolts] control number and wire control number and wire
instructions. instructions.
BY WIRE
Wire the funds and mail To make a same day wire
1-800/632-2301 your signed application investment, please call
(or 1-650/312-2000 collect) to Investor Services. us by 1:00 p.m. pacific
Please include the wire time and make sure your
control number or your wire arrives by 3:00 p.m.
new account number on the
application.
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 two Call Shareholder Services Call Shareholder
arrows pointing in at the number below, or Services at the number
opposite directions] send signed written below or our automated
instructions. The TeleFACTS system, or
BY EXCHANGE TeleFACTS system cannot send signed written
be used to open a new instructions.
TeleFACTS(R) account.
1-800/247-1753 (Please see page 42 for
(around-the-clock access) (Please see page 42 for information on
information on exchanges.) exchanges.)
- --------------------------------------------------------------------------------
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 handset] 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.
*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.
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 47).
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 certificate] SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
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 Contact your investment representative
hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
BY MAIL 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
changed your address by phone within the last 15
BY PHONE 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
three lightning sent to a bank account. See the policies above for
bolts] selling shares by mail or phone.
BY ELECTRONIC FUNDS Before requesting to have redemption proceeds sent to
TRANSFER (ACH) a bank account, please make sure we have your bank
account information on file. If we do not have this
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 is 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
TeleFACTS(R) shares by mail or phone.
1-800/247-1753
(around-the-clock access) If you hold share certificates, you will need to
return 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 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 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 on Class C NAV purchases. A dealer commission of up to
0.25% may be paid 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 Service 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
[Insert Franklin Templeton Ben Head]
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
Goal and Strategies ............................... 2
Information about the Underlying
Franklin Templeton Funds ......................... 3
Officers and Trustees ............................. 18
Investment Advisory, Asset Allocation
and Other Services................................ 20
Portfolio Transactions ............................ 21
Distributions and Taxes ........................... 22
Organization, Voting Rights
and Principal Holders ............................ 24
Buying and Selling Shares ......................... 25
Pricing Shares .................................... 31
The Underwriter ................................... 31
Performance ....................................... 33
Miscellaneous Information.......................... 36
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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 the 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
- -------------------------------------------------------------------------------
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"). These underlying funds 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 an underlying 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, an underlying
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 underlying 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 an underlying 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.
An underlying 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 a fund obligates the fund to sell specified currency to
the holder of the option at a specified price at any time before the expiration
date. A put option written by 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.
A 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 underlying 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
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 total amount of the loans may
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's, Franklin Large Cap Growth Fund's and Templeton
Developing Markets Trust's total assets. Mutual Shares Fund, Mutual Discovery
Fund and Mutual European Fund intend to limit such lending to 5% of their
respective total assets at the time of the most recent loan.
The borrower must deposit with the fund's custodian bank collateral with an
initial market value of at least 100% of the market value of the securities
loaned, including accrued interest, with the value of the collateral and loaned
securities marked-to-market daily to maintain collateral coverage of at least
100% (102% in the case of 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 Fund 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 - 331/3% 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 331/3%
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 331/3% 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 $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services.
The fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to board
members who serve on other boards within the Franklin Templeton Group of Funds.
The following table provides the total fees paid to noninterested board members
by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
THE FRANKLIN GROUP
TOTAL FEES TEMPLETON OF FUNDS
RECEIVED FROM GROUP OF ON WHICH
NAME THE TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
- -------------------------------------------------------------------------------
Frank H. Abbott, III 771 166,614 27
Harris J. Ashton 923 361,157 48
S. Joseph Fortunato 879 367,835 50
Edith E. Holiday 1,070 211,400 24
Frank W. T. LaHaye 881 171,536 27
Gordon S. Macklin 923 361,157 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 53 registered investment companies, with approximately 156 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
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INVESTMENT MANAGER AND SERVICES PROVIDED Each fund's investment 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, Sr. are the principal shareholders of Resources. Pursuant to the
investment advisory and asset allocation agreement with the fund, the manager
will determine how each fund's assets will be invested pursuant to the
investment goal and policies of the fund. The manager will determine (a) the
percentage range of assets of any fund that may be invested in U.S. and foreign
equity, fixed income, and money market securities, (b) the underlying Franklin
Templeton funds in which the fund may invest, and (c) the percentage of assets
that may be invested by each fund in any one underlying Franklin Templeton fund.
To the extent that the funds invest directly in securities and engage directly
in various investment practices, the manager provides investment research and
portfolio management services, including the selection of securities for each
fund to buy, hold or sell. The manager also selects the brokers who execute the
fund's portfolio transactions. The manager's activities are subject to the
review and supervision of the Board to whom the manager renders periodic reports
of each fund's investment activities. To protect each fund, 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 each fund's 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 allocation services, which are provided to each
fund for a monthly fee equivalent to an annual rate of 0.25% of the average
daily net assets of each fund. The fee is computed at the close of business on
the last business day of each month 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, each fund 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 advance 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 advance 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 advance 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 29, 2000. 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 Investor Services, as the transfer agent for the Underlying Funds,
effectively acts as the funds' custodian and holds the funds' shares of the
Underlying Funds on its books. Bank of New York, Mutual Funds Division, 90
Washington Street, New York, NY 10286, acts as custodian of the funds' cash,
pending investment in shares of the Underlying Funds.
AUDITOR PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY
10036, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the fund's Annual Report to Shareholders and
reviews the fund's registration statement filed with the U.S. Securities and
Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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Orders for the purchase and sale of shares of the underlying Franklin Templeton
funds will be placed directly with Franklin Templeton Distributors, Inc.
(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.
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 fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the securities 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 the 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. The fund intends to declare and pay these amounts in
December (or to pay them in January, in which case you must treat them 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 minimum
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 and 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 each 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 funds continuously offer their 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
In addition, effective January 1, 2000, Class C shares may be purchased without
an initial sales charge by any investor who buys Class C shares through an
omnibus account with Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply,
however, if the shares are sold within 18 months of purchase.
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 generally are 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
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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 IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS 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 BY THE
EXPENSES ($) FUND ($)
- ----------------------------------------------------------------------
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 C 0.50 15.10
Moderate Target Fund Class C -1.11 15.05
Growth Target Fund Class C 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 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $218 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 105 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 been
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 developing
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.
FAS SAI 12/99
