PROSPECTUS
FRANKLIN TEMPLETON
FUND ALLOCATOR SERIES
DECEMBER 1, 1998 AS AMENDED AUGUST 16, 1999
INVESTMENT STRATEGY
GROWTH & INCOME
FRANKLIN TEMPLETON CONSERVATIVE TARGET FUND
FRANKLIN TEMPLETON MODERATE TARGET FUND
FRANKLIN TEMPLETON GROWTH TARGET FUND
[Insert Franklin Templeton Ben Head]
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how each fund invests
and the services available to shareholders.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated December 1, 1998,
which we may amend from time to time.
We have filed the SAI with the SEC and have incorporated it by reference into
this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
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.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FRANKLIN TEMPLETON
FUND ALLOCATOR SERIES
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUNDS
Expense Summary ............................................ 2
Financial Highlights ....................................... 5
How Do the Funds Invest Their Assets? ...................... 11
What Are the Risks of Investing in the Funds? .............. 15
What Are the Risks of Investing in the Underlying
Franklin Templeton Funds? .................................. 15
How Do the Underlying Franklin Templeton
Funds Invest Their Assets? ................................. 20
Who Manages the Funds? ..................................... 47
How Taxation Affects the Funds and Their Shareholders ...... 52
How Is the Trust Organized? ................................ 54
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ....................................... 55
May I Exchange Shares for Shares of Another Fund? .......... 63
How Do I Sell Shares? ...................................... 66
What Distributions Might I Receive From the Funds? ......... 69
Transaction Procedures and Special Requirements ............ 70
Services to Help You Manage Your Account ................... 74
What If I Have Questions About My Account? ................. 76
GLOSSARY
Useful Terms and Definitions ............................... 77
APPENDICES
What Are Some of the Other Investment
Policies, Strategies and Risks of the
Underlying Franklin Templeton Funds? ....................... 79
Description of Ratings ..................................... 93
FRANKLIN
TEMPLETON
FUND ALLOCATOR
SERIES
DECEMBER 1, 1998
AS AMENDED AUGUST 16, 1999
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
P.O. Box 997151
Sacramento, CA 95899-9983
1-800/DIAL BEN(R)
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in each
fund. It is based on the historical expenses of each fund for the fiscal year
ended July 31, 1998. Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
- ---------------------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES+
CLASS A 1
<S> <C> <C> <C>
Maximum Sales Charge
(as a percentage of Offering Price)++ 5.75% 5.75% 5.75%
Paid at time of redemption+++ None None None
Exchange Fee (per transaction)* None None None
CLASS C 1
Maximum Sales Charges
(as a percentage of Offering Price) 1.99% 1.99% 1.99%
Paid at time of purchase++++ 1.00% 1.00% 1.00%
Paid at redemption+++ 0.99% 0.99% 0.99%
Exchange Fee (per transaction)* None None None
CONSERVATIVE MODERATE GROWTH
TARGET FUND TARGET FUND TARGET FUND
- ---------------------------------------------------------------------------------------------
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
CLASS A 1
<S> <C> <C> <C>
Asset Allocation Fees** 0.25% 0.25% 0.25%
Rule 12b-1 Fees*** 0.25% 0.25% 0.25%
Other Expenses** 0.56% 0.42% 0.48%
Management Fees of the Underlying
Franklin Templeton Funds 0.54% 0.58% 0.61%
Other Expenses of the Underlying
Franklin Templeton Funds 0.16% 0.20% 0.22%
Total Fund Operating Expenses** 1.76% 1.70% 1.81%
CLASS C 1
Asset Allocation Fees** 0.25% 0.25% 0.25%
Rule 12b-1 Fees*** 1.00% 1.00% 1.00%
Other Expenses** 0.56% 0.42% 0.48%
Management Fees of the Underlying
Franklin Templeton Funds 0.54% 0.58% 0.61%
Other Expenses of the Underlying
Franklin Templeton Funds 0.16% 0.20% 0.22%
Total Fund Operating Expenses** 2.51% 2.45% 2.56%
</TABLE>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in a
fund.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Conservative Target Fund - Class A $74**** $110 $147 $253
Conservative Target Fund - Class C $45 $87 $142 $292
Moderate Target Fund - Class A $74**** $108 $144 $247
Moderate Target Fund - Class C $44 $86 $139 $286
Growth Target Fund - Class A $75**** $111 $150 $258
Growth Target Fund - Class C $45 $89 $145 $297
</TABLE>
For the same Class C investment, you would pay projected expenses of $35
(Conservative Target Fund), $35 (Moderate Target Fund), and $36 (Growth
Target Fund) if you did not sell your shares at the end of the first year.
Your projected expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
++There is no front-end sales charge if you invest $1 million or more in
Class A shares.
+++A Contingent Deferred Sales Charge may apply to any Class C purchase if
you sell the shares within 18 months and to Class A purchases of $1 million
or more if you sell the shares within one year. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class A shares without a front-end sales charge. The charge is 1% of
the value of the shares sold or the Net Asset Value at the time of purchase,
whichever is less. The number in the table shows the charge as a percentage
of Offering Price. While the percentage is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
++++Although Class C has a lower front-end sales charge than Class A, its
Rule 12b-1 fees are higher. Over time you may pay more for Class C shares.
Please see "How Do I Buy Shares? - Choosing a Share Class."
*There is a $5.00 fee for exchanges by Market Timers.
**For the period shown, the manager had agreed in advance to limit its asset
allocation fees and to assume as its own expense certain expenses otherwise
payable by each fund. With this reduction, asset allocation fees were 0.08%
for the Moderate Target Fund and 0.02% for the Growth Target Fund. The
Conservative Target Fund paid no asset allocation fees. Total direct
operating expenses were .75% for Class A and 1.50% for Class C of each fund.
The funds also indirectly bear their pro rata share of the expenses of the
Franklin Templeton funds in which they invest.
***These fees may not exceed 0.25% for Class A and 1.00% for Class C. The
combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc. For the Conservative Target Fund -
Class A and the Moderate Target Fund - Class A the total fund operating
expenses are different than the ratio of expenses to average net assets shown
under "Financial Highlights" due to a timing difference between the end of
the 12b-1 plan year and the fund's fiscal year end.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the funds' independent auditor. The audit
report covering the periods shown below appears in the Trust's Annual Report to
Shareholders for the fiscal year ended July 31, 1998. The Annual Report to
Shareholders also includes more information about each fund's performance. For a
free copy, please call Fund Information.
CONSERVATIVE TARGET FUND - CLASS A
YEAR ENDED JULY 31,
--------------------------
1998 1997***
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.87 $10.00
--------------------------
Income from investment operations:
Net investment income .39 .12
Net realized and unrealized gains .18 .80
--------------------------
Total from investment operations .57 .92
Less distributions from:
Net investment income (.38) (.05)
Net realized gains (.06) -
--------------------------
Total distributions (.44) (.05)
--------------------------
Net asset value, end of year $11.00 $10.87
==========================
Total return* 5.41% 9.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $11,637 $1,609
Ratios to average net assets:
Expenses .76% .59%**
Expenses excluding waiver and payments
by affiliate 1.07% 3.64%**
Net investment income 3.88% 3.93%**
Portfolio turnover rate 141.96% 33.30%
CONSERVATIVE TARGET FUND - CLASS C
YEAR ENDED JULY 31,
--------------------------
1998 1997***
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $10.81 $10.00
--------------------------
Income from investment operations:
Net investment income .33 .10
Net realized and unrealized gains .15 .75
--------------------------
Total from investment operations .48 .85
--------------------------
Less distributions from:
Net investment income (.31) (.04)
Net realized gains (.06) -
--------------------------
Total distributions (.37) (.04)
--------------------------
Net asset value, end of year $10.92 $10.81
==========================
Total return* 4.56% 8.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $10,218 $3,010
Ratios to average net assets:
Expenses 1.50% 1.48%**
Expenses excluding waiver and payments
by affiliate 1.81% 4.53%**
Net investment income 3.27% 3.04%**
Portfolio turnover rate 141.96% 33.30%
MODERATE TARGET FUND - CLASS A
YEAR ENDED JULY 31,
--------------------------
1998 1997***
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.26 $10.00
--------------------------
Income from investment operations:
Net investment income .37 .17
Net realized and unrealized gains .01 1.13
--------------------------
Total from investment operations .38 1.30
--------------------------
Less distributions from:
Net investment income (.38) (.04)
Net realized gains (.49) -
--------------------------
Total distributions (.87) (.04)
--------------------------
Net asset value, end of year $10.77 $11.26
==========================
Total return* 3.71% 13.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $23,028 $6,498
Ratios to average net assets:
Expenses .77% .67%**
Expenses excluding waiver and payments
by affiliate .94% 1.26%**
Net investment income 3.37% 2.69%**
Portfolio turnover rate 124.87% 264.78%
MODERATE TARGET FUND - CLASS C
YEAR ENDED JULY 31,
--------------------------
1998**** 1997***
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.16 $10.00
--------------------------
Income from investment operations:
Net investment income .30 .07
Net realized and unrealized gains - 1.11
--------------------------
Total from investment operations .30 1.18
--------------------------
Less distributions from:
Net investment income (.32) (.02)
Net realized gains (.49) -
Total distributions (.81) (.02)
Net asset value, end of year $10.65 $11.16
==========================
Total return* 2.98% 11.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $19,501 $4,695
Ratios to average net assets:
Expenses 1.50% 1.50%**
Expenses excluding waiver and payments
by affiliate 1.68% 2.09%**
Net investment income 2.75% 1.86%**
Portfolio turnover rate 124.87% 264.78%
GROWTH TARGET FUND - CLASS A
YEAR ENDED JULY 31,
--------------------------
1998 1997***
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.33 $10.00
--------------------------
Income from investment operations:
Net investment income .33 .05
Net realized and unrealized gains (losses) (.05) 1.28
--------------------------
Total from investment operations .28 1.33
--------------------------
Less distributions from:
Net investment income (.30) -
Net realized gains (.15) -
--------------------------
Total distributions (.45) -
--------------------------
Net asset value, end of year $11.16 $11.33
--------------------------
Total return* 2.63% 13.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $27,042 $9,638
Ratios to average net assets:
Expenses .75% .73%**
Expenses excluding waiver and payments
by affiliate .98% 2.19%**
Net investment income 2.80% 2.65%**
Portfolio turnover rate 118.19% 65.52%
GROWTH TARGET FUND - CLASS C
YEAR ENDED JULY 31,
--------------------------
1998 1997***
--------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.30 $10.00
--------------------------
Income from investment operations:
Net investment income .24 .04
Net realized and unrealized gains (losses) (.05) 1.26
--------------------------
Total from investment operations .19 1.30
--------------------------
Less distributions from:
Net investment income (.26) -
Net realized gains (.15) -
--------------------------
Total distributions (.41) -
--------------------------
Net asset value, end of year $11.08 $11.30
==========================
Total return* 1.84% 13.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $20,752 $4,733
Ratios to average net assets:
Expenses 1.50% 1.49%**
Expenses excluding waiver and payments
by affiliate 1.73% 2.95%**
Net investment income 1.97% 1.89%**
Portfolio turnover rate 118.19% 65.52%
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized.
**Annualized.
***For the period December 31, 1996 (effective date) to July 31, 1997.
****Per share amounts have been calculated using the daily average shares
outstanding during the period.
HOW DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The investment goal of each fund is the highest level of long-term total
return that is consistent with an acceptable level of risk. The goal is
fundamental, which means that it may not be changed without shareholder
approval.
WHAT ARE THE FUNDS' INVESTMENT STRATEGIES?
The investment manager allocates each fund's assets among the broad asset
classes of equity, fixed income and short-term (money market) investments by
investing in a uniquely-weighted combination of Franklin Templeton funds
("underlying Franklin Templeton funds"). These funds, in turn, invest in a
variety of U.S. and foreign equity, fixed-income and money market securities.
While the manager attempts to invest the assets of each fund in the same
underlying Franklin Templeton funds, the manager varies the underlying
Franklin Templeton funds investment allocation percentages based upon each
fund's risk/return level. The following descriptions compare the three funds'
levels of risk and return relative to one another and are not intended to
imply an absolute level of risk or return for any fund.
CONSERVATIVE TARGET FUND is designed for investors seeking the highest level
of long-term total return that is consistent with a lower level of risk. This
fund may be most appropriate for investors with a shorter 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.
Following is a general guide the manager uses in allocating each of the
fund's assets among the broad asset classes of equity, fixed-income and
short-term (e.g., money market) investments. The percentages for each asset
class for each fund may be changed from time to time by the funds' manager
without the approval of shareholders.
SHORT-TERM FIXED-INCOME
INVESTMENTS EQUITY FUND FUNDS
- --------------------------------------------------------------------------------
Conservative Target Fund 20% 40% 40%
Moderate Target Fund 10% 55% 35%
Growth Target Fund 5% 80% 15%
In evaluating the risk level of the underlying Franklin Templeton funds, the
manager analyzes such factors as: (a) relative and absolute performance,
including correlations with other underlying Franklin Templeton funds as well
as corresponding benchmarks, and (b) their volatility (the variability of
returns from one period to the next).
The underlying Franklin Templeton funds in which the funds invest are listed
below. This list may change from time to time upon the recommendation of the
funds' manager without shareholder approval. For more detailed information on
the investment policies of each underlying Franklin Templeton fund, see "How
Do the Underlying Franklin Templeton Funds Invest Their Assets?" in this
prospectus.
EQUITY FUNDS
Franklin Aggressive Growth Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin Large Cap Growth Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Small Cap Growth Fund
Franklin Strategic Income Fund
Franklin Value Fund
Franklin Utilities Fund
Mutual Shares Fund
Mutual Discovery Fund
Mutual European Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Global Smaller Companies Fund
Templeton International Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
FIXED-INCOME FUNDS
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin U.S. Government Securities Fund
Franklin Templeton Hard Currency Fund
Templeton Global Bond Fund
No more than 25% of each fund's assets may be invested in any one underlying
Franklin Templeton 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.
DIRECT INVESTMENT IN SECURITIES AND OTHER INVESTMENT STRATEGIES. Each fund
may invest up to 5% of its assets directly in the types of securities in
which the underlying Franklin Templeton funds invest and may invest without
limitation in repurchase agreements and securities issued or backed by the
full faith and credit of the U.S. government. U.S. government securities
include U.S. Treasury bills, notes, and bonds. Securities backed by the full
faith and credit of the U.S. government include those issued by the
Government National Mortgage Association.
Each fund may also engage directly in the types of investment strategies
employed by the underlying Franklin Templeton funds. Each fund may invest in
futures and related options for the purpose of managing the desired effective
asset allocation of the fund. In addition, each fund may hedge its
investments to protect the fund against a decline in market value. No fund
intends to commit more than 5% of its assets to these investment strategies.
Each fund may also invest up to 100% of its assets temporarily in the same
types of securities that the underlying Franklin Templeton funds may invest
in for temporary purposes, and under the same circumstances as the underlying
Franklin Templeton funds.
PURCHASES OF SHARES OF THE UNDERLYING FRANKLIN TEMPLETON FUNDS. The funds
invest only in Class Z shares of Mutual Discovery Fund, Mutual European Fund
and Mutual Shares Fund and Advisor Class shares of the other underlying
Franklin Templeton funds. Accordingly, the funds will not pay any sales load
or 12b-1 service or distribution fees in connection with their investments in
the underlying Franklin Templeton funds. The funds, however, will indirectly
bear their pro rata share of the fees and expenses of the underlying Franklin
Templeton funds that are applicable to holders of Class Z and Advisor Class
shares. The investment returns of each fund, therefore, will be net of the
expenses of the underlying Franklin Templeton funds it invests in.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in a particular industry,
group of industries, geographic region, or asset class. Non-diversified funds
may invest a greater portion of their assets in the securities of one issuer
than diversified funds. Economic, business, political or other changes can
affect all securities of a similar type. A non-diversified fund may be more
sensitive to these changes.
- - Each of the funds is a non-diversified fund because it invests in a
limited number of mutual funds. The underlying Franklin Templeton funds
are diversified funds with the exception of Franklin Global Government
Income Fund, Franklin Natural Resources Fund, Franklin Real Estate
Securities Fund, Franklin Strategic Income Fund, Franklin Templeton Hard
Currency Fund, Franklin Value Fund, and Templeton Global Bond Fund.
ILLIQUID INVESTMENTS. Each fund's policy is not to invest more than 15% of
its net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them.
PORTFOLIO TURNOVER. The portfolio turnover rate for Conservative Target Fund
was 141.96% for the fiscal year ended July 31, 1998, and 33.30% for the
fiscal year ended July 31, 1997. The portfolio turnover rate for Growth
Target Fund was 118.19% for the fiscal year ended July 31, 1998, and 65.52%
for the fiscal year ended July 31, 1997. Although the funds generally
anticipate that portfolio turnover will not exceed 100% per year, in any
given year turnover may exceed that level for a variety of reasons. These
include higher than anticipated market volatility, as well as changes in
portfolio composition and relative performance of the underlying Franklin
Templeton funds.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the funds' investment policies,
including those described above, please see "How Do the Funds Invest Their
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when a fund makes an investment. In most cases, a 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 and restrictions.
For more information about the various types of investments and strategies of
each fund and the underlying Franklin Templeton funds, see "What Are the
Risks of Investing in the Funds?"; "What Are the Risks of Investing in the
Underlying Franklin Templeton Funds?"; "How Do the Underlying Franklin
Templeton Funds Invest Their Assets?"; and the appendix and the SAI.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
There is no assurance that a fund will meet its investment goal.
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decreases. In this way you participate in any change in the value
of the securities owned by the fund. The ability of each fund to meet its
investment goal depends on its asset allocation among the underlying Franklin
Templeton funds and the ability of those funds to meet their investment
goals. There can be no assurance that the underlying Franklin Templeton funds
will meet their investment goals.
In addition to the factors that affect the value of any particular security
that a fund or an underlying Franklin Templeton fund may own, the value of
fund shares may also change with movements in the stock and bond markets as a
whole. The value of each fund varies from day to day, reflecting changes in
these markets and the values of the underlying Franklin Templeton funds. The
value of an investment in Growth Target Fund tends to fluctuate more than an
investment in Moderate Target Fund or Conservative Target Fund due to its
more aggressive mix of investments in the underlying Franklin Templeton
funds. Similarly, Moderate Target Fund tends to fluctuate more than an
investment in Conservative Target Fund.
The underlying Franklin Templeton funds may buy securities or engage in
investment strategies that involve certain risks. As a result, each fund will
be subject to some of the risks resulting from these investments. If the
funds invest directly in securities or engage in these strategies, they will
be subject to the same types of risks as the underlying Franklin Templeton
funds.
WHAT ARE THE RISKS OF INVESTING
IN THE UNDERLYING FRANKLIN TEMPLETON FUNDS?
EQUITY SECURITIES RISK. To the extent an underlying Franklin Templeton fund
invests in equity securities, general market movements in any country where
the fund has investments are likely to affect the value of the securities it
owns in that country and the fund's share price may also be affected. Thus, a
decline in the market, expressed for example by a drop in a securities index
such as the Dow Jones Industrials or the Standard & Poor's 500 average, may
result in a decline in an underlying Franklin Templeton fund's share price.
Of course, individual and worldwide stock markets have increased and
decreased, sometimes very dramatically, in the past. These changes are likely
to occur again in the future at unpredictable times.
FIXED INCOME SECURITIES RISK. Underlying Franklin Templeton funds investing
in fixed-income securities are subject to risks, including the following:
o INTEREST RATE RISK is the risk that changes in interest rates can reduce
the value of a security. When interest rates rise, fixed income security
prices fall. The opposite is also true: fixed income security prices go up
when interest rates fall. Generally, interest rates rise when future
inflation rates are expected to increase. This often occurs during periods
of strong economic growth, but may also occur during periods of rising
government budget deficits or when the value of the U.S. dollar declines
against other currencies. Interest rates generally fall when future
inflation rates are expected to decline. This often occurs during periods
of slower economic growth. Securities with longer maturities usually are
more sensitive to interest rate changes than securities with shorter
maturities.
o INCOME RISK is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
o CREDIT RISK is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value. Even
securities supported by credit enhancements have the credit risk of the
entity providing the credit support. Credit support provided by a foreign
entity may be less certain because of the possibility of adverse foreign
economic, political or legal developments that may affect the ability of
that foreign entity to meet its obligations. Changes in the credit quality
of the credit provider could affect the value of the security and the
fund's share price.
o MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk
associated with all securities. When there are more sellers than buyers,
prices tend to fall. Likewise, when there are more buyers than sellers,
prices tend to increase.
o CALL RISK is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest
rates are falling, because the issuer can issue new bonds with lower
interest payments. If a bond is called, a fund may have to replace it with
a lower-yielding security.
Independent rating organizations such as Moody's and S&P rate securities
based upon their assessment of the financial soundness of the issuer.
Generally, a lower rating indicates a higher risk. Please see the appendix
for a description of the ratings.
HIGH YIELD SECURITIES RISK. Securities rated below investment grade,
sometimes called "junk bonds," generally have more credit risk than
higher-rated securities and a fund investing in these securities will have
greater price swings than a fund emphasizing higher-rated debt securities.
Underlying Franklin Templeton funds investing in high yield debt securities
are subject to risks, including the following:
o SUBSTANTIAL CREDIT RISK. High yield debt securities carry a high degree of
credit risk. Companies issuing high yield debt securities are not as
strong financially as those with higher credit ratings and their ability
to make interest payments or repay principal is less certain. These
companies are more likely to encounter financial difficulties and to be
materially affected by them. They are also more vulnerable to changes in
the economy, such as a recession or a sustained period of rising interest
rates, that could prevent them from making interest and principal payments
in a timely manner.
o DEFAULTED DEBT SECURITIES RISK. In some cases, an underlying Franklin
Templeton fund may own securities where the issuer is not paying or stops
paying interest and/or principal on the securities. Payments on these
securities may never resume. These securities may be worthless and the
fund could lose its entire investment, which may lower the fund's Net
Asset Value. Defaulted securities tend to lose much of their value before
they default, in which case the fund's Net Asset Value will be adversely
affected before the issuer stops making interest or principal payments.
o VOLATILITY RISK. The market prices of high yield debt securities fluctuate
more than higher-quality securities and may decline significantly in
periods of general or regional economic difficulty. Prices are especially
sensitive to developments affecting the company's business and business
prospects and to changes in the ratings assigned by ratings organizations
such as S&P and Moody's. Prices are often closely linked with the
company's stock prices and typically will rise and fall in response to
business developments, general stock market activity and other factors
that affect stock prices. In addition, the entire high yield securities
market can experience sudden and sharp price swings due to changes in
economic conditions, stock market activity, large sustained sales by major
investors, a high-profile default, or other factors. Price swings in the
high yield securities market can adversely affect the prices of all high
yield securities.
o REDUCED LIQUIDITY RISK. The high yield debt securities market is generally
less liquid than the market for higher-quality bonds and large purchases
or sales of these securities can cause sudden and substantial changes in
their market prices. Many of these securities do not trade frequently, and
when they do trade their prices may be significantly higher or lower than
expected. In less liquid markets such as this, it is generally more
difficult to sell securities promptly at an acceptable price, which may
limit a fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
The underlying Franklin Templeton funds that invest in high yield securities
rely on their investment manager's judgment, analysis and experience in
evaluating the credit and other risks of high yield securities and the high
yield market as a whole. In order for the funds to achieve their investment
goals, the investment manager must correctly predict general economic and
market trends and evaluate particular issuer's financial resources,
sensitivity to economic conditions and trends, operating history and quality
of management, as well as regulatory and other matters.
FOREIGN SECURITIES RISK. The value of foreign (and U.S.) securities is
affected by general economic conditions and individual company and industry
earnings prospects. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. These risks can be significantly
greater for investments in emerging markets.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The underlying Franklin Templeton funds may have greater
difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to foreign investments in
foreign courts than with respect to domestic issuers in U.S. courts.
Some of the countries in which the underlying Franklin Templeton funds invest
are considered developing or emerging markets. Investments in these markets
are subject to all of the risks of foreign investing generally, and have
additional and heightened risks due to a lack of legal, business and social
frameworks to support securities markets.
Emerging markets involve additional significant risks, including:
o political and social uncertainty (for example, regional conflicts and risk
of war)
o currency exchange rate volatility
o pervasiveness of corruption and crime
o delays in settling portfolio transactions
o risk of loss arising out of the system of share registration and custody
o comparatively smaller and less liquid than developed markets
o dependency upon foreign economic assistance and international trade
o less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the U.S.
All of these factors make developing market equity and fixed-income
securities' prices generally more volatile than securities issued in
developed countries.
CURRENCY RISK. Investments of certain of the underlying Franklin Templeton
funds may be denominated in foreign currencies so that changes in the foreign
currency exchange rates will affect the value of what a fund owns and thus
the price of its shares. Currency valuations have increased and decreased,
sometimes very dramatically, in the past. These changes are likely to occur
again in the future at unpredictable times.
SMALLER COMPANIES RISK. Certain underlying Franklin Templeton funds invest in
the securities of companies with small market capitalizations. Historically,
smaller company securities have been more volatile in price than larger
company securities, especially over the short term. Among the reasons for the
greater price volatility are the less certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such securities
and the greater sensitivity of smaller companies to changing economic
conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions, futures contracts, swap agreements and
collateralized mortgage obligations are considered derivative investments. To
the extent an underlying Franklin Templeton fund enters into these
transactions, their success will depend upon the investment manager's ability
to predict pertinent market movements.
CONCENTRATION. The following underlying Franklin Templeton funds may
concentrate their investments in a particular industry or sector: Franklin
Gold Fund, Franklin Natural Resources Fund, Franklin Real Estate Securities
Fund, Franklin Strategic Income Fund, Franklin Templeton Hard Currency Fund,
Franklin Utilities Fund, Franklin Value Fund, and Templeton Global Bond Fund.
Franklin Global Government Income Fund may invest more than 25% of its assets
in the securities of foreign governments.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is only one of the factors a fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, 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 company and its major suppliers to
verify their Year 2000 readiness.
If a company a fund is invested in is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of a fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see "Year 2000 Problem" under "Who Manages the Funds?" for more information.
For more information about the risks of investing in the funds and underlying
Franklin Templeton funds, please see the appendix and the SAI.
HOW DO THE UNDERLYING FRANKLIN TEMPLETON FUNDS INVEST THEIR ASSETS?
The following is a summary of the investment goals and strategies of the
underlying Franklin Templeton funds and the types of securities the funds
invest in. The goal of each fund is fundamental, which means it may not be
changed without the approval of the fund's shareholders. Additional
information about the funds' investment strategies may be found in the
appendix and the SAI. For a free copy of a prospectus of any of these funds,
call 1-800/DIAL BEN.
EQUITY FUNDS
The following underlying Franklin Templeton funds invest primarily in equity
securities.
FRANKLIN AGGRESSIVE GROWTH FUND ("AGGRESSIVE GROWTH"). The investment goal of
the fund is capital appreciation. The fund normally invests 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 invests in small, medium, and large
capitalization companies with strong growth potential across a wide range of
sectors.
EQUITY SECURITIES. In choosing equity investments, the fund's manager will
focus on sectors that have exceptional growth potential and fast growing,
innovative companies within these sectors. In addition, solid management and
sound financial records are factors the manager also considers. Although the
manager will search for investments across a large number of sectors, it
expects to have significant positions in particular sectors. These sectors
may include, for example, technology (including computers and
telecommunications), health care (including biotechnology), consumer
products, and consumer services (including media, broadcasting and
entertainment).
FRANKLIN EQUITY FUND ("EQUITY"). The principal investment goal of Equity is
capital appreciation. The fund's secondary goal is to provide current income
return through the receipt of dividends or interest from its investments.
The fund's investment strategy is generally to invest in companies that the
manager believes have strong future growth prospects and whose securities are
undervalued relative to their industry. The fund uses traditional fundamental
analysis and active management along with disciplined, quantitative models to
identify what the manager believes are potentially rewarding investments that
may provide enhanced value to shareholders over the long term.
The fund tries to achieve its investment goal by investing at least 65% of
its assets in equity securities which may be traded on a securities exchange
or in the over-the-counter market. The fund may invest up to 35% of its
assets in other securities that are consistent with the fund's goal.
EQUITY SECURITIES. The fund's primary investments are in common stock.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may buy debt securities which are rated Baa by Moody's or BBB by S&P or
better; or unrated debt which it determines to be of comparable quality. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's).
SMALLER COMPANIES. The fund may invest in relatively new or unseasoned
companies that are in their early stages of development, or in new and
emerging industries where the opportunity for rapid growth is expected to be
above average. In general, the fund will invest in smaller companies with a
market capitalization of less than $1 billion at the time of the fund's
investment. Market capitalization is the total market value of a company's
outstanding common stock. The fund currently does not intend to invest more
than 25% of its total assets in securities of small capitalization companies.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund will ordinarily buy
foreign securities traded in the U.S. It may buy the securities directly in
foreign markets. The fund may buy Depositary Receipts.
Although the fund may invest without limit in foreign securities, it
presently intends to limit its investments to no more than 15% of its total
assets in securities of companies of developed foreign nations.
CONVERTIBLE SECURITIES. The fund does not intend to invest more than 10% of
its total assets in convertible securities.
REITS. The fund may invest in real estate investment trusts ("REITs"). The
fund does not intend to invest more than 10% of its total assets in REITs.
FRANKLIN GOLD FUND ("GOLD"). The fund's principal goal is capital
appreciation. Its secondary goal is to provide shareholders with current
income through dividends or interest received from its investments. The fund
will normally invest at least 65% of total assets in equity securities of
companies engaged in gold operations. The fund concentrates (invests more
than 25% of total assets) in companies which mine, process, or deal in gold
or other precious metals, such as silver, platinum, and palladium. The fund
may buy gold companies anywhere in the world and generally invests more than
50% of total assets in companies outside the U.S. The fund invests primarily
in common stocks of companies engaged in gold operations. This includes gold
mining finance companies as well as operating companies with long-, medium-,
or short-life mines.
The fund's manager looks for companies with established records, as well as
companies having low-cost reserves to bring into production. The manager also
considers a company's potential for reserve growth and retention and
production growth.
FRANKLIN GROWTH FUND ("GROWTH"). The principal investment objective of Growth
is capital appreciation. The secondary objective of Growth is current income.
Growth primarily invests in common stocks or convertible securities believed
to offer favorable possibilities of capital appreciation some of which may
yield little or no current income. The fund may invest in shares of capital
stock traded on any national securities exchange, or issued by a corporation,
association or similar entity having gross assets valued at not less than
$1,000,000 as shown on its latest published annual report, or in bonds or
preferred stock convertible into shares of capital stock listed for trading
on a national securities exchange. The fund may keep a significant portion of
its assets in cash or cash equivalents from time to time. There are no
restrictions on investment of Growth's assets in foreign securities. The fund
may purchase American Depositary Receipts, and does not presently intend to
invest more than 25% of its net assets in foreign securities not publicly
traded in the U.S.
FRANKLIN LARGE CAP GROWTH FUND ("LARGE CAP GROWTH"). The principal investment
goal of the fund is long-term capital appreciation. Under normal market
conditions, the fund will invest 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 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. These
companies generally dominate, or are gaining market share, in their
respective industries and have a reputation for quality management, as well
as superior products and services.
EQUITY SECURITIES. In choosing equity investments, the fund's manager will
focus on companies that have exhibited above average growth, strong financial
records and large market capitalization. In addition, management expertise,
industry leadership, growth in market share and sustainable competitive
advantage are factors the manager also considers. Although the manager will
search for investments across a large number of industries, it expects to
have significant positions (but not in excess of 25% of its total assets in a
given sector) in the technology (including computers, telecommunications and
electronics), health care and finance industries.
FRANKLIN NATURAL RESOURCES FUND ("NATURAL RESOURCES"). The investment goal of
the fund is to seek to provide high total return. The fund's total return
consists of both capital appreciation and current dividend and interest
income. The fund tries to achieve its goal by investing at least 65% of its
assets in the equity and debt securities of U.S. and foreign companies in the
natural resources sector.
The fund may also invest up to 35% of its assets outside the natural
resources sector, including in U.S. and foreign equity and debt securities
and REITs.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may buy debt securities that are rated B by Moody's or S&P or better, or
unrated debt that it determines to be of comparable quality. The fund will
not invest more than 15% of its total assets in lower-rated securities (rated
lower than BB by S&P or Ba by Moody's) and unrated securities of comparable
quality. The fund will only buy commercial paper rated A-1 or A-2 by S&P or
Prime-1 or Prime-2 by Moody's, or unrated commercial paper that it determines
to be of comparable quality.
The natural resources sector includes companies that own, produce, refine,
process, and market natural resources and companies that provide related
services. The sector includes the following industries: integrated oil, oil
and gas exploration and production, gold and precious metals, steel and iron
ore production, aluminum production, forest products, farming products, paper
products, chemicals, building materials, energy services and technology, and
environmental services.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills, notes and
bonds, which are direct obligations of the U.S. government, backed by the
full faith and credit of the U.S. Treasury, and in securities issued or
guaranteed by federal agencies. The fund may also invest in securities issued
or guaranteed by foreign governments and their agencies.
AMERICAN DEPOSITARY RECEIPTS. The fund may also invest in American Depositary
Receipts.
GENERAL. The fund may invest up to 10% of its assets in REITs. The fund
expects to invest more of its assets in U.S. securities than in securities of
any other single country, but the fund may invest more than 50% of its total
assets in foreign securities.
FRANKLIN REAL ESTATE SECURITIES FUND ("REAL ESTATE"). The investment goal of
the fund is to maximize total return. The fund tries to achieve its
investment goal by investing, under normal market conditions, at least 65% of
its total assets in equity securities of companies operating in the real
estate industry. This includes:
o companies qualifying as REITs for federal income tax purposes; and
o companies, such as homebuilders and developers, that have at least 50% of
their assets or revenues attributable to the ownership, construction,
management or sale of residential, commercial or industrial real estate.
The fund may invest up to 35% of its total assets in securities of issuers
engaged in businesses closely related to the real estate industry. This
includes manufacturers and distributors of building supplies; financial
institutions that issue or service mortgages, such as savings and loan
associations or mortgage bankers; and companies whose principal business is
unrelated to the real estate industry but which have significant real estate
holdings (at least 50% of their assets).
The fund's primary REIT investments are in equity REITs.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest up to 10% of
its total assets in securities of issuers in any foreign country, developed
or developing, and in Depositary Receipts.
CONVERTIBLE SECURITIES. The fund may also invest in convertible securities.
FRANKLIN SMALL CAP GROWTH FUND ("SMALL CAP"). The investment goal of the fund
is long-term capital growth. The fund tries to achieve its investment goal by
investing primarily in equity securities of small capitalization growth
companies. The fund may also invest up to 35% (measured at the time of
purchase) of its total assets in any combination of
o equity securities of larger capitalization companies which its investment
manager believes have strong growth potential, and
o relatively well-known, larger companies in mature industries which the
investment manager believes have the potential for capital appreciation,
if the investment presents a favorable investment opportunity consistent with
the fund's investment goal.
The fund may invest up to 5% of its total assets in corporate debt securities
that the investment manager believes have the potential for capital
appreciation as a result of improvement in the creditworthiness of the
issuer. The receipt of income from debt securities is incidental to the
fund's investment goal of capital growth.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund will invest in securities rated B or above by Moody's or S&P, or in
unrated securities of comparable quality. The fund will not invest more than
5% of its total assets in non-investment grade securities (rated lower than
BBB by S&P or Baa by Moody's).
SMALL COMPANIES. Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities of small capitalization
growth companies. In general, companies in which the fund will invest have a
market capitalization of less than $1.5 billion at the time of the fund's
investment. Market capitalization is the total market value of a company's
outstanding common stock. The securities of small capitalization companies
are traded on the NYSE and American Stock Exchange and in the
over-the-counter market.
In selecting these securities for the fund's portfolio, the investment
manager identifies companies with relatively small market capitalization that
it believes are positioned for rapid growth in revenues or earnings and
assets. The investment manager believes that the securities of such companies
may experience significant capital appreciation. Small companies often pay no
dividends, and current income is not a factor in the selection of stocks.
The fund tries to provide investors with potentially greater long-term
rewards by investing in securities of small companies that may offer greater
potential for capital appreciation. The investment manager will select small
company equity securities for the fund based on the financial strength of the
company, the expertise of management, the growth potential of the company
within its industry, and the growth potential of the industry itself.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest up to 25% of
its total assets in foreign securities, including those of developing or
undeveloped markets, and sponsored or unsponsored Depositary Receipts. The
fund currently intends to limit its investments in foreign securities to 10%
of its total assets.
GENERAL. The fund may invest up to 10% of its total assets in REITs. The fund
may not invest more than 10% of its net assets in securities of issuers with
less than three years continuous operation.
FRANKLIN STRATEGIC INCOME FUND ("STRATEGIC INCOME"). The principal investment
goal of the fund is to earn a high level of current income. Its secondary
goal is capital appreciation over the long term. The fund normally invests at
least 65% of its assets in U.S. and foreign debt securities. The fund shifts
its investment 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; and U.S. government bonds.
The fund may invest up to 100% of its total assets in debt securities that
are rated below investment grade. Investment grade debt securities are rated
in the top four ratings categories by independent rating organizations such
as Standard & Poor's Corporation (S&P) and Moody's Investors Services, Inc.
(Moody's). The fund generally invests in securities rated at least Caa by
Moody's or CCC by S&P, or unrated securities the fund's manager determines
are comparable.
The fund uses an active asset allocation strategy to try to achieve its goals
of income and capital appreciation. This means the fund allocates its assets
among securities in various market sectors based on the manager's assessment
of changing economic, market, industry, and issuer conditions. The manager
uses a "top-down" analysis of macroeconomic trends combined with a
"bottom-up" fundamental analysis of market sectors, industries, and issuers
to try to take advantage of varying sector reactions to economic events. The
manager will evaluate country risk, business cycles, yield curves, and values
between and within markets.
FRANKLIN VALUE FUND ("VALUE"). The investment objective of the fund is to
seek long-term total return. The fund seeks to achieve this objective by
investing at least 65% of its assets in the securities of companies that its
investment manager believes are undervalued. The securities in which Value
may invest include common and preferred stocks, warrants, secured and
unsecured bonds, and notes. Income is a secondary consideration of the fund,
although it is not part of Value's investment objective.
Value invests at least 65% of its assets in companies of various sizes,
including investments in small capitalization companies, that its investment
manager believes are selling substantially below the underlying value of
their assets or their private market value. Private market value is what a
sophisticated investor would pay for the entire company. The investment
manager may take into account a variety of factors in order to determine
whether to purchase or hold securities including: low price to earnings ratio
relative to market, industry group or earnings growth; low price relative to
book value or cash flow; valuable franchises, patents, trademarks, trade
names, distribution channels, or market share for particular products or
services, tax loss carry-forwards, or other intangibles that may not be
reflected in stock prices; ownership of understated or underutilized tangible
assets such as land, timber, or mineral; underutilized cash or investment
assets; and unusually high current income. These criteria and others, alone
and in combination, may identify companies that are attractive to financial
or strategic acquirers (i.e., takeover candidates) or companies that have
suffered sharp price declines but in the manager's opinion, still have
significant potential ("fallen angels"). Purchases may include companies in
cyclical businesses, turnarounds, and companies emerging from bankruptcy.
Purchase decisions may also be influenced by company stock buy-backs and
insider purchases and sales. Value may invest in companies that have
relatively small revenues, limited product lines, and a small share of the
market for their products or services.
The fund may invest up to 25% of its net assets lower quality, fixed-income
and convertible securities (those rated BB or lower by S&P or Ba or lower by
Moody's) and unrated securities of comparable quality, which its investment
manager believes possess intrinsic values in excess of the current market
prices of such securities. Lower rated securities in which Value may invest
include securities rated D, the lowest rating category of S&P, or unrated
securities of comparable quality. Debt obligations rated D are in default and
the payment of interest and/or repayment of principal is in arrears. The fund
may invest in zero coupon or deferred interest securities and pay-in-kind
bonds. The fund may also acquire loan participations and trade claims.
While Value currently intends to invest primarily in domestic securities, it
may invest up to 25% of its total assets in foreign securities. Value may buy
sponsored or unsponsored Depositary Receipts. The fund may also purchase the
securities of foreign issuers directly in foreign markets, and may purchase
the securities of issuers in developing nations.
Value may invest in structured notes. Structured notes entitle their holders
to receive some portion of the principal or interest payments that would be
due on traditional debt obligations. A zero coupon bond is a simple form of
structured note. A structured note's performance or value may be linked to a
change in return, interest rate, or value at maturity of the change in an
identified or "linked" equity security, currency, interest rate index, or
other financial indicator. The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending upon changes in certain rates of interest or other external events.
Value may invest in mortgage-backed securities, including collateralized
mortgage obligations ("CMOs") and asset-backed securities.
FRANKLIN UTILITIES FUND ("UTILITIES"). The investment objectives of Utilities
are both capital appreciation and current income. As a fundamental policy,
the fund's assets may be invested in securities of an issuer engaged in the
public utilities industry, or held in cash or cash equivalents. The public
utilities industry includes the manufacture, production, generation,
transmission and sale of gas, water and electricity and companies involved in
providing services related to these activities. The industry also includes
issuers engaged in the communications field, such as telephone, cellular,
paging, telegraph, satellite, microwave and other companies that provide
communication facilities or services for the public's benefit. As required by
the SEC, at least 65% of the fund's investments will be in the securities of
issuers engaged in the public utilities industry. Under normal circumstances,
the fund expects to have substantially all of its assets invested in
securities issued by these types of issuers.
To achieve its investment objectives, the fund invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if,
in the opinion of the fund's investment manager, these securities appear to
offer attractive opportunities for capital appreciation. The fund may also
invest in preferred stocks and bonds issued by issuers engaged in the public
utilities industry. When buying fixed-income debt securities, the fund may
invest in securities regardless of their rating depending upon prevailing
market and economic conditions, including securities in the lowest rating
categories and unrated securities. Most of the fund's investments, however,
are rated at least Baa by Moody's or BBB by S&P. These ratings represent the
opinions of the rating services with respect to the securities and are not
absolute standards of quality. They will be considered in connection with the
investment of the fund's assets but will not be a determining or limiting
factor.
With respect to unrated securities, it is also the fund's intent to buy
securities that, in the view of the manager, would be comparable in quality
to the fund's rated securities and have been determined to be consistent with
the fund's objectives without exposing the fund to excessive risk. The fund
will not buy issues that are in default or that the manager believes involve
excessive risk.
MUTUAL SHARES FUND ("MUTUAL SHARES"). The principal investment goal of Mutual
Shares is capital appreciation, which may occasionally be short-term. The
secondary investment goal is income.
The fund may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) ("convertible securities"). The fund generally
invests in securities which, in the opinion of its investment adviser, are
available at prices less than their actual value based on certain recognized
objective criteria ("intrinsic value").
There are no limitations on the percentage of the fund's assets which may be
invested in equity securities, debt securities, convertible securities or
cash equivalent investments.
GENERAL POLICIES AND STRATEGIES. The fund's investment manager selects
investments for the fund based upon its analysis and research. This analysis
and research takes into account the factors the manager determines are
relevant, which may include, among other factors, (i) the relationship of a
security's book value to market value, (ii) cash flow and (iii) multiples of
earnings of comparable securities. The relationship of a security's "book
value to market value" is an analysis of the difference between the price at
which a security is trading in the market, as compared to the value of that
security based upon an analysis of certain information contained in a
company's financial statements. Cash flow analysis considers the inflow and
outflow of money into and out of a company. An analysis of "multiples of
earnings of comparable securities" involves a review of the market values of
comparable companies as compared to their earnings, and then comparing the
results of this review with a comparison of the earnings of the company in
question with its market value. These factors are not applied according to a
predetermined formula. Rather, the investment manager examines each security
separately. The manager has not established guidelines as to the size of an
issuer, its earnings or the industry in which it operates in order for a
security to be excluded as unsuitable for purchase by the fund.
INVESTMENT IN THE SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT
TO TENDER OR EXCHANGE OFFERS. The fund also seeks to invest in the securities
of domestic or foreign companies which are in the process of reorganizing or
restructuring ("Reorganizing Companies") or as to which there exist
outstanding tender or exchange offers. The fund may from time to time
participate in such tender or exchange offers. A tender offer is an offer by
the company itself or by another company or person to purchase a company's
securities at a higher (or lower) price than the market value for such
securities. An exchange offer is an offer by the company or by another
company or person to the holders of the company's securities to exchange
those securities for different securities. Although there are no restrictions
limiting the extent to which the fund may invest in Reorganizing Companies,
the fund presently does not anticipate committing more than 50% of its assets
to such investments. In addition to typical equity and debt investments, the
fund's investments in Reorganizing Companies may include Indebtedness,
Participations and Trade Claims, as further described below.
INVESTING TO INFLUENCE OR CONTROL MANAGEMENT. The fund generally purchases
securities for investment purposes and not for the purpose of influencing or
controlling management of a company. However, in certain circumstances when
the fund's investment manager perceives that the fund may benefit, the
manager may use the fund's ownership interest in a company to seek to
influence or control management. The fund also may invest in entities whose
business is to acquire securities of companies for the purpose of influencing
or controlling management or with the expectation of taking over such
companies. The fund may also invest in a particular company which the manager
believes may be an attractive company to be taken over by another entity.
NON-U.S. SECURITIES. The fund may purchase securities of non-U.S. issuers and
may invest in Depositary Receipts.
The fund may purchase securities whose values are quoted and traded in any
currency in addition to the U.S. dollar. In order to avoid the unexpected
fluctuations in value as a result of relative currency values, the fund
expects to employ an investment technique called "hedging," which attempts to
reduce or eliminate changes in a security's value resulting from changing
currency exchange rates.
DEBT SECURITIES. The debt securities in which the fund may invest may be
either unrated or rated by one or more independent rating organizations such
as S&P or Moody's. The debt securities which the fund may purchase may be
rated in any rating category established by the independent rating
organizations. The fund may invest to an unlimited degree in junk bonds.
The fund will generally invest in debt securities under circumstances similar
to those under which they will invest in equity securities; namely, when, in
the investment manager's opinion, such debt securities are available at
prices less than their intrinsic value. Investment in fixed-income securities
under these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in the manager's investment decision-making process.
Historically, the fund has invested in debt securities issued by Reorganizing
Companies because such securities often are available at less than their
intrinsic value. Debt securities of such companies typically are unrated,
lower rated, in default or close to default. While posing a greater risk than
higher rated securities with respect to payment of interest and repayment of
principal at the price at which the debt security was originally issued, such
debt securities typically rank senior to the equity securities of
Reorganizing Companies and may offer the potential for certain investment
opportunities.
DIRECT INVESTMENT IN INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. From time
to time, the fund may purchase the direct indebtedness of various companies
("Indebtedness"), or participations in such Indebtedness. Indebtedness can be
distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the SEC, and
which is held by a large group of investors. Indebtedness may not be a
security, but rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the Indebtedness
of companies, the fund steps into the shoes of the financial institution
which made the loan to the company prior to its restructuring or refinancing.
Indebtedness purchased by the fund may be in the form of loans, notes or
bonds.
The length of time remaining until maturity on the Indebtedness is one factor
the fund's manager considers in purchasing a particular Indebtedness.
Indebtedness which represents a specific indebtedness of the company to a
bank is not considered to be a security issued by the bank selling it. The
fund purchases loans from national and state chartered banks as well as
foreign banks. The fund normally invests in the Indebtedness of a company
which Indebtedness has the highest priority in terms of payment by the
company, although on occasion lower priority Indebtedness also may be
acquired.
The fund may also purchase participation interests in Indebtedness
("Participations"). Participations represent fractional interests in a
company's Indebtedness. The financial institutions which typically make
Participations available are banks or insurance companies, governmental
institutions, such as the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation, or certain
organizations such as the World Bank which are known as "supranational
organizations." Supranational organizations are entities established or
financially supported by the national governments of one or more countries to
promote reconstruction or development.
The fund may also purchase trade claims and other direct obligations or
claims ("Trade Claims") of Reorganizing Companies. Trade Claims generally
represent money due to a supplier of goods or services to such Reorganizing
Company.
Indebtedness, Participations and Trade Claims may be illiquid.
MORTGAGE-BACKED SECURITIES. The fund may invest in mortgage-backed
securities. Two principal types of mortgage-backed securities are CMOs and
real estate mortgage investment conduits (REMICs).
The fund may also invest directly in distressed mortgage obligations. A
direct investment in a distressed mortgage obligation involves the purchase
by the fund of a lender's interest in a mortgage granted to a borrower, where
the borrower has experienced difficulty in making its mortgage payments, or
for which it appears likely that the borrower will experience difficulty in
making its mortgage payments. As is typical with mortgage obligations,
payment of the loan is secured by the real estate underlying the loan. By
purchasing the distressed mortgage obligation, the fund steps into the shoes
of the lender from a risk point of view.
MUTUAL DISCOVERY FUND ("DISCOVERY"). The principal goal of Discovery is
long-term capital appreciation. Discovery does not have a secondary
investment goal. Discovery's investment policies and strategies are virtually
identical to those of Mutual Shares, except that Discovery seeks to achieve
its investment objective by investing proportionately more of its assets in
smaller sized and may invest 50% or more of its assets in foreign securities.
Investing in smaller capitalized companies may involve greater risks than
investing in securities of larger companies. The smaller companies in which
Discovery invests often are not well known, their securities may trade in the
securities markets below their book values and may not be followed by
established securities analysts.
See "Mutual Shares Fund" above for the other investment strategies of this
fund.
MUTUAL EUROPEAN FUND ("EUROPEAN"). The principal investment goal of European
is capital appreciation, which may occasionally be short term. The secondary
goal is income. European's investment policies and strategies are virtually
identical to those of Mutual Shares, except that European will normally
invest at least 65% of its total assets in the securities of issuers (i)
organized under the laws of, (ii) whose principal business operations are
located in, or (iii) at least 50% of whose revenue is earned from, European
countries. For purposes of the fund's investments, European countries means
all of the countries that are members of the European Union, the United
Kingdom, Scandinavia, Eastern and Western Europe and those regions of Russia
and the former Soviet Union that are considered part of Europe. European may
also invest up to 35% of its total assets in securities of U.S. issuers as
well as in securities of issuers from the Levant, the Middle East and the
remaining regions of the world.
It is currently anticipated that European will invest primarily in securities
of issuers in Western Europe and Scandinavia. European will normally invest
in securities from at least five different countries although, from time to
time, it may invest all of its assets in a single country. Under normal
circumstances, European, at the close of each taxable year, will have at
least 50% of its assets invested in securities of foreign issuers.
See "Mutual Shares Fund" above for additional information about the
investment strategies of this fund.
TEMPLETON DEVELOPING MARKETS TRUST ("DEVELOPING MARKETS"). The investment
goal of the fund is long-term capital appreciation. The fund tries to achieve
its investment goal by investing, under normal market conditions, at least
65% of its total assets in equity securities of developing market issuers.
The fund normally will invest in at least three developing market countries.
The fund may invest up to 100% of its total assets in emerging markets,
including up to 5% of its total assets in Russian securities.
For purposes of the fund's investments, developing or emerging market
countries include those considered such by the World Bank, the International
Finance Corporation, or the United Nations. In addition, developing market
equity securities means those issued by:
o companies with their principal securities trading market within a
developing market country, as defined above; or
o companies that derive 50% or more of their total revenue from either goods
or services produced or sales made in developing market countries; or
o companies organized under the laws of, and with a principal office in, a
developing market country.
EQUITY SECURITIES. The fund's primary investments are in common stock. In
selecting equity securities, the manager does a company-by-company analysis,
rather than focusing on a specific industry or economic sector. The manager
concentrates primarily on the market price of a company's securities relative
to its view regarding the company's long-term earnings potential. A company's
historical value measures, including price/earnings ratios, profit margins
and liquidation value, will also be considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may invest up to 35% of its total assets in debt securities which are
rated C or better by Moody's or S&P or unrated debt which it determines to be
of comparable quality. The fund may invest up to 10% of its total assets in
defaulted debt securities. At present, the fund does not intend to invest
more than 5% of its total assets in non-investment grade securities (rated
lower than BBB by S&P or Baa by Moody's).
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
CLOSED-END INVESTMENT COMPANIES. To encourage indirect foreign investment in
their capital markets, some countries, including South Korea, Chile and
India, have permitted the creation of closed-end investment companies. The
fund may invest up to 10% of its total assets in securities of these
companies.
TEMPLETON FOREIGN FUND ("TEMPLETON FOREIGN"). The investment goal of the fund
is long-term capital growth. The fund tries to achieve its investment goal by
a flexible policy of investing in the equity and debt securities of companies
and governments outside the U.S. The fund may invest up to 100% of its total
assets in emerging markets, including up to 5% of its total assets in Russian
securities.
EQUITY SECURITIES. The fund's primary investments are in common stock. In
selecting equity securities, the fund's investment manager does a
company-by-company analysis, rather than focusing on a specific industry or
economic sector. The manager concentrates primarily on the market price of a
company's securities relative to its view regarding the company's long-term
earnings potential. A company's historical value measures, including price/
earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. The
fund may buy debt securities which are rated Caa by Moody's or CCC by S&P or
better; or unrated debt which it determines to be of comparable quality. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's), although the fund may invest up to 10% of its total assets in
defaulted debt securities.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
TEMPLETON FOREIGN SMALLER COMPANIES FUND ("FOREIGN SMALLER"). The investment
goal of the fund is long-term capital growth. The fund tries to achieve its
investment goal by investing primarily in equity securities of smaller
companies outside the U.S. Smaller companies generally are those with market
capitalizations of less than $1 billion.
Under normal market conditions, the fund expects to invest at least 65% of
its total assets in smaller companies (i) located in, or (ii) deriving a
significant portion of their revenues from, or (iii) for which the principal
securities trading market is in any foreign country, including emerging
market countries.
The fund may invest up to 35% of its total assets in any combination of (i)
equity securities of larger capitalized issuers outside the U.S.; or (ii)
equity securities of issuers within the U.S. - the fund presently does not
expect to invest more than 5% of its assets in these securities; or (iii)
both rated and unrated debt securities - independent rating organizations
rate debt securities based upon their assessment of the financial soundness
of the issuer. Generally, a lower rating indicates higher risk. The fund may
buy debt securities which are rated C or better by Moody's or S&P; or unrated
debt which it determines to be of comparable quality. At present, the fund
does not intend to invest more than 5% of its total assets in non-investment
grade securities (rated lower than BBB by S&P or Baa by Moody's), including
defaulted securities.
EQUITY SECURITIES. The fund's primary investments are in common stock. In
selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
manager concentrates primarily on the market price of a company's securities
relative to its view regarding the company's long-term earnings potential. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered.
DEPOSITARY RECEIPTS. The fund may also invest in American, European, and
Global Depositary Receipts.
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("SMALLER COMPANIES"). The
investment goal of the fund is long-term capital growth. The fund tries to
achieve its investment goal by investing primarily in the equity securities
of smaller companies of any nation. Under normal market conditions, the fund
will invest at least 65% of its total assets in issuers located in at least
three countries (including the U.S.). The fund may invest up to 35% of its
assets in securities other than equity securities, including debt securities.
SMALLER COMPANIES. The fund expects to invest 75% of its assets in companies
whose market capitalizations would place them (at the time of purchase) in
the same size range as companies falling in approximately the lowest 20%
range (based on their total market capitalization) whose equity securities
are listed on a U.S. national securities exchange or traded in the NASDAQ
system. Based on recent U.S. share prices, these companies typically have
market capitalizations between approximately $50 million and $1 billion.
Because the fund is permitted to apply the U.S. size standard on a global
basis, it may invest in issues that might rank above the lowest 20% by total
market capitalization in local markets and, in fact, might in some countries
rank among the largest companies in terms of capitalization. The fund's board
of directors has adopted an operating policy that the fund will not purchase
securities of companies with market capitalizations of more than $1 billion.
This policy may be changed by the board without shareholder approval.
EQUITY SECURITIES. In selecting equity securities, the fund's manager does a
company-by-company analysis, rather than focusing on a specific industry or
economic sector. The manager concentrates primarily on the market price of a
company's securities relative to its view regarding the company's long-term
earnings potential. A company's historical value measures, including price/
earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's), although the fund may invest up to 10% of its total assets in
defaulted debt securities.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
TEMPLETON INTERNATIONAL FUND ("INTERNATIONAL FUND"). The fund's investment
goal is long-term capital appreciation. The fund normally invests at least
75% of its total assets 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. At least 65% of the fund's total
assets will be invested in issuers located in at least three countries.
In addition to common stocks and preferred stocks, the fund also invests in
American, European, and Global Depositary Receipts, which are certificates
typically issued by a bank or trust company that give their holders the right
to receive securities issued by a foreign or domestic company. Depending upon
current market conditions, the fund generally invests a portion of its total
assets in rated or unrated debt securities of companies. These include bonds,
notes, and debentures.
The Templeton investment philosophy is "bottom-up," value-oriented and
long-term. In choosing equity investments, the fund's manager will focus on
the market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. A
company's historical value measures, including price/earnings ratio, profit
margins, and liquidation value, will also be considered.
TEMPLETON LATIN AMERICA FUND ("LATIN AMERICA"). The investment goal of the
fund is long-term capital appreciation. The fund tries to achieve its
investment goal by investing at least 65% of its total assets in the equity
and debt securities of Latin America issuers.
For purposes of the fund's investments, "Latin America" countries include
Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba,
Ecuador, El Salvador, French Guyana, Guatemala, Guyana, Honduras, Mexico,
Nicaragua, Panama, Paraguay, Peru, Surinam, Trinidad/Tobago, Uruguay and
Venezuela.
The fund may invest the remaining 35% of its total assets in any combination
of: (i) equity and debt securities of issuers domiciled outside Latin
America; and (iii) short-term and medium-term debt securities.
EQUITY SECURITIES. Currently the funds invest primarily in common stock. In
selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
manager concentrates primarily on the market price of a company's securities
relative to their view regarding the company's long-term earnings, assets and
cash flow potential. A company's historical value measures, including
price/earnings ratios, profit margins and liquidation value, will also be
considered.
DEBT SECURITIES. The fund may buy both rated and unrated debt securities. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's or, if unrated, determined by the fund to be of comparable quality).
The fund may invest up to 5% of its total assets in defaulted debt securities.
BRADY BONDS. The fund may invest in certain debt securities referred to as
"Brady Bonds." Investments in Brady Bonds are subject to the fund's current
policy of not investing more than 5% of its total assets in non-investment
grade securities. Please see "Templeton International Fund" above for a
description of Brady Bonds.
DEPOSITARY RECEIPTS. The fund may also invest in Depositary Receipts.
TEMPLETON PACIFIC GROWTH FUND ("PACIFIC GROWTH"). The investment goal of the
fund is long-term capital growth. The fund tries to achieve its investment
goal by investing at least 65% of its total assets in equity securities that
trade on Pacific Rim markets and are issued by companies (i) domiciled in the
Pacific Rim or (ii) that derive at least 50% of their revenues or pre-tax
income from Pacific Rim activities.
For purposes of the fund's investments, Pacific Rim countries include
Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand,
Pakistan, Philippines, Singapore, South Korea and Thailand.
Under normal market conditions, the fund will invest at least 65% of its
total assets in issuers in at least three of these countries.
The fund may invest up to 35% of its total assets in any combination of (i)
securities of issuers domiciled outside the Pacific Rim - these investments
may include securities of issuers that are linked by tradition, economic
markets, cultural similarities or geography to countries in the Pacific Rim
or that have operations in the Pacific Rim or that stand to benefit from
political and economic events in the Pacific Rim; or (ii) both rated and
unrated debt and synthetic convertible securities - independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk. The fund may buy debt securities when they are rated Baa by Moody's or
BBB by S&P or better; or unrated debt which it determines to be of comparable
quality. The fund's investments in debt instruments may include U.S. and
foreign government and corporate securities, including Samurai bonds, Yankee
bonds and Eurobonds. The fund currently has no intention of investing more
than 5% of its net assets in synthetic convertible securities.
EQUITY SECURITIES. The fund's primary investments are in common stock. In
selecting equity securities, the fund's manager does a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
manager concentrates primarily on the market price of a company's securities
relative to its view regarding the company's long-term earnings potential. A
company's historical value measures, including price/
earnings ratios, profit margins and liquidation value, will also be
considered.
DEPOSITARY RECEIPTS. The fund may invest in American and Global Depositary
Receipts.
FIXED INCOME FUNDS
The following underlying Franklin Templeton funds invest primarily in fixed
income securities.
FRANKLIN'S AGE HIGH INCOME FUND ("AGE"). The investment goal of the fund is
to earn a high level of current income. As a secondary goal, the fund seeks
capital appreciation to the extent it is possible and consistent with the
fund's principal goal. The fund will generally invest in high yield, lower
rated debt securities. High yield debt securities are often issued by the
following types of companies:
o Companies lacking the financial strength needed to receive an "investment
grade" rating;
o Companies that do not have the track record needed to receive an
"investment grade" rating. These include companies in relatively new
industries such as the cellular communications industry;
o Companies that have borrowed to finance acquisitions or to expand their
operations;
o Companies seeking to refinance their debt at lower rates; and
o Companies that have been downgraded due to financial difficulties.
Lower rated securities generally pay higher yields than more highly rated
securities to compensate investors for the higher risk. The fund seeks to
invest in securities offering the highest yield and expected total return
without taking on an excessive amount of risk.
The fund may also invest in "zero coupon bonds" and in dividend-paying equity
securities.
QUALITY AND RATINGS. The fund may buy both rated and unrated debt securities.
The fund may buy debt securities regardless of their rating and up to 100% of
the portfolio may be invested in non-investment grade securities. The fund
may invest up to 10% of its total assets in debt securities where the issuer
is not currently making interest payments (defaulted debt securities). It is
the fund's intent not to buy unrated securities that are comparable to
securities rated below B by Moody's or S&P. As of May 31, 1998, approximately
92.72% of the fund's net assets were invested in lower rated and comparable
quality unrated debt securities.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis
at the time of the rating. Credit quality in the high yield debt market,
however, can change suddenly and unexpectedly, and credit ratings may not
reflect the issuer's current financial condition. For these reasons, the
fund's manager does not rely principally on the ratings assigned by rating
agencies, but performs its own independent investment analysis of securities
being considered for the fund's portfolio. In its analysis, the fund's
manager considers a variety of factors, including:
o the experience and managerial strength of the issuer;
o responsiveness to changes in interest rates and business conditions;
o debt maturity schedules and borrowing requirements;
o the issuer's changing financial condition and market recognition of the
change; and
o relative values based on such factors as anticipated cash flow, interest
or dividend coverage, asset coverage, and earnings prospects.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest in securities
of issuers in any foreign country, developed or developing, and may buy
foreign securities that are traded in the U.S. or securities of U.S. issuers
that are denominated in a foreign currency. The fund may also invest in
Depositary Receipts. The fund presently has no intention of investing more
than 10% of its net assets in foreign securities not publicly traded in the
U.S.
FRANKLIN BOND FUND ("BOND FUND"). The investment goal of the fund is to
provide a high level of current income consistent with the preservation of
capital, with capital appreciation over the long term as a secondary goal.
The fund will allocate assets among securities in various market sectors
based on the investment manager's assessment of changing economic, market,
industry and issuer conditions. The investment manager will use a "top-down"
analysis of macroeconomic trends, combined with a "bottom-up" fundamental
analysis of market sectors, industries and issuers to attempt to take
advantage of varying sector reactions to economic events. The manager will
evaluate business cycles, changes in yield curves and apparent imbalances in
values between and within markets, as well as the risks of investing in
particular foreign markets. Through diversification among various market
sectors and its own independent credit analysis of securities being
considered for the fund's portfolio, the investment manager attempts to
reduce the risks of investing in non-investment grade securities.
The fund tries to achieve its investment goal by investing at least 65% of
its total assets in investment grade fixed-income securities, including debt
securities and mortgage-backed and asset-backed securities. Up to 35% of the
fund's total assets may be invested in non-investment grade fixed-income
securities.
DEBT SECURITIES. The fund may buy both rated and unrated fixed-income
securities. The fund may buy fixed-income securities which are rated B or
better by Moody's or S&P or unrated securities which it determines to be of
comparable quality. The fund may buy securities of issuers in any foreign
country, developed or developing.
Through diversification among various market sectors and its own independent
analysis for securities being considered for the fund's portfolio, the fund's
investment manager attempts to reduce the risks of investing in
non-investment grade securities.
MORTGAGE-BACKED SECURITIES. The fund may invest in mortgage-backed
securities, including CMOs.
ASSET-BACKED SECURITIES. The fund may invest in asset-backed securities.
GOVERNMENT SECURITIES. The fund may invest in Treasury bills, notes and
bonds, which are direct obligations of the U.S. government, backed by the
full faith and credit of the U.S. Treasury, and in securities issued or
guaranteed by federal agencies. The fund may also invest in securities issued
or guaranteed by foreign governments and their agencies.
FRANKLIN GLOBAL GOVERNMENT INCOME FUND ("GLOBAL GOVERNMENT"). The fund's
investment objective is to provide high current income, consistent with
preservation of capital, with capital appreciation as a secondary
consideration.
Global Government seeks to achieve its objective by investing at least 65% of
its total assets in securities issued or guaranteed by domestic and foreign
governments and their political subdivisions, including the U.S. government,
its agencies, and authorities or instrumentalities. The fund considers
securities issued by central banks that are guaranteed by their national
governments to be government securities. The fund selects investments to
provide a high current yield and currency stability, or a combination of
yield, capital appreciation or currency appreciation consistent with the
fund's objective.
As a global fund, Global Government may invest in securities issued in any
currency and may hold foreign currency. Under normal circumstances, the fund
invests at least 65% of its assets in government securities of issuers
located in at least three countries, one of which may be the U.S. Securities
of issuers within a given country may be denominated in the currency of
another country, or in multinational currency units such as the European
Currency Unit ("ECU").
Under normal economic conditions, the fund invests at least 65% of its total
assets in fixed-income securities such as bonds, notes and debentures. Some
of the fixed-income securities may be convertible into common stock or be
traded together with warrants for the purchase of common stocks, although the
fund has no current intention of converting such securities into equity or
holding them as equity upon such conversion. The remaining 35% may be
invested, to the extent available and permissible, in equity securities,
foreign or domestic currency deposits or equivalents such as short-term U.S.
Treasury notes or repurchase agreements.
Global Government may invest in debt securities with varying maturities.
Under current market conditions, it is expected that the dollar-weighted
average maturity of the fund's investments will not exceed 15 years.
Generally, the portfolio's average maturity will be shorter when its
investment manager expects interest rates worldwide or in a particular
country to rise, and longer when interest rates are expected to fall.
The fund may also invest in other fixed-income securities of both domestic
and foreign issuers, including preferred and preference stock and all types
of long-term or short-term debt obligations, such as bonds, debentures,
notes, commercial paper, equipment lease certificates, equipment trust
certificates and conditional sales contracts. These fixed-income securities
may involve equity features, such as conversion or exchange rights or
warrants for the acquisition of stock of the same or a different issuer;
participation based on revenues, sales or profits; or the purchase of common
stock in a unit transaction (where an issuer's debt securities and common
stock are offered as a unit). Global Government will limit its investments in
warrants, valued at the lower of cost or market, to 5% of the fund's net
assets or to warrants attached to securities.
Global Government may also invest in debt securities of supranational
entities denominated in any currency. The fund may, in addition, invest in
debt securities denominated in ECU of an issuer in any country (including
supranational issuers). Global Government is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state or equivalent government or are obligations
of a government jurisdiction that are not backed by its full faith and credit
and general taxing powers.
Global Government will allocate its assets among securities of various
issuers, geographic regions, and currency denominations in a manner that is
consistent with its objective based upon relative interest rates among
currencies, the outlook for changes in these interest rates, and anticipated
changes in worldwide exchange rates. In considering these factors, the fund
will evaluate a country's economic and political conditions such as inflation
rate, growth prospects, global trade patterns and government policies.
Global Government's invests it assets principally within Australia, Canada,
Japan, New Zealand, the U.S. and Western Europe, and in securities
denominated in the currencies of these countries or denominated in
multinational currency units such as the ECU. The fund may also acquire
securities and currency in less developed countries and in developing
countries. The investment manager does not currently expect the fund's
investments in less developed and developing countries to exceed 30% of the
fund's net assets.
Global Government may invest in obligations of domestic and foreign banks
which, at the date of investment, have total assets (as of the date of their
most recently published financial statements) in excess of one billion
dollars (or foreign currency equivalent at then-current exchange rates).
Global Government is also authorized to acquire loan participations.
Global Government may invest in higher yielding, higher risk, lower rated
debt obligations that are rated at least B by Moody's or S&P or, if unrated,
are at least of comparable quality as determined by the investment manager;
such investments will be less than 35% of the fund's net assets. Many debt
obligations of foreign issuers, especially developing market issuers, are not
rated by U.S. rating agencies and their selection depends on the investment
manager's internal analysis.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
("SHORT-INTERMEDIATE"). The investment objective of Short-Intermediate is to
provide as high a level of current income as is consistent with prudent
investment practices while seeking preservation of shareholders' capital. The
fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy, Short-Intermediate must invest at least
65% of its net assets in U.S. government securities. It is the investment
policy of the fund (which may be changed upon notice to shareholders) to
maintain the average dollar weighted maturity of its portfolio in a range of
two to five years. Within this range, the fund intends to emphasize an
average weighted maturity of 31/2 years or less.
Short-Intermediate may invest in obligations either issued or guaranteed by
the U.S. government and its agencies or instrumentalities including, but not
limited to: direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds; and obligations of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National Mortgage
Association, Government National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land Banks, Federal
Intermediate Credit Banks, Tennessee Valley Authority, Export-Import Bank of
the United States, Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage Corporation,
or National Credit Union Administration. Since inception, the assets of the
fund have been invested solely in direct obligations of the U.S. Treasury and
in repurchase agreements collateralized by U.S. Treasury obligations. The
level of income achieved by Short-Intermediate may not be as high as that of
other funds which invest in lower quality, longer-term securities. The fund
may invest in zero coupon bonds issued or guaranteed by the U.S. government
or its agencies or instrumentalities and in inflation-indexed securities
issued by the U.S. Treasury.
FRANKLIN U.S. GOVERNMENT SECURITIES FUND ("GOVERNMENT SECURITIES"). The
investment objective of Government Securities is income through investment in
a portfolio limited to securities that are obligations of the U.S. government
or its instrumentalities. U.S. government securities include, but are not
limited to, U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills,
U.S. Treasury certificates of indebtedness, and securities issued by
instrumentalities of the U.S. government. Other than investments in
short-term U.S. Treasury securities or assets held in cash pending
investment, the assets of the fund are currently invested solely in
obligations ("GNMAs") of the Government National Mortgage Association
("Association"). GNMAs are mortgage-backed securities representing part
ownership of a pool of mortgage loans. GNMAs differ from other bonds in that
principal may be paid back on an unscheduled basis rather than returned in a
lump sum at maturity. Government Securities will buy GNMAs whose principal
and interest are guaranteed. The fund also purchases "adjustable rate" GNMAs
and other types of securities which may be issued with the Association's
guarantee.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the U.S. government. The Association
may borrow U.S. Treasury funds to the extent needed to make payments under
its guarantee. Of course, this guarantee does not extend to the market value
or yield of the GNMAs or the Net Asset Value or performance of the fund,
which will fluctuate daily with market conditions.
Payments to holders of GNMAs, such as the fund, consist of the monthly
distributions of interest and principal less the Association's and issuers'
fees. The portion of the monthly payment which represents a return of
principal will be reinvested by Government Securities in securities which may
bear interest at a rate higher or lower than the obligations from which the
principal payment was received. When mortgages in the pool underlying a GNMA
are prepaid by borrowers or as a result of foreclosure, such principal
payments are passed through to the GNMA holders, such as the fund.
Accordingly, a GNMA's life is likely to be substantially shorter than the
stated maturity of the mortgages in the underlying pool. Because of such
variation in prepayment rates, it is not possible to accurately predict the
life of a particular GNMA.
FRANKLIN TEMPLETON HARD CURRENCY FUND ("HARD CURRENCY"). The investment
objective of Hard Currency is to protect against depreciation of the U.S.
dollar relative to other currencies. The fund seeks to achieve its objective
by investing in high-quality money market instruments (and forward contracts)
denominated in foreign major currencies which historically have experienced
low rates of inflation and which, in the view of its investment manager,
follow economic policies conducive to continued low rates of inflation in the
future and currency appreciation versus the U.S. dollar over the long-term.
These currencies are often referred to as "hard currencies" and the economic
policies are often referred to as "sound money" policies. The "major
currencies" are: Australian dollar, Belgian franc, British pound sterling,
Canadian dollar, Danish krone, Netherlands guilder, European Currency Unit
("ECU"), French franc, German mark, Italian lira, Japanese yen, New Zealand
dollar, Spanish peseta, Swedish krona, Swiss franc, and U.S. dollar.
Hard Currency tries to keep foreign currency (non-U.S. dollar) exposure with
respect to 100% of its net assets. The fund may invest in U.S.
dollar-denominated money market instruments in combination with forward
contracts (calling for the future acquisition of foreign currencies in
exchange for U.S. dollars) to obtain an investment result that is
substantially the same as a direct investment in a foreign
currency-denominated instrument.
Under normal market conditions, Hard Currency will not expose its portfolio
in excess of 50% of its total assets to a single foreign currency.
Subject to specific fund restrictions, the fund may invest in money market
instruments and forward contracts denominated in any of the major currencies.
The currencies of various countries may be added to or deleted from the
foregoing list of major currencies when, in the opinion of the fund's
investment manager, world social, economic, financial or political conditions
justify it.
Hard Currency will attempt to maintain a weighted average effective maturity
of 120 days or less and will buy only money market instruments that have an
effective maturity, at the time of purchase, of one year or less. These
securities include floating or variable rate obligations that may have actual
maturities of over one year but that have interest rates which adjust at
periodic intervals. The effective maturity of each floating or variable rate
obligation within the fund's portfolio will be based upon these periodic
adjustments. Because the fund invests primarily in short-term securities
which are excluded from the calculation of portfolio turnover rate, the
portfolio turnover rate for the fund is usually minimal.
The issuers of money market instruments in which Hard Currency may invest may
include governments of, and financial institutions, corporations or other
entities located in or organized under the laws of, any country. The fund may
also invest in money market securities issued by supranational organizations
such as the World Bank, chartered to finance development projects in member
countries; the European Union, a twelve-nation organization engaged in
cooperative economic activities; the economic union of various European
nations' steel and coal industries; and the Asian Development Bank, an
international development bank established to lend funds, promote investment,
and provide technical assistance to member nations in the Asian and Pacific
regions.
Hard Currency invests only in instruments which are considered by its
investment managers to be of high quality, comparable to those (1) rated AAA
or AA (A-1 for commercial paper) by S&P or Aaa or Aa (P-1 for commercial
paper) by Moody's or (2) issued by companies having an outstanding unsecured
debt issue currently rated within the above rating categories by S&P or
Moody's.
TEMPLETON GLOBAL BOND FUND ("GLOBAL BOND"). The investment objective of
Global Bond is current income with capital appreciation and growth of income.
The fund seeks to achieve its objective through a flexible policy of
investing primarily in debt securities of companies, governments, and
government agencies of various nations throughout the world, as well as
preferred stock, common stocks which pay dividends, incomeproducing
securities which are convertible into common stock of such companies, and
sponsored and unsponsored Depositary Receipts. The fund may invest in
"when-issued" securities and collateralized mortgage obligations. Under
normal circumstances, the fund will invest 65% of its total assets in issuers
domiciled in at least three different nations (one of which may be the U.S.).
The fund's investments in common stocks will emphasize companies, in various
countries and industries, which pay dividends and may offer prospects for
further growth in dividend payments and capital appreciation.
Global Bond may invest in any debt security (which may include structured
investments), including securities rated in any category by S&P or Moody's
and securities which are unrated by any rating agency. As an operating
policy, the fund will not invest more than 5% of its total assets in debt
securities rated lower than BBB by S&P or Ba by Moody's. The fund will not
invest more than 10% of its total assets in defaulted debt securities, which
may be illiquid. Investments in commercial paper are limited to obligations
rated Prime-1 by Moody's or A-1 by S&P, or if unrated, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA
or AA by S&P. The average maturity of the debt securities in the fund's
portfolio will fluctuate depending upon its investment manager's judgment as
to future interest rate changes.
The fund may invest up to 5% of its total assets in securities that may not
be resold without registration under applicable law ("restricted
securities"). The fund may invest up to 10% of its total assets in restricted
securities and other securities which are not restricted but which are not
readily marketable (i.e., trading in the security is suspended or, in the
case of unlisted securities, market makers do not exist or will not entertain
bids or offers).
WHAT ARE SOME OF THE UNDERLYING FRANKLIN TEMPLETON FUNDS' OTHER INVESTMENT
POLICIES AND PRACTICES?
OPTIONS ON SECURITIES AND SECURITIES INDICES. Certain of the underlying
Franklin Templeton funds may buy and sell options on securities and
securities indices to earn additional income and/or to help protect portfolio
holdings against market and/or exchange rate movements. An option on a
security is a contract that allows the buyer of the option the right to buy
or sell a specific security at a stated price during the option's term. An
option on a securities index is a contract that allows the buyer of the
option the right to receive from the seller cash, in an amount equal to the
difference between the index's closing price and the option's exercise price.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. To help protect portfolio holdings
against adverse changes in foreign currency exchange rates, certain of the
underlying Franklin Templeton funds may (1) buy and sell foreign currency at
the prevailing rate in the foreign currency exchange market; (2) enter into
forward foreign currency contracts which are agreements to buy or sell a
specific currency at a set price on a future date (generally within one
year); (3) buy and sell put and call options on foreign currencies; and (4)
enter into currency swap agreements which are agreements to exchange cash
flows on a notional amount of two or more currencies based on the relative
value differential between them.
FUTURES CONTRACTS. Changes in interest rates, securities prices or foreign
currency valuations may affect the value of an underlying Franklin Templeton
fund's investments. To reduce exposure to these factors, certain of the
underlying Franklin Templeton funds may buy and sell financial futures
contracts, stock index futures contracts, interest rate futures contracts,
foreign currency futures contracts and options on any of these contracts. A
financial futures contract is an agreement to buy or sell a specific security
or commodity at a specified future date and price. An index futures contract
is an agreement to take or make delivery of an amount of cash based on the
difference between the value of the index at the beginning and end of the
contract period. An interest rate futures contract is a contract for the
future delivery of U.S. government securities and index-based futures
contracts, the value of which depend primarily on prevailing interest rates.
A futures contract on a foreign currency is an agreement to buy or sell a
specific amount of a currency for a set price on a future date.
Each of the underlying Franklin Templeton funds limits its futures and
related options activities so that it will not be considered a "commodity
pool operator" under the rules of the Commodity Futures Trading Commission.
In addition, a number of the funds have committed to limit their options and
futures transactions to various percentages.
INTEREST RATE SWAPS. Certain of the underlying Franklin Templeton funds may
participate in interest rate swaps. An interest rate swap is the transfer
between two counterparties of interest rate obligations, one of which has an
interest rate fixed to maturity while the other has an interest rate that
changes in accordance with changes in a designated benchmark (e.g., London
Interbank Offered Rate (LIBOR), prime, commercial paper, or other benchmarks).
TEMPORARY INVESTMENTS. When a manager of an underlying Franklin Templeton
fund believes that the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist, the manager may invest the fund's portfolio in a
temporary defensive manner. Under such circumstances, the funds typically may
invest up to 100% of their assets in a variety of foreign and domestic debt
securities and instruments, including U.S. government securities, high grade
commercial paper, repurchase agreements, money market securities, bank
obligations and time deposits. Certain underlying Franklin Templeton funds
may also invest temporarily in high risk, lower quality debt securities.
SHORT-TERM INVESTMENTS. A number of the underlying Franklin Templeton funds
may invest cash being held for liquidity purposes in shares of Franklin Money
Fund, other money market funds in the Franklin Templeton Funds or a variety
of U.S. or foreign debt securities or obligations.
REPURCHASE AGREEMENTS. Each underlying Franklin Templeton fund (except
Government Securities) will generally have a portion of its assets in cash or
cash equivalents for a variety of reasons including waiting for a special
investment opportunity or taking a defensive position. To earn income on this
portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
For more information about the various types of investments and strategies
employed by the underlying Franklin Templeton funds, please see the appendix
and the SAI.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages each fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. The manager also provides asset allocation services by
allocating each fund's assets among the underlying Franklin Templeton funds.
It is wholly owned by Resources, a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources. The
manager or other direct or indirect wholly owned subsidiaries of Resources
are the investment managers of the underlying Franklin Templeton funds.
Together, the manager and its affiliates manage over $228 billion in assets.
Please see "Investment Advisory, Asset Allocation and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the funds' Code of Ethics.
PORTFOLIO MANAGER.
Mark Boyadjian
Portfolio Manager of Franklin Advisers, Inc.
Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in Philosophy from University of California at Berkeley. Prior to
joining the Franklin Templeton Group in 1998, Mr. Boyadjian was a portfolio
manager at 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, 1998, asset
allocation fees, before any advance waiver, totaled 0.25% of the average
monthly net assets of each fund. Total direct operating expenses were 1.06%
for Conservative Target Fund - Class A, 1.81% for Conservative Target Fund -
Class C, 0.92% for Moderate Target Fund - Class A, 1.67% for Moderate Target
Fund - Class C, 0.98% for Growth Target Fund - Class A and 1.73% for Growth
Target Fund - Class C. Under an agreement by the manager to waive or limit
its fees, Conservative Target Fund paid no asset allocation fees and Moderate
Target Fund and Growth Target Fund paid asset allocation fees totaling 0.08%
and 0.02%, respectively. Each fund paid direct operating expenses totaling
0.75% for Class 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:
<TABLE>
<CAPTION>
UNDERLYING FRANKLIN TEMPLETON FUND MANAGER FEE RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Franklin Advisers, Inc. ("Advisers") 0.625% 1
Growth Advisers 0.625% 2
Utilities Advisers 0.625% 2
Small Cap Advisers 0.625% 3
Value Franklin Advisory Services, Inc. 0.750% 4
("Advisory Services")
Real Estate Advisers 0.625% 3
Mutual Shares Franklin Mutual Advisers, Inc. 0.60%
("Franklin Mutual")
Discovery Franklin Mutual 0.80%
European Franklin Mutual 0.80%
Aggressive Growth Advisers 0.50% 5
Large Cap Growth Advisers 0.50% 5
Bond Fund Advisers; TICI (sub-adviser) 0.425% 6,*
Short-Intermediate Advisers 0.625% 1
Government Securities Advisers 0.625% 2
UNDERLYING FRANKLIN TEMPLETON FUND MANAGER FEE RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
AGE Advisers 0.625% 1
Templeton Foreign Templeton Global Advisors Limited 0.75% 7
("TGAL")
Developing Markets Templeton Asset Management Ltd. - 1.25%
Hong Kong Branch
Smaller Companies Templeton Investment Counsel, Inc. 0.75%
("TICI")
Foreign Smaller Advisers; TICI (sub-adviser) 1.00% 8,*
International TGAL 0.75%
Pacific Growth Advisers; TICI (sub-adviser) 1.00% 8,*
Latin America TGAL 1.25%
Hard Currency Advisers; TICI (sub-adviser) 0.65%*
Global Bond TICI 0.50% 9
Global Government Advisers; TICI (sub-adviser) 0.625% 1,*
Gold Advisers 0.625% 1
Natural Resources Advisers 0.625% 3
Strategic Income Advisers; TICI (sub-adviser) 0.625% 1,*
</TABLE>
1. .625% of the month end net assets of the fund up to $100 million, reduced
to .50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million.
2. .625% of the month end net assets of the fund up to $100 million, reduced
to .50% of such net assets in excess of $100 million up to $250 million, and
further reduced to .45% of such net assets in excess of $250 million up to
$10 billion, further reduced to .44% of such net assets in excess of $10
billion up to $12.5 billion, further reduced to .42% of such net assets in
excess of $12.5 billion up to $15 billion, further reduced to .40% of such
net assets in excess of $15 billion up to $17.5 billion, further reduced to
.38% of such net assets in excess of $17.5 billion up to $20 billion, and
further reduced to .36% in excess of $20 billion.
3. .625% of the average daily net assets of the fund up to $100 million, .50%
of the average daily net assets of the fund over $100 million up to $250
million, .45% of the average daily net assets of the fund over $250 million
up to $10 billion, .44% of the average daily net assets of the fund over $10
billion up to $12.5 billion, .42% of the average daily net assets of the fund
over $12.5 billion up to $15 billion, and .40% of the average daily net
assets of the fund over $15 billion.
4. .75% of average daily net assets up to $500 million, .625% of average
daily net assets over $500 million up to $1 billion, and .50% of average
daily net assets over $1 billion.
5. .40% of the value of net assets over $500 million up to and including $1
billion; .35% of the value of net assets over $1 billion up to and including
$1.5 billion; .30% of the value of net assets over $1.5 billion up to and
including $6.5 billion; .275% of the value of net assets over $6.5 billion up
to and including $11.5 billion; .25% of the value of net assets over $11.5
billion up to and including $16.5 billion; .24% of the value of net assets
over $16.5 billion up to and including $19 billion; .23% of the value of net
assets over $19 billion up to and including $21.5 billion; and .22% of the
value of net assets in excess of $21.5 billion.
6. .425% of the value of its average daily net assets up to and including
$500 million; .325% of the value of its average daily net assets over $500
million up to and including $1 billion; and .280% of the value of its average
daily net assets over $1 billion up to and including $1.5 billion; and .235%
of the value of its average daily net assets over $1.5 billion up to and
including $6.5 billion; .215% of the value of its average daily net assets
over $6.5 billion up to and including $11.5 billion; and .200% of the value
of its average daily net assets over $11.5 billion up to and including $16.5
billion; and .190% of the value of its average daily net assets over $16.5
billion up to and including $19 billion; .180% of the value of its average
daily net assets over $19 billion up to and including $21.5 billion; and
.170% of the value of its average daily net assets over $21.5 billion.
7. .75% of the average daily net assets of the fund up to the first $200
million, reduced to a fee of .675% of such average daily net assets in excess
of $200 million up to $1.3 billion, and further reduced to a fee of .60% of
such average daily net assets in excess of $1.3 billion.
8. 1% of daily net assets up to $100 million, .90% of daily net assets over
$100 million up to $250 million, .80% of daily net assets over $250 million
up to $500 million, and .75% of daily net assets over $500 million.
9. .50% of its average daily net assets, .45% of such net assets in excess of
$200 million and .40% of such net assets in excess of $1.3 billion.
*TICI is entitled to receive from Advisers a sub-advisory fee; the
sub-advisory fees payable by Advisers have no effect on the fees payable by
the underlying Franklin Templeton funds to Advisers. As to Foreign Smaller
and Pacific Growth, TICI receives from Advisers a fee equal to an annual rate
of the value of each fund's average daily net assets as follows: .50% of such
assets up to $100 million; .40% of such assets over $100 million up through
$250 million; .30% of such assets over $250 million up through $500 million;
and .25% of such assets over $500 million. As to Hard Currency, TICI receives
from Advisers a fee equal to an annual rate of .25% of the value of each
fund's average daily net assets. As to Global Government, TICI receives from
Advisers a fee equal to an annual rate of the value of the fund's assets as
follows: .35% of such assets up to $100 million; .25% of such assets over
$100 million up through $250 million; and .20% of such assets over $250
million. As to Bond Fund, TICI receives 25% of the investment advisory fee
paid to Advisers by the fund.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Do the Funds Buy Securities for Their Portfolios?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the fund at no charge. Please see "Investment Advisory,
Asset Allocation and Other Services" in the SAI for more information.
YEAR 2000 PROBLEM. The funds' 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
non-standard 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 funds could experience difficulties in effecting transactions if
any of their 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.
THE RULE 12B-1 PLANS
Each fund and class have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses
of activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the funds under their Class A plans may not exceed 0.25% per year
of Class A's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class A purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class C plans, a fund may pay Distributors up to 0.75% per year of
Class C's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class C
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class C
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
A fund may also pay a servicing fee of up to 0.25% per year of Class C's
average daily net assets under the Class C plans. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Funds' Underwriter" in the SAI.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
TAXATION OF THE FUNDS' INVESTMENTS. HOW DO THE FUNDS EARN INCOME AND GAINS?
A fund invests your money in the
underlying Franklin Templeton funds and A fund earns dividends and interest (a
other securities that are described in fund's "income") on its investments.
the section "How Do the Funds Invest When a fund sells a security for a
Their Assets?" Special tax rules may price that is higher than it paid, it
apply when determining the income and has a gain. When a fund sells a
gains that a fund earns on its security for a price that is lower
investments. These rules may, in turn, than it paid, it has a loss. If a fund
affect the amount of distributions that has held the security for more than
a fund pays to you. These special tax one year, the gain or loss will be a
rules are discussed in the SAI. long-term capital gain or loss. If a
fund has held the security for one
TAXATION OF THE FUNDS. As a regulated year or less, the gain or loss will be
investment company, a fund generally a short-term capital gain or loss. A
pays no federal income tax on the fund may also receive capital gain
income and gains that it distributes to distributions from the underlying
you. Franklin Templeton funds and realize
capital gains upon the redemption of
FOREIGN TAXES. Foreign governments may shares of the underlying Franklin
impose taxes on the income and gains Templeton funds. A fund's gains and
from the underlying Franklin Templeton losses are netted together, and, if a
fund's investments in foreign stocks fund has a net gain (a fund's
and bonds. These taxes will reduce the "gains"), that gain will generally be
amount a fund distributes to you. distributed to you.
TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. Distributions from a WHAT IS A DISTRIBUTION?
fund, whether you receive them in cash
or in additional shares, are generally As a shareholder, you will receive
subject to income tax. A fund will send your share of a fund's income and
you a statement in January of the gains on its investments in the
current year that reflects the amount underlying Franklin Templeton funds
of ordinary dividends, capital gain and other securities. A fund's income
distributions and non-taxable and short term capital gains are paid
distributions you received from the to you as ordinary dividends. A fund's
fund in the prior year. This statement long-term capital gains are paid to
will include distributions declared in you as capital gain distributions. If
December and paid to you in January of a fund pays you an amount in excess of
the current year, but which are taxable its income and gains, this excess will
as if paid on December 31 of the prior generally be treated as a non-taxable
year. The IRS requires you to report distribution. These amounts, taken
these amounts on your income tax return together, are what we call a fund's
for the prior year. distributions to you.
DISTRIBUTIONS to Retirement Plans. Fund distributions received by your
qualified retirement plan, such as a section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Special rules apply to payouts from Roth and Education
IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they
receive from a fund.
REDEMPTIONS AND EXCHANGES. If you WHAT IS A REDEMPTION?
redeem your shares or if you exchange
your shares in a fund for shares in A redemption is a sale by you to a
another Franklin Templeton Fund, you fund of some or all of your shares in
will generally have a gain or loss that the fund. The price per share you
the IRS requires you to report on your receive when you redeem fund shares
income tax return. If you exchange fund may be more or less than the price at
shares held for 90 days or less and pay which you purchased those shares. An
no sales charge, or a reduced sales exchange of shares in a fund for
charge, for the new shares, all or a shares of another Franklin Templeton
portion of the sales charge you paid on Fund is treated as a redemption of
the purchase of the shares you fund shares and then a purchase of
exchanged is not included in their cost shares of the other fund. When you
for purposes of computing gain or loss redeem or exchange your shares, you
on the exchange. If you hold your will generally have a gain or loss,
shares for six months or less, any loss depending upon whether the amount you
you have will be treated as a long-term receive for your shares is more or
capital loss to the extent of any less than your cost or other basis in
capital gain distributions received by the shares.
you from a fund. All or a portion of
any loss on the redemption or exchange
of your shares will be disallowed by
the IRS if you buy other shares in a
fund within 30 days before or after
your redemption or exchange.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital
gain distributions and gains arising from redemptions or exchanges of your fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in a fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from a fund, and gains arising from redemptions or exchanges of your fund
shares will generally be subject to state and local income tax. It is
anticipated that no portion of a fund's distributions will qualify for the
exemption from state and local income tax as dividends paid from interest
earned on direct obligations of the U.S. government. The holding of fund shares
may also be subject to state and local intangibles taxes. You may wish to
contact your tax advisor to determine the state and local tax consequences of
your investment in a fund.
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that
you provide your taxpayer Backup withholding occurs when a fund
identification number ("TIN"), certify is required to withhold and pay over
that it is correct, and certify that to the IRS 31% of your distributions
you are not subject to backup and redemption proceeds. You can avoid
withholding under IRS rules. If you backup withholding by providing a fund
fail to provide a correct TIN or the with your TIN, and by completing the
proper tax certifications, the IRS tax certifications on your shareholder
requires a fund to withhold 31% of all application that you were asked to
taxable distributions (including sign when you opened your account.
ordinary dividends and capital gain However, if the IRS instructs a fund
distributions), and redemption proceeds to begin backup withholding, it is
paid to you. A fund is also required to required to do so even if you provided
begin backup withholding on your the fund with your TIN and these tax
account if the IRS instructs the fund certifications, and backup withholding
to do so. A fund reserves the right not will remain in place until the fund is
to open your account, or, instructed by the IRS that it is no
alternatively, to redeem your shares at longer required.
the current Net Asset Value, less any
taxes withheld, if you fail to provide
a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUNDS. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
HOW IS THE TRUST ORGANIZED?
The funds are non-diversified series of Franklin Templeton Fund Allocator
Series (the "Trust"), an open-end management investment company, commonly
called a mutual fund. It was organized as a Delaware business trust on
October 2, 1995, and is registered with the SEC. Each fund offers two classes
of shares: Conservative Target Fund - Class A and Conservative Target Fund -
Class C, Moderate Target Fund - Class A and Moderate Target Fund - Class C,
and Growth Target Fund - Class A and Growth Target Fund - Class C. Additional
series and classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the
Board. If this happens, holders of the remaining shares voting will not be
able to elect anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A
meeting may also be called by the Board in its discretion or by shareholders
holding at least 10% of the outstanding shares. In certain circumstances, we
are required to help you communicate with other shareholders about the
removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum
investments are:
o To open a regular, non-retirement account ................... $1,000
o To open an IRA, IRA Rollover, Roth IRA, or Education IRA..... $250*
o To open a custodial account for a minor
(an UGMA/UTMA account) ..................................... $100
o To open an account with an automatic investment plan......... $ 50**
o To add to an account ........................................ $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. We also reserve
the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. Please also
indicate which class of shares you want to buy. If you do not specify a
class, we will automatically invest your purchase in Class A shares. It
is important that we receive a signed application since we will not be
able to process any redemptions from your account until we receive your
signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your
check made payable to the fund.
For additional investments:
Send a check made payable to the fund.
Please include your account number on the
check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to
receive a wire control number and wire
instructions. You need a new wire control
number every time you wire money into your
account. If you do not have a currently
effective wire control number, we will
return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also
return your signed shareholder application
to the fund.
IMPORTANT DEADLINES: If we receive your call
before 1:00 p.m. Pacific time and the bank
receives the wired funds and reports the receipt
of wired funds to the fund by 3:00 p.m. Pacific
time, we will credit the purchase to your account
that day. If we receive your call after 1:00 p.m.
or the bank receives the wire after 3:00 p.m., we
will credit the purchase to your account the
following business day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best for
you depends on a number of factors, including the amount and length of time you
expect to invest. Generally, Class A shares may be more attractive for long-term
investors or investors who qualify to buy Class A shares at a reduced sales
charge. Your financial representative can help you decide.
CLASS A CLASS C
- --------------------------------------------------------------------------------
o Higher front-end sales charges than o Lower front-end sales charges
Class C shares. There are several than Class A shares
ways to reduce these charges, as
described below. There is no
front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge on o Contingent Deferred Sales
purchases of $1 million or more Charge on purchases sold
sold within twelve months withing 18 months
o Lower annual expenses than Class C o Higher annual expenses than
shares Class A shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class A shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS A SHARES. You may accumulate more than $1
million in Class C shares through purchases over time. If you plan to do this,
however, you should determine if it would be better for you to buy Class A
shares through a Letter of Intent.
PURCHASE PRICE OF FUND SHARES
For Class A shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class C shares is 1%
and, unlike Class A, does not vary based on the size of your purchase.
TOTAL SALES CHARGE
TO AS A PERCENTAGE OF AMOUNT PAID
------------------------- DEALER AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------
CLASS A
Under $50,000....................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000...... 4.50% 4.71% 3.75%
$100,000 but less than $250,000..... 3.50% 3.63% 2.80%
$250,000 but less than $500,000..... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000... 2.00% 2.04% 1.60%
$1,000,000 or more*................. None None None
CLASS C
Under $1,000,000*................... 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more and any Class C purchase. Please see "How Do I Sell
Shares? - Contingent Deferred Sales Charge." Please also see "Other Payments
to Securities Dealers" below for a discussion of payments Distributors may
make out of its own resources to Securities Dealers for certain purchases.
Purchases of Class C shares are limited to purchases below $1 million. Please
see "Choosing a Share Class."
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - Class A Only. To determine if you may pay a
reduced sales charge, the amount of your current Class A purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT - Class A Only. You may buy Class A shares at a reduced
sales charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class A shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION,
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct. Our policy of reserving shares does not
apply to certain retirement plans.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - Class A Only. 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 does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class A shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class A shares only,
except for items 1 and 2 which also apply to Class C purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class 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
Class A shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares,
except proceeds from the sale of Class B shares will be reinvested in
Class A shares.
If you paid a Contingent Deferred Sales Charge when you sold your Class
A or C shares, we will credit your account with the amount of the
Contingent Deferred Sales Charge paid but a new Contingent Deferred
Sales Charge will apply. For Class B shares reinvested in Class A, a new
Contingent Deferred Sales Charge will not apply, although your account
will not be credited with the amount of any Contingent Deferred Sales
Charge paid when you sold your Class B shares.
Proceeds immediately placed in a Franklin Bank CD also may be reinvested
without a front-end sales charge if you reinvest them within 365 days
from the date the CD matures, including any rollover.
This waiver does not apply to shares you buy and sell under our exchange
program. Shares purchased with proceeds from a money fund may be subject
to a sales charge.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin 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.
5. Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a
new Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class A shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. 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
9. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
10. Accounts managed by the Franklin Templeton Group
11. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
12. Group annuity separate accounts offered to retirement plans
13. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without a front-end sales
charge. Retirement plans that are not Qualified Retirement Plans, SIMPLEs or
SEPs must also meet the requirements described under "Group Purchases - Class
A Only" above to be able to buy Class A shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the
funds. Plan documents are required for all retirement plans. Trust Company
can provide the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. 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.
Please consult your legal, tax or retirement plan specialist before choosing
a retirement plan. Your investment representative or advisor can help you
make investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class C purchases and certain Class A purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the fund or its shareholders.
1. Class C purchases - up to 1% of the purchase price.
2. Class A purchases of $1 million or more - up to 1% of the amount
invested.
3. Class A purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class A purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class A purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class A shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is
the only money fund exchange option available to Class C shareholders. Unlike
our other money funds, shares of Money Fund II may not be purchased directly
and no drafts (checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class C shares.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates
for the shares you want to exchange
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges. If you have
held your shares less than six months, however, you will pay the percentage
difference between the sales charge you previously paid and the applicable
sales charge of the new fund, if the difference is more than 0.25%. If you
have never paid a sales charge on your shares because, for example, they have
always been held in a money fund, you will pay the fund's applicable sales
charge no matter how long you have held your shares. These charges may not
apply if you qualify to buy shares without a sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class A shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class C shares for shares of Money
Fund II, however, the time your shares are held in that fund will count
towards the completion of any Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares
o You may only exchange shares within the SAME CLASS, except as noted
below.
o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature
guarantee. You may, however, exchange shares from a fund account
requiring two or more signatures into an identically registered money
fund account requiring only one signature for all transactions. PLEASE
NOTIFY US IN WRITING IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5.00. Some of our funds do
not allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the funds, such as "Advisor Class" or "Class Z" shares. Because
the funds do not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class A shares of a fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may also exchange their Class Z
shares for Class A shares of a fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you
would like your redemption proceeds wired to
a bank account, your instructions should
include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have other
requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $100,000 or less.
Institutional accounts may exceed $100,000 by
completing a separate agreement. Call
Institutional Services to receive a copy
o If there are no share certificates issued for
the shares you want to sell or you have
already returned them to the fund
o Unless the address on your account was changed
by phone within the last 15 days
- If you do not want the ability to redeem by
phone to apply to your account, please let us
know.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the funds nor their agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 591/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class A purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class A investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class C
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions 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 a fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan, 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 Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy
o Returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?
Each fund intends to pay a dividend at least quarterly representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee a fund will
pay dividends. THE FUNDS DO NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.
To receive a dividend, you must be a shareholder on the record date. The
record dates for each fund's dividends will vary. Please keep in mind that if
you invest a large amount in a fund shortly before the record date of a
dividend, you will receive some of your investment back in the form of that
dividend and it will be a taxable distribution. If you would like information
on upcoming record dates for the funds' dividends, please call 1-800/DIAL BEN.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of Class A
and Class C.
Dividend payments are not guaranteed, are subject to the Board's discretion
and may vary with each payment.
DISTRIBUTION OPTIONS
You may receive your distributions from a fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. This is a convenient way to accumulate additional
shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
Please note that distributions may only be directed to an existing account.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both
dividend and capital gain distributions in cash. If you have the money sent
to another person or to a checking or savings account, you may need a
signature guarantee. If you send the money to a checking or savings account,
please see "Electronic Fund Transfers" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class C shareholders who chose to reinvest their distributions
in Class A shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class C shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE
WILL AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE
SAME CLASS OF THE FUND. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The funds are open for business each day the NYSE is open. We determine the
Net Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. Each
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, the funds
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.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A notarized signature is not sufficient.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want
to sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do
this either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- --------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- --------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- --------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- --------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts and custodial accounts for minors. We will only do this
if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of
your account to $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to IRAs and other retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in a fund.
Under the plan, you can have money transferred automatically from your
checking or savings account to a fund each month to buy additional shares. If
you are interested in this program, please refer to the automatic investment
plan application included with this prospectus or contact your investment
representative. The market value of a fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by calling
Shareholder Services.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50. For
retirement plans subject to mandatory distribution requirements, the $50
minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete
the systematic withdrawal plan section of the shareholder application
included with this prospectus and indicate how you would like to receive your
payments. You may choose to direct your payments to buy the same class of
shares of another Franklin Templeton Fund or have the money sent directly to
you, to another person, or to a checking or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. Once your plan is established, any distributions paid
by the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class A, B or C accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
numbers are as follows:
CODE NUMBER
----------------------
CLASS A CLASS C
----------------------
Conservative Target Fund....... 484 584
Moderate Target Fund .......... 485 585
Growth Target Fund ............ 486 586
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the funds will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the funds' financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the funds may
be available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
information, call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the funds may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at P.O. Box 997151, Sacramento, CA 95899-9983. The funds,
Distributors and the manager are also located at this address. You may also
contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00
p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS A, CLASS B AND CLASS C - Each fund offers two classes of shares,
designated "Class A" and "Class C." The two classes have proportionate
interests in the fund's portfolio. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Certain funds in the Franklin
Templeton Funds also offer a share class designated "Class B."
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class A shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class C shares, the
contingency period is 18 months. The holding period begins on the day you buy
your shares. For example, if you buy shares on the 18th of the month, they
will age one month on the 18th day of the next month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your shares within the Contingency Period.
DEPOSITARY RECEIPTS - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the funds' principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - 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
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class A and 1% for Class C. We calculate
the offering price to two decimal places using standard rounding criteria.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established
under section 408(k) of the Code
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of Resources.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
APPENDICES
WHAT ARE SOME OF THE OTHER INVESTMENT POLICIES, STRATEGIES AND RISKS OF THE
UNDERLYING FRANKLIN TEMPLETON FUNDS?
CONVERTIBLE SECURITIES, INCLUDING ENHANCED AND SYNTHETIC CONVERTIBLE
SECURITIES. A convertible security is generally a preferred stock or debt
security that may be converted within a specified period of time into a
certain amount of common stock or other equity securities of the same or a
different issuer. Convertible securities also include non-convertible debt
securities with warrants or stock or stock index options attached ("synthetic
convertible securities"). A convertible security entitles the holder to
receive interest paid or accrued on debt securities or dividends paid or
accrued on preferred stock until the security matures or is redeemed,
converted or exchanged. If a convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank. Convertible securities generally offer income yields that
are higher than the dividend yield, if any, of the underlying common stock,
but lower than the yield of similar non-convertible debt securities. While
the underlying Franklin Templeton funds generally use the same criteria to
rate a convertible debt security that they use to rate a more conventional
debt security, a convertible preferred stock is treated like a preferred
stock for financial reporting, credit rating, and investment limitation
purposes.
A convertible security has risk characteristics of both equity and debt
securities. Its value may rise and fall with the market value of the
underlying stock or, like a debt security, vary with changes in interest
rates and the credit quality of the issuer. A convertible security tends to
perform more like a stock when the underlying stock price is high (because it
is assumed it will be converted) and more like a debt security when the
underlying stock price is low (because it is assumed it will not be
converted). Because its value can be influenced by many different factors, a
convertible security is not as sensitive to interest rate changes as a
similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
DEBT SECURITIES. Debt securities are securities issued by a company which
represent a loan of money by the purchaser of the securities to the company.
A debt security typically has a fixed payment schedule which obligates the
company to pay interest to the lender and to return the lender's money over a
certain time period. A company typically meets its payment obligations
associated with its outstanding debt securities before it declares and pays
any dividends to holders of its equity securities. While debt securities are
typically used as an investment to produce income to an investor as a result
of the fixed payment schedule, debt securities may also increase or decrease
in value depending upon factors such as interest rate movements and the
success or lack of success of a company.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
Depositary Receipts. ADRs evidence ownership of, and represent the right to
receive, securities of foreign issuers deposited in a domestic bank or trust
company or a foreign correspondent bank. EDRs and GDRs are typically issued
by foreign banks or trust companies, although they also may be issued by U.S.
banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a U.S. corporation. Generally, Depositary
Receipts in registered form are designed for use in the U.S. securities
market and Depositary Receipts in bearer form are designed for use in
securities markets outside the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, an underlying Franklin Templeton
fund will avoid currency risks during the settlement period for either
purchases or sales. In general, there is a large, liquid market in the U.S.
for ADRs quoted on a national securities exchange or on NASDAQ. The
information available for ADRs is subject to the accounting, auditing, and
financial reporting standards of the U.S. market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. EDRs and GDRs may not necessarily
be denominated in the same currency as the underlying securities into which
they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there
may not be a correlation between such information and the market value of the
Depositary Receipts.
Depositary Receipts reduce but do not eliminate all the risk inherent in
investing in the securities of foreign issuers. To the extent that an
underlying Franklin Templeton fund acquires Depositary Receipts through banks
which do not have a contractual relationship with the foreign issuer of the
security underlying the Depositary Receipt to issue and service such
Depositary Receipts, there may be an increased possibility that the fund
would not become aware of and be able to respond to corporate actions such as
stock splits or rights offerings involving the foreign issuer in a timely
manner.
DERIVATIVE SECURITIES. Certain of the underlying Franklin Templeton funds may
use certain investment techniques, all of which may be dependent upon a
prediction of the future direction of various financial barometers. In this
regard, some of the funds may purchase and sell put and call options on
securities and securities indices which trade on securities exchanges, which
may include foreign exchanges, and in the over-the-counter ("OTC") market.
Some funds also may purchase and sell financial futures and options on
financial futures with respect to securities and securities indices.
Some funds may engage in "spread" and "straddle" transactions. A spread
transaction is one in which a fund purchases and writes a put or call option
on the same underlying security, with the options having different exercise
prices and/or expiration dates. In a straddle transaction, the fund purchases
or writes combinations of put and call options on the same security.
Some of the funds may write (sell) covered call or put options which are
listed for trading on a national securities exchange or traded OTC. Writing a
"covered" call option means that the fund will only write (sell) options on
securities which it actually owns. When a fund sells covered call options, it
will receive a cash premium which can be used in whatever way is felt to be
most beneficial to the fund. Funds may also purchase put options on
securities. Put options on particular securities may be purchased to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option. Funds may sell a put
option which it has previously purchased prior to the sale of the securities
underlying such option.
Some funds may engage in forward conversion transactions whereby the fund
will write call options on securities it has purchased and purchase put
options on those securities.
Some funds may enter into futures on debt securities that are backed by the
U.S. government and may enter into futures on corporate securities and
non-U.S. government debt securities when such securities become available.
The futures activities of each of the underlying Franklin Templeton funds
will be accomplished so that no fund is considered to be a commodity pool
operator under the laws governing the trading of commodities. All futures and
related options activities of the funds are limited to bona fide hedging
transactions, or, if not for bona fide hedging purposes, the aggregate
initial margin premiums required to establish its futures or related options
positions may not exceed 5% of the underlying Franklin Templeton fund's total
assets (after taking into account unrealized profits and unrealized losses on
such contracts it has entered into; provided however, that, in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5%). In addition, certain of underlying
Franklin Templeton funds have committed to limit their options and futures
transactions to various percentages.
Options and futures may fail as hedging techniques where the price movements
of the securities underlying the options and futures do not follow the price
movements of the underlying Franklin Templeton fund's securities which are
subject to the hedge. The loss from investing in futures transactions is
potentially unlimited. Gains and losses on investments in options and futures
depend on the investment manager's ability to predict correctly the direction
of securities markets, interest rates, and other economic factors. Also, a
liquid secondary market for any particular option or future may not be
available when the investment manager wishes to "close out" a position in an
option or future. In such a situation, the underlying Franklin Templeton fund
will likely be unable to control losses by closing its position.
For a further description of these techniques, see the SAI.
DEVELOPING OR EMERGING MARKET COUNTRIES. Investments in developing countries
may be subject to potentially higher risks than investments in developed
countries. These risks include (i) less social, political, and economic
stability; (ii) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which results in a lack
of liquidity and in greater price volatility; (iii) certain national policies
which may restrict a fund's investment opportunities, including restrictions
on investment in issuers or industries deemed sensitive to national
interests; (iv) foreign taxation; (v) the absence of developed structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (vi) the absence, until recently in certain
Eastern European countries, of capital market structure or market-oriented
economy; and (vii) the possibility that recent favorable economic
developments in Eastern Europe may be slowed or reversed by unanticipated
political or social events in such countries.
In addition, some developing market countries have experienced substantial,
and in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may continue
to have negative effects on the economies and securities markets of certain
countries. Moreover, the economies of some developing countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
To the extent of the Communist Party's influence, investments in such
countries may involve risks of nationalization, expropriation and
confiscatory taxation. The communist governments of a number of Eastern
European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there can be no
assurance that such expropriation will not occur in the future. In the event
of such expropriation, a fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in Eastern European countries. Finally, even though certain
Eastern European currencies may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to an underlying Franklin Templeton fund and its shareholders.
There are further risks specific to investments in Eastern Europe, including
Russia, Hong Kong and/or Latin America. For a further discussion of these
risks, please see the SAI.
EQUITY SECURITIES. Equity securities are securities which entitle the holder
to participate in a company's general operating success or failure. The
purchaser of an equity security typically receives an ownership interest in
the company as well as certain voting rights. The owner of an equity security
may participate in a company's success through the receipt of dividends which
are distributions of earnings by the company to its owners. Equity security
owners may also participate in a company's success or lack of success through
increases or decreases in the value of the company's shares as traded in the
public trading market for such shares. The public trading market for such
shares is typically a stock exchange but can also be a market which arises
between broker-dealers seeking buyers and sellers of a particular security.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well.
EURO 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.
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 a fund may hold in its portfolio, and
their impact on fund performance. To the extent a fund holds non-U.S. dollar
(euro or other) denominated securities, it will still be exposed to currency
risk due to fluctuations in those currencies versus the U.S. dollar.
FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS. Some of the underlying
Franklin Templeton funds may enter into futures contracts on currencies. A
futures contract on currency is an agreement to buy or sell currency at a
specified price during a designated month.
Some funds may also buy and sell put and call options on currency futures
contracts. A put option purchased by the fund would give it the right to
assume a position as the seller of a futures contract. A call option
purchased by the fund would give it the right to assume a position as the
buyer of a futures contract. The fund is required to pay a premium for a put
or call option on a futures contract, but is not required to take any actions
under the contract. If the option cannot be profitably exercised before it
expires, the fund's loss will be limited to the amount of the premium and any
transaction costs.
Some of the underlying Franklin Templeton funds may purchase and sell (write)
put and call options on foreign currencies traded on U.S. and foreign
exchanges, or OTC. The funds will engage in such option transactions for
various hedging purposes such as to protect against declines in the U.S.
dollar value of foreign portfolio securities and against increases in the
U.S. dollar cost of foreign securities or other assets to be acquired or to
hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Hard Currency may, for hedging
purposes, buy put and call options on any currency in which the fund's
investments are denominated.
FOREIGN CURRENCY TRANSACTION RISKS. Currency transactions, such as forward
currency exchange contracts, currency futures and options on such futures,
options on currencies, and currency swaps are subject to different risks than
other portfolio transactions. Because currency control is of great importance
to the issuing governments and influences economic planning and policy,
purchases and sales of currency and related instruments can be negatively
affected by government exchange controls, blockages, and manipulations or
exchange restrictions imposed by governments. These can result in losses to a
fund if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks
that apply to the use of futures generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank
based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always
be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
FORWARD CURRENCY EXCHANGE CONTRACTS. A number of the underlying Franklin
Templeton funds may, to some degree, engage in foreign currency exchange
transactions. The funds will normally conduct foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market or through entering into forward
contracts to purchase or sell foreign securities. However, some price spread
on these transactions (to cover service charges) will be incurred when a fund
converts assets from one currency to another. When a fund is the buyer or
seller in such a transaction, it will either cover its position or maintain,
in a segregated account with its custodian bank, cash or securities having an
aggregate value equal to the amount of such commitment until payment is made.
Some funds may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange
of that currency for another currency.
GNMAS. As with most bonds, in a period of rising interest rates, the value of
a GNMA will generally decline. In a period of declining interest rates,
however, it is more likely that mortgages contained in GNMA pools will be
prepaid, thus reducing the effective yield. This potential for prepayment
during periods of declining interest rates may reduce the general upward
price increases of GNMAs as compared to the increases experienced by
non-callable debt securities over the same periods. Moreover, any premium
paid on the purchase of a GNMA will be lost if the obligation is prepaid. Of
course, price changes of GNMAs and other securities held by a fund will have
a direct impact on the Net Asset Value per share of the fund.
LOAN PARTICIPATIONS. Some of the underlying Franklin Templeton funds are
authorized to acquire loan participations in which the funds will purchase
from a lender a portion of a larger loan which it has made to a borrower.
Generally, such loan participations are sold without guarantee or recourse to
the lending institution and are subject to the credit risks of both the
borrower and the lending institution. Such loan participations, however, may
enable the fund to acquire an interest in a loan from a financially strong
borrower which it could not do directly. While loan participations generally
trade at par value, the funds will be permitted to purchase such securities
which sell at a discount because of the borrower's credit problems. To the
extent the borrower's credit problems are resolved, such loan participations
may appreciate in value. Loan participations carry substantially the same
risks as those for defaulted debt obligations and may cause loss of the
entire investment.
MORTGAGE-BACKED SECURITIES (INCLUDING CMOS) AND ASSET-BACKED SECURITIES
(INCLUDING CARS). Mortgage-backed securities represent an ownership interest
in mortgage loans made by banks and other financial institutions to finance
purchases of homes, commercial buildings or other real estate. These mortgage
loans may have either fixed or adjustable interest rates. The individual
mortgage loans are packaged or "pooled" together for sale to investors. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments. Mortgage-backed securities are issued by U.S. government
agencies, foreign government agencies, and private institutions. The payment
of interest and principal on securities issued by U.S. government agencies
generally is guaranteed either by the full faith and credit of the U.S.
government or by the credit of the agency. The guarantee applies only to the
timely repayment of principal and interest and not to the market prices and
yields of the securities or to the Net Asset Value or performance of the
fund, which will vary with changes in interest rates and other market
conditions. Mortgage-backed securities issued by foreign government agencies
and private institutions are not guaranteed by the U.S. government or its
agencies.
A mortgage-backed security differs from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans.
During periods of declining interest rates, the volume of principal
prepayments generally increases as borrowers refinance their mortgages at
lower rates. The fund may be forced to reinvest returned principal at lower
interest rates, reducing the fund's income. For this reason, mortgage-backed
securities may be less effective than other types of securities as a means of
"locking in" long-term interest rates and may have less potential for capital
appreciation during periods of falling interest rates than other investments
with similar maturities. A reduction in the anticipated rate of principal
prepayments, especially during periods of rising interest rates, may increase
the effective maturity of mortgage-backed securities, making them more
susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase the volatility of the fund's returns
and share price.
CMOs may be issued or guaranteed by U.S. government agencies or issued by
certain financial institutions and other mortgage lenders. CMOs and REMICs
are debt instruments issued by special purpose entities and are secured by
pools of mortgages backed by residential and various types of commercial
properties. Multi-class pass-through securities are equity interests in a
trust composed of mortgage loans or other mortgage-backed securities.
Payments of principal and interest on the underlying collateral provides the
funds to pay debt service on the CMO or REMIC or make scheduled distributions
on the multi-class pass-through securities.
CMOs are collateralized by pools of mortgage loans created by commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other issuers in the U.S. Timely payment of interest and
principal (but not the market value and yield) of some of these pools is
supported by various forms of insurance or guarantees issued by private
issuers, those who pool the mortgage assets and, in some cases, by U.S.
government agencies. Prepayments of the mortgages underlying a CMO, which
usually increase when interest rates decrease, will generally reduce the life
of the mortgage pool, thus impacting the CMO's yield. Under these
circumstances, the reinvestment of prepayments will generally be at a rate
lower than the rate applicable to the original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a
specified coupon rate or adjustable rate and has a stated maturity or final
distribution date. Principal prepayments on collateral underlying a CMO,
however, may cause it to be retired substantially earlier than the stated
maturities or final distribution dates. Interest is paid or accrues on all
classes of a CMO on a monthly, quarterly or semiannual basis. The principal
and interest on the underlying mortgages may be allocated among several
classes of a series in many ways. In a common structure, payments of
principal, including any principal prepayments, on the underlying mortgages
are applied to the classes of a series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment
of principal will be made on any class of a CMO until all other classes
having an earlier stated maturity or final distribution date have been paid
in full.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured
by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. As with CMOs, the mortgages that
collateralize the REMICs in which the fund may invest include mortgages
backed by GNMAs or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities or issued by private
entities, which are not guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields
on CMOs issued or guaranteed by U.S. government agencies. However, the risk
of loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government.
Asset-backed securities are securities backed by credit card receivables,
automobile, mobile home and recreational vehicle loans and leases, and other
receivables. Asset-backed securities present certain additional risks that
are not presented by mortgage-backed securities because asset-backed
securities generally do not have the benefit of a security interest
in collateral that is comparable to mortgage assets. There is the possibility
that, in some cases, recoveries on repossessed collateral may not be
available to support payments on these securities. CARs are asset-backed
securities. In the case of automobile receivables, there is a risk that the
holders of these receivables may not have either a proper or first security
interest in all of the obligations backing the receivables due to the large
number of vehicles involved in a typical issuance and technical requirements
under state law. Therefore, recoveries on repossessed collateral may not
always be available to support payments on the securities.
NATURAL RESOURCES SECTOR RISKS. There are a number of risks associated with
investing in the natural resources sector, including gold. The securities of
companies in the natural resources sector may experience more price
volatility than securities of companies in other industries. Some of the
commodities in these industries are subject to limited pricing flexibility
because of supply and demand factors. Others are subject to more broad price
fluctuations as a result of volatility of the prices for certain raw
materials' prices and the instability of supplies of other materials. These
factors can affect the profitability of companies in the natural resources
sector and, as a result, the value of their securities.
Gold operation companies involve special considerations. Prices of their
securities will be affected by the price of gold and precious metals. They
may also be affected by changing costs of production. The price of gold may
fluctuate substantially over short periods of time so the fund's share price
may be more volatile than other types of investments.
The price of gold and other precious metals is affected by several factors
including (1) how much of the worldwide supply of gold is held among four
major producers. Economic, political, or other conditions affecting one of
the major sources could have a substantial effect on the world's gold supply
in countries throughout the world; (2) increased environmental, labor or
other costs in mining; (3) changes in laws relating to mining or gold
production or sales; and (4) unpredictable monetary policies and economic and
political conditions in countries throughout the world. For example, if
Russia decides to sell some of its gold reserves, the supply would go up, and
the price would generally go down.
In addition, changes in U.S. or foreign tax, currency or mining laws may make
it more expensive and/or more difficult to pursue the fund's investment
strategies.
The value of a company may be affected by factors that affect the company
alone, the industry, or the entire country in which it is located.
Because of current conditions in South Africa, Gold's investments in South
African companies, approximately 20% of the portfolio as of July 31, 1998,
may be subject to somewhat greater risk than investments in companies of
countries with more stable political profiles.
NEW OR UNSEASONED COMPANIES. Certain of the underlying Franklin Templeton
funds may invest in the securities of relatively new or unseasoned companies
which are in their early stages of development or small companies positioned
in new and emerging industries where the opportunity for rapid growth is
expected to be above average. These companies may have relatively small
revenues, limited product lines, and a small share of the market for their
products or services. Small companies may lack depth of management and may be
unable to generate the funds necessary for growth or potential development.
In addition, these companies may be developing or marketing new products and
services for which markets are not yet or may never become established. As a
result, small companies may suffer significant losses as well as realize
substantial growth, and investments in such companies tend to be volatile
and, therefore, speculative.
PUBLIC UTILITIES SECURITIES. The risks of investments in the public utilities
industry include: risks associated with regulatory changes (including
deregulation); risks associated with interest rate fluctuations; the
difficulty of obtaining adequate returns on invested capital in spite of
frequent rate increases; the difficulty of financing large construction
programs during inflationary periods; restrictions on operations and
increased costs and delays attributable to environmental considerations;
difficulties of the capital markets in absorbing utility debts and equity
securities; difficulties in obtaining fuel for electric generation at
reasonable prices; risks associated with the operation of nuclear power
plants; and general effects of energy conservation.
REIT AND REAL ESTATE-RELATED RISKS. REITs typically invest directly in real
estate and/or in mortgages and loans collateralized by real estate. "Equity"
REITs are real estate companies that own and manage income-producing
properties such as apartments, hotels, shopping centers or office buildings.
The income, primarily rent from these properties, is generally passed on to
investors in the form of dividends. These companies provide experienced
property management and generally concentrate on a specific geographic region
or property type. "Mortgage" REITs make loans to commercial real estate
developers and earn income from interest payments.
To the extent an underlying Franklin Templeton invests in REITs or securities
of companies operating in the real estate industry, it generally is subject
to the same risks that affect direct investments in real estate and its
performance is closely tied to conditions affecting the real estate industry.
Real estate values rise and fall in response to a variety of factors,
including local, regional and national economic conditions, the strength of
specific industries renting properties, and other factors affecting supply
and demand for properties. When economic growth is slowing, demand for
property decreases and prices may decline. Rising interest rates, which drive
up mortgage and financing costs, can restrain construction and buying and
selling activity and make other investments more attractive. Property values
could decrease because of overbuilding, increases in property taxes and
operating expenses, changes in zoning laws, environmental regulations or
hazards, uninsured casualty or condemnation losses, or a general decline in
neighborhood values.
The value of securities of companies that service the real estate industry
will also be affected by changes affecting the real estate market.
REITS. Changes in the market value of an underlying Franklin Templeton fund's
investments in REIT securities will also affect its performance. A REIT's
performance depends on the types and locations of the properties it owns and
on how well it manages those properties. A decline in rental income could
occur because of extended vacancies, increased competition from other
properties, tenants' failure to pay rent or poor management. A REIT's
performance also depends on the company's ability to finance property
purchases and renovations and manage its cash flows. Mortgage REITs are
subject to the risks that the borrower may be unable to make interest and
principal payments on the loan made by the mortgage REIT and that the value
of the property may be less than the amount of the loan. Because REITs
typically are invested in a limited number of projects or in a particular
market segment, they are more susceptible to adverse developments affecting a
single project or market segment than more broadly diversified investments.
Loss of status as a qualified REIT or changes in the treatment of REITs under
the Code could adversely affect the value of a particular REIT or the market
for REITs as a whole and the underlying Franklin Templeton fund's performance.
SHORT SALES. Short sales are transactions in which the fund sells a security
it does not own in anticipation of a decline in the market value of that
security. In a short sale "against the box," the fund owns or has the
immediate and unconditional right to acquire at no additional cost the
identical security. Possible losses from short sales differ from losses that
could be incurred from a purchase of a security because losses from short
sales may be unlimited, whereas losses from purchases can equal only the
total amount invested.
TRADE CLAIMS. Some of the underlying Franklin Templeton funds may invest a
portion of their assets in trade claims. Trade claims are purchased from
creditors of companies in financial difficulty. For purchasers such as these
funds, trade claims offer the potential for profits since they are often
purchased at a significantly discounted value and, consequently, may generate
capital appreciation in the event that the value of the claim increases as
the debtor's financial position improves. In the event that the debtor is
able to pay the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price. Trade
claims are generally liquid as there is a secondary market, but the boards of
the funds will monitor their liquidity.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trading in claims is not regulated by
federal securities laws or the SEC. Currently, trading in claims is regulated
primarily by bankruptcy laws. Because trade claims are unsecured, holders of
trade claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding.
VALUE INVESTING. Some of the funds will invest principally in the securities
of companies believed by the investment manager to be undervalued. Securities
of a company may be undervalued as a result of overreaction by investors to
unfavorable news about a company, industry, the stock market in general, or
as a result of a market decline, poor economic conditions, tax-loss selling
or actual or anticipated unfavorable developments affecting a company. Often
these companies are attempting to recover from business setbacks or adverse
events (turnarounds), cyclical downturns, or, in certain cases, bankruptcy.
Cyclical stocks in which a fund may invest tend to increase in value more
quickly during economic upturns than noncyclical stocks, but they also tend
to lose value more quickly in economic downturns. As with all investments,
there is always the possibility when investing in these securities that the
investment manager may be incorrect in its assessment of a particular
industry or company or that the investment manager may not purchase these
securities at their lowest possible prices or sell them at their highest.
A fund's purchase of securities of companies emerging from bankruptcy may
present risks that do not exist with other investments. Companies emerging
from bankruptcy may have some difficulty retaining customers and suppliers
who prefer transacting with solvent organizations. If new management is
installed in a company emerging from bankruptcy, the management may be
considered untested; if the existing management is retained, the management
may be considered incompetent. Further, even when a company has emerged from
bankruptcy with a lower level of debt, it may still retain a relatively weak
balance sheet. During economic downturns these companies may not have
sufficient cash flow to pay their debt obligations and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
A policy of investing in securities that may be out of favor, including
turnarounds, cyclicals, and companies emerging from bankruptcy, companies
reporting poor earnings, and companies whose share prices have declined
sharply or which are not widely followed, differs from the approach followed
by many other mutual funds. The investment manager believes, however, that
these securities may provide a greater total investment return than
securities whose prices appear to reflect anticipated favorable developments.
WHEN-ISSUED, DELAYED DELIVERY, AND TO-BE-ANNOUNCED TRANSACTIONS. Some of the
underlying Franklin Templeton funds may purchase and sell obligations on a
"when-issued" or "delayed delivery" basis. In these transactions a fund
purchases securities with payment and delivery scheduled for a future time,
generally within two weeks. Although the funds will generally purchase
securities on a when-issued basis with the intention of acquiring the
securities, they may sell the securities before the settlement date if it is
deemed advisable. When a fund is the buyer in these transactions, it will
maintain with its custodian bank, in an account that is separate and apart
from its normal custody account, cash or securities having a total value
equal to the amount of the fund's commitment until payment for the obligation
is made. Some funds may purchase and sell GNMA certificates on a
"To-Be-Announced" ("TBA") and "delayed delivery" basis, and is not subject to
any percentage limit with respect to these transactions. These transactions
are arrangements under which the fund may purchase securities with payment
and delivery scheduled for a future time, generally within 30 to 60 days.
Purchases of securities on a when-issued, delayed delivery or TBA basis are
subject to market fluctuation and the risk that the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. If the other party to a when-issued,
delayed delivery or TBA transaction fails to complete the transaction, the
fund could miss a favorable price or yield opportunity. Securities purchased
on a when-issued, delayed delivery or TBA basis do not generally earn
interest until their scheduled delivery date.
ZERO COUPON AND PAY-IN-KIND BONDS. The credit risk factors pertaining to
lower rated securities also apply to lower rated zero coupon, deferred
interest, and pay-in-kind bonds. These bonds carry an additional risk in
that, unlike bonds that pay interest throughout the period to maturity, the
fund will realize no cash until the cash payment date and, if the issuer
defaults, the fund may obtain no return at all on its investment. Zero
coupon, deferred interest, and pay-in-kind bonds involve additional special
considerations.
Zero coupon or deferred interest securities are debt obligations that do not
entitle the holder to any periodic payments of interest prior to maturity or
a specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount
from their face amounts or par value. The discount varies depending on the
time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date of the
security approaches. The market prices of zero coupon securities are
generally more volatile than the market prices of securities that pay
interest periodically and are likely to respond to changes in interest rates
to a greater degree than do non-zero coupon or deferred interest securities
having similar maturities and credit quality.
Some of the underlying Franklin Templeton funds may purchase pay-in-kind
bonds. Pay-in-kind bonds are securities that pay interest through the
issuance of additional bonds. The fund will be deemed to receive interest
over the life of such bonds and be treated as if interest were paid on a
current basis for federal income tax purposes, although no cash interest
payments are received by the fund until the cash payment date or until the
bonds mature. Accordingly, during periods when the fund receives no cash
interest payments on its zero coupon securities or deferred interest or
pay-in-kind bonds, it may be required to dispose of portfolio securities to
meet distribution requirements and such sales may be subject to the risk
factors discussed above.
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A: Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, CDs, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
