AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1999.
File Nos.
33-20313
811-5479
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 21 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 24
TEMPLETON VARIABLE PRODUCTS SERIES FUND
(Exact Name of Registrant as Specified in Charter)
500 East Broward Blvd., Suite 2100
FORT LAUDERDALE, FLORIDA 33396-3091
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(954)527-7500
Barbara J. Green
Templeton Variable Product Series Fund
500 East Broward Blvd., Suite 2100
Fort Lauderdale, FLORIDA 33396-3091
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on May 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on July 1, 1999 pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on May 1, 1999 pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities Being Registered:
Shares of Beneficial Interest:
Templeton Variable Products Series Fund
Templeton International Smaller Companies Investments Fund - Class 1
Templeton International Smaller Companies Investments Fund - Class 1
PROSPECTUS
July 1, 1999
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
TEMPLETON INTERNATIONAL SMALLER COMPANIES INVESTMENTS FUND
CLASS 1 SHARES
As with all fund prospectuses, 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.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Information about each fund
you i OVERVIEW
should know before
investing
INDIVIDUAL FUND DESCRIPTIONS
TIS-1 Templeton International Smaller
Companies Investments Fund
ADDITIONAL INFORMATION, ALL FUNDS
Important Recent Developments
Distributions and Taxes
FUND ACCOUNT INFORMATION
Buying Shares
Information about fund Selling Shares
account transactions Exchanging Shares
and services Fund Account Policies
Questions
FOR MORE INFORMATION
Where to learn more about Back Cover
each fund
Templeton Variable Products Series Fund
Overview
Templeton Variable Products Series Fund (the Trust) currently consists of
eleven separate funds, offering a wide variety of investment choices. Each
fund has two classes of shares, class 1 and class 2. The funds are only
available as investment options in variable annuity or variable life
insurance contracts. The accompanying contract prospectus, or disclosure
document, indicates which funds and classes are available to you.
INVESTMENT CONSIDERATIONS
o Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider
diversifying your fund choices.
o You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
o All securities markets, interest rates, and currency valuations move up and
down, sometimes dramatically, and mixed with the good years can be some bad
years. Since no one can predict exactly how financial markets will perform,
you may want to exercise patience and focus not on short-term market
movements, but on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment
goal.
o Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
o 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. Fund shares involve investment risks, including the
possible loss of principal.
More detailed information about each fund, its investment policies, and its
particular risks can be found in the Trust's Statement of Additional
Information (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $211 billion
in assets. Franklin Templeton is one of the largest mutual fund organizations
in the United States, and offers money management expertise spanning a
variety of investment objectives. In 1992, Franklin, recognized as a leader
in managing domestic mutual funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later.
TEMPLETON INTERNATIONAL SMALLER COMPANIES SECURITIES FUND
[Insert graphic of bullseye and arrows] Goals and Strategies
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of smaller companies
located outside the U.S., including emerging markets. Smaller companies
generally are those with market capitalization values (share price times the
number of common stock shares outstanding) of less than $1.5 billion, at the
time of purchase. Equities represent ownership interests in individual companies
and give shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock. The
fund also invests in American, European, and Global Depositary Receipts, which
are certificates issued by a bank or trust company that give their holders the
right to receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in an internationally diversified
portfolio of smaller companies' common stocks.
[End callout]
In addition to its principal investments, the fund may invest significantly in
equity securities of larger capitalized companies located outside the U.S.,
equity securities of U.S. companies (though currently not more than 5% of its
assets), and depending upon current market conditions, in debt securities of
companies and governments located anywhere in the world. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Common debt securities are bonds,
including bonds convertible into common stock and unsecured bonds; notes; and
short-term investments, including cash or cash equivalents.
PORTFOLIO SELECTION 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. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries. The
manager intends to manage the fund's exposure to various geographic regions and
their currencies based on its assessment of changing market and political
conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of its assets in U.S. or non-U.S. currency investments. Such
investments may be medium-term(less than 5 years for this fund) of short-term,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or securities market. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, smaller company securities have been more volatile in price
and have fluctuated independently from larger company securities, especially
over the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, and their growth prospects are less
certain.
For example, smaller companies may lack depth of management; or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies may suffer significant losses, their securities can
be less liquid, and investment sin these companies can be speculative.
Technology and biotechnology industry stocks, in particular, can be subject to
abrupt or erratic price movements.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer U.S.
dollars. Currency markets generally are not as regulated as securities markets.
Country General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to non-U.S. investments in
non-U.S. courts than with respect to U.S. companies in U.S. courts.
DIVERSIFICATION The fund is non-diversified under federal securities laws. As
such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.
INTEREST RATE Rate changes can be sudden and unpredictable when interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength may
affect the debt security's value and, thus, impact the value of fund shares.
See "Important Recent Developments," in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
Because the fund started on July 1, 1999, performance for a full calendar year
is not yet available.
FEES AND EXPENSES
Templeton International Smaller Companies Investments Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY
FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH
THE FUND IS AN INVESTMENT OPTION. IF THEY WERE INCLUDED, YOUR COSTS WOULD BE
HIGHER. Investors should consult the contract prospectus or disclosure
document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
- --------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering
price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS 1
Management fees
Other expenses1
Total annual fund operating expenses
[FIGURES TO BE SUPPLIED IN A LATER AMENDMENT]
1. "Other Expenses" are based on estimated amounts for the current fiscal year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
[to be supplied in a later amendment]
[Insert graphic of briefcase] MANAGEMENT
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394, is the fund's investment manager.
The team responsible for the fund's management is:
Management Team
Simon Rudolph
Senior Vice President, TICI
Mr. Rudolph has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1997. Previously, he was an executive director with
Morgan Stanley.
Peter N. Nori CFA
Senior Vice President, TICI
Mr. Nori has been a manager of the fund since inception. He joined the Franklin
Templeton Group in 1987.
Juan J. Benito
Vice President, TICI
Mr. Benito has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1996. Previously he was a management consultant and
case team leader with Monitor Company, a leading global strategy consulting
firm.
The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is equal to an annual rate of [to be supplied]
IMPORTANT RECENT DEVELOPMENTS
o YEAR 2000 PROBLEM The funds' business operations depend upon 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
called the Year 2000 problem). In addition, the fact that the Year 2000 is a
leap year may create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by their managers, their service providers and
other third parties they do 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.
When evaluating current and potential portfolio positions, Year 2000 is one
of the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year
2000 readiness. Issuers in countries outside of the U.S., particularly in
emerging markets, may be more susceptible to Year 2000 problems and may not
be required to make the same level of disclosure regarding Year 2000
readiness as is required in the U.S. The managers, of course, cannot audit
any company or their major suppliers to verify their Year 2000 readiness. If
a company in which any fund is invested 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.
The managers and their 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 managers may have no control.
o EURO On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which replaced the national currency for the
eleven participating member countries. If a fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the funds may hold in their
portfolios, 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.
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.
Dividends paid by a fund will be automatically reinvested in additional
shares of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on
the provisions of the variable annuity or variable life insurance contract
through which they are invested in the funds. For more information, please
consult the accompanying contract prospectus or disclosure document.
Fund Account Information
Buying Shares
Shares of each fund are sold at NAV to insurance company separate accounts to
serve as investment options for variable annuity or variable life insurance
contracts. The funds' Board monitors this to be sure there are no material
conflicts of interest between the two different types of contract owners. If
there were, the Board would take corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares
are processed at the NAV next calculated after we receive the request in
proper form. The funds do not issue share certificates.
Selling Shares
Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under
the terms of its contracts. Requests to sell shares are processed at the NAV
next calculated after we receive the request in proper form.
Exchanging Shares
Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options
available under a variable insurance contract, subject to the terms, and any
specific limitations on the exchange (or "transfer") privilege, described in
the contract prospectus. Frequent exchanges can interfere with fund
management or operations and drive up fund costs. To protect shareholders,
there are limits on the number and amount of exchanges that may be made
(please see "Market Timers," below).
Fund Account Policies
CALCULATING SHARE PRICE The funds calculate their NAV per share each
business day at the close of trading on the New York Stock Exchange (normally
1:00 p.m. Pacific time). Each class's NAV is calculated by dividing its net
assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of the
shares may change on days that the insurance company separate account cannot
buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open
for business at the NAV next calculated after we receive the request in
proper form.
REPORTS Insurance company shareholders will receive the fund's financial
reports every six months. If you need additional copies, please call
1-800/774-5001.
MARKET TIMERS The funds are not designed for market timers, large or
frequent transfers. The funds may restrict or refuse purchases or exchanges
by market timers. You will be considered a market timer if you have (i)
requested an exchange out of the fund within two weeks of an earlier exchange
request, or (ii) exchanged shares out of the fund more than twice in a
calendar quarter, or (iii) exchanged shares equal to at least $5 million, or
more than 1% of the fund's net assets, or (iv) otherwise seem to follow a
timing pattern. Accounts under common ownership or control are combined for
these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o Each fund may refuse any order to buy shares.
o At any time, each fund may establish or change investment minimums.
o Each fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to
make payments in securities or other assets of a fund, in the case of an
emergency.
o To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule 12b-1
Plan" which is described in prospectuses offering class 2 shares.
Questions
More detailed information about the Trust and the funds' account policies can
be found in the funds' Statement of Additional Information (SAI). If you have
any questions about the funds, you can write to us at 100 Fountain Parkway,
St. Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your
protection and to help ensure we provide you with quality service, all calls
may be monitored or recorded.
For More Information
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life
insurance contracts. Please consult the accompanying contract prospectus or
disclosure document for information about the terms of an investment in a
contract.
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed
performance information, fund holdings, and the auditor's report (Annual
Report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, policies, and
risks. It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment
representative or by calling us at the number below.
Franklin(R)Templeton(R)
1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
HTTP://WWW.SEC.GOV.
Investment Company Act file 811-5479 Lit. Code #
PROSPECTUS
July 1, 1999
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
TEMPLETON INTERNATIONAL SMALLER COMPANIES INVESTMENTS FUND
CLASS 2 SHARES
As with all fund prospectuses, 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.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Information about each i OVERVIEW
fund
you should know before
investing
INDIVIDUAL FUND DESCRIPTIONS
TIS-1 Templeton International Smaller Companies
Investments Fund
ADDITIONAL INFORMATION, ALL FUNDS
Important Recent Developments
Distributions and Taxes
FUND ACCOUNT INFORMATION
Information about fund Buying Shares
account transactions Selling Shares
and services Exchanging Shares
Fund Account Policies
Questions
FOR MORE INFORMATION
Where to learn more about Back Cover
each fund
Templeton Variable Products Series Fund
Overview
Templeton Variable Products Series Fund (the Trust) currently consists of eleven
separate funds, offering a wide variety of investment choices. Each fund has two
classes of shares, class 1 and class 2. The funds are only available as
investment options in variable annuity or variable life insurance contracts. The
accompanying contract prospectus, or disclosure document, indicates which funds
and classes are available to you.
INVESTMENT CONSIDERATIONS
o Each fund has its own investment strategy and risk profile. Generally, the
higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider diversifying
your fund choices.
o You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
o All securities markets, interest rates, and currency valuations move up
and down, sometimes dramatically, and mixed with the good years can be
some bad years. Since no one can predict exactly how financial markets will
perform, you may want to exercise patience and focus not on short-term market
movements, but on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment goal.
o Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
o 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. Fund shares involve investment risks, including the
possible loss of principal.
More detailed information about each fund, its investment policies, and its
particular risks can be found in the Trust's Statement of Additional Information
(SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $211 billion in
assets. Franklin Templeton is one of the largest mutual fund organizations in
the United States, and offers money management expertise spanning a variety of
investment objectives. In 1992, Franklin, recognized as a leader in managing
domestic mutual funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Advisers team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
TEMPLETON INTERNATIONAL SMALLER COMPANIES SECURITIES FUND
[Insert graphic of bullseye and arrows] Goals and Strategies
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of smaller companies
located outside the U.S., including emerging markets. Smaller companies
generally are those with market capitalization values (share price times the
number of common stock shares outstanding) of less than $1.5 billion, at the
time of purchase. Equities represent ownership interests in individual companies
and give shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock. The
fund also invests in American, European, and Global Depositary Receipts, which
are certificates issued by a bank or trust company that give their holders the
right to receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in an internationally diversified portfolio of
smaller companies' common stocks.
[End callout]
In addition to its principal investments, the fund may invest significantly in
equity securities of larger capitalized companies located outside the U.S.,
equity securities of U.S. companies (though currently not more than 5% of its
assets), and depending upon current market conditions, in debt securities of
companies and governments located anywhere in the world. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Common debt securities are bonds,
including bonds convertible into common stock and unsecured bonds; notes; and
short-term investments, including cash or cash equivalents.
PORTFOLIO SELECTION 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. As a
"bottom-up" investor focusing primarily on individual securities, the fund may
from time to time have significant investments in particular countries. The
manager intends to manage the fund's exposure to various geographic regions and
their currencies based on its assessment of changing market and political
conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of its assets in U.S. or non-U.S. currency investments. Such
investments may be medium-term(less than 5 years for this fund) of short-term,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or securities market. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, smaller company securities have been more volatile in price
and have fluctuated independently from larger company securities, especially
over the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, and their growth prospects are less
certain.
For example, smaller companies may lack depth of management; or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies may suffer significant losses, their securities can
be less liquid, and investment sin these companies can be speculative.
Technology and biotechnology industry stocks, in particular, can be subject to
abrupt or erratic price movements.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer U.S.
dollars. Currency markets generally are not as regulated as securities markets.
Country General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of currency devaluations by
a country's government or banking authority, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on removal
of currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions can cause previously established securities markets to become limited
trading markets, potentially causing liquid securities to become illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies and obtaining judgments with respect to non-U.S. investments in
non-U.S. courts than with respect to U.S. companies in U.S. courts.
DIVERSIFICATION The fund is non-diversified under federal securities laws. As
such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.
INTEREST RATE Rate changes can be sudden and unpredictable when interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength may
affect the debt security's value and, thus, impact the value of fund shares.
See "Important Recent Developments," in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
Because the fund started on July 1, 1999, performance for a full calendar year
is not yet available.
FEES AND EXPENSES
Templeton International Smaller Companies Investments Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY
FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH
THE FUND IS AN INVESTMENT OPTION. IF THEY WERE INCLUDED, YOUR COSTS WOULD BE
HIGHER. Investors should consult the contract prospectus or disclosure
document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
- --------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering
price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS 2
Management fees
Rule 12b-1 fees
Other expenses1
Total annual fund operating expenses
[FIGURES TO BE SUPPLIED IN A LATER AMENDMENT]
1. "Other Expenses" are based on estimated amounts for the current fiscal year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
[to be supplied in a later amendment]
[Insert graphic of briefcase] MANAGEMENT
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394, is the fund's investment manager.
The team responsible for the fund's management is:
Management Team
Simon Rudolph
Senior Vice President, TICI
Mr. Rudolph has been a manager of the fund since inception. He joined the
Franklin Templeton Group in inception. Previously, he was an executive director
with Morgan Stanley.
Peter N. Nori CFA
Senior Vice President, TICI
Mr. Nori has been a manager of the fund since inception. He joined the Franklin
Templeton Group in 1987.
Juan J. Benito
Vice President, TICI
Mr. Benito has been a manager of the fund since inception. He joined the
Franklin Templeton Group in 1996. Previously he was a management consultant and
case team leader with Monitor Company, a leading global strategy consulting
firm.
The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is equal to an annual rate of [to be supplied]
Important Recent Developments
o YEAR 2000 PROBLEM The funds' business operations depend upon 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 called the Year 2000
problem). In addition, the fact that the Year 2000 is a leap year may create
difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected if
the computer systems used by their managers, their service providers and other
third parties they do 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.
When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year 2000
readiness. Issuers in countries outside of the U.S., particularly in emerging
markets, may be more susceptible to Year 2000 problems and may not be required
to make the same level of disclosure regarding Year 2000 readiness as is
required in the U.S. The managers, of course, cannot audit any company or their
major suppliers to verify their Year 2000 readiness. If a company in which any
fund is invested 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.
The managers and their 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 managers may have no control.
o EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the eleven
participating member countries. If a fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the funds may hold in their portfolios, 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.
Distributions and Taxes
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.
Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus or disclosure document.
Fund Account Information
Buying Shares
Shares of each fund are sold at NAV to insurance company separate
accounts to serve as investment options for variable annuity or variable life
insurance contracts. The funds' Board monitors this to be sure there are no
material conflicts of interest between the two different types of contract
owners. If there were, the Board would take corrective action.
Contract owners'
payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
Selling Shares
Each insurance company sells shares of the applicable fund to
make benefit or surrender payments or to execute transfers between investment
options under the terms of its contracts. Requests to sell shares are processed
at the NAV next calculated after we receive the request in proper form.
Exchanging Shares
Contract owners may exchange shares of any one class or fund for shares of other
classes or funds through a transfer between investment options available under a
variable insurance contract, subject to the terms, and any specific limitations
on the exchange (or "transfer") privilege, described in the contract prospectus.
Frequent exchanges can interfere with fund management or operations and drive up
fund costs. To protect shareholders, there are limits on the number and amount
of exchanges that may be made (please see "Market Timers," below).
Fund Account Policies
CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class's NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The funds' assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
a fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of the shares may change
on days that the insurance company separate account cannot buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper form.
REPORTS Insurance company shareholders will receive the fund's financial reports
every six months. If you need additional copies, please call 1-800/774-5001.
MARKET TIMERS The funds are not designed for market timers, large or frequent
transfers. The funds may restrict or refuse purchases or exchanges by market
timers. You will be considered a market timer if you have (i) requested an
exchange out of the fund within two weeks of an earlier exchange request, or
(ii) exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o Each fund may refuse any order to buy shares.
o At any time, each fund may establish or change investment minimums.
o Each fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to
make payments in securities or other assets of a fund, in the case of an
emergency.
o To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule 12b-1
Plan" which is described in prospectuses offering class 2 shares.
DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 has a distribution plan, sometimes
known as a rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year (up to 0.15% for the Bond Fund) to those who sell and
distribute Class 2 and provide services to shareholders and contract owners.
Because these fees are paid out of Class 2's assets on an on-going basis, over
time these fees will increase the cost of an investment in the fund, and may
cost more than paying other types of sales charges.
Questions
More detailed information about the Trust and the funds' account policies can be
found in the funds' Statement of Additional Information (SAI). If you have any
questions about the funds, you can write to us at 100 Fountain Parkway, St.
Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your protection and
to help ensure we provide you with quality service, all calls may be monitored
or recorded.
For More Information
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life insurance
contracts. Please consult the accompanying contract prospectus or disclosure
document for information about the terms of an investment in a contract.
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and
the auditor's report (Annual Report only).
STATEMENT OF ADDITIONAL INFORMATION
(SAI) Contains more information about the funds, their investments, policies,
and risks. It is incorporated by reference (is legally a part of this
prospectus).
You may obtain these free reports by contacting your investment representative
or by calling us at the number below.
Franklin(R)Templeton(R)
1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at HTTP://WWW.SEC.GOV.
Investment Company Act file 811-5479 Lit. Code #
TEMPLETON VARIABLE PRODUCTS SERIES FUND
TEMPLETON INTERNATIONAL SMALLER COMPANIES INVESTMENTS FUND
CLASS 1 AND 2
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 1999
500 EAST BROWARD BOULEVARD
SUITE 2100
FORT LAUDERDALE, FLORIDA 33394-3091 1-800/774-5001
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the Trust's prospectuses. The
prospectuses, dated July 1, 1999, which we may amend from time to time, contain
the basic information you should know before investing in any of the funds. You
should read this SAI together with the prospectuses.
Templeton Variable Products Series Fund ("Trust") has several series or funds
("funds") each of which is in effect a separate mutual fund. Each fund has two
classes of shares: class 1 and class 2. Shares of the funds are sold only to
insurance companies for use as investment options in variable annuity or
variable life insurance contracts ("Contracts"). The Trust may combine
prospectuses for different funds and share classes to the funds and share
classes available under the Contract. This SAI pertains only to the Templeton
International Smaller Companies Investments Fund ("International Smaller
Companies Fund").
For a free copy of the current prospectus, contact your investment
representative or call 1-800/774-5001.
CONTENTS PAGE
Goals and Strategies
Risks
Investment Restrictions
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Financial Statements
Miscellaneous Information
Description of Bond Ratings
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- -------------------------------------------------------------------------------
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INTERNATIONAL SMALLER COMPANIES FUND
GOALS AND STRATEGIES
The investment goal of the fund is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
EQUITY SECURITIES 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.
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. Equity securities may also include convertible securities, warrants
or rights. Convertible securities typically are debt securities or preferred
stocks which are convertible into common stock after certain time periods or
under certain circumstances. Warrants or rights give the holder the right to
purchase a common stock at a given time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule which
obligates the issuer 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 dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
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.
FOREIGN INVESTMENTS The fund invests in securities of foreign issuers. The funds
may invest up to 100% of total assets in emerging markets and up to 5% of its
total assets in Russian securities.
On occasion the fund may invest more than 25% of its assets in the securities of
issuers in one industrialized country that, in the view of the manager, poses no
unique investment risk. However, the fund will not invest more than 25% of its
assets in any one industry or securities issued by any one foreign government.
CURRENCY TRANSACTIONS Although the fund has the authority to enter into
forward currency exchange contracts ("forward contracts") and currency
futures contracts and options on these futures contracts, as well as buy put
or call options and write covered put and call options on currencies traded
in U.S. or foreign markets, it presently has no intention of entering into
such transactions.
A forward contract involves an obligation to buy or sell a specific currency
at a future date, that may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks).
The fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated
in a different currency if the managers determine that there is a pattern of
correlation between the two currencies. The fund may also buy and sell
forward contracts (to the extent they are not deemed "commodities") for
non-hedging purposes when the manager anticipates that the foreign currency
will appreciate or depreciate in value, but securities denominated in that
currency do not present attractive investment opportunities and are not held
in the fund's portfolio.
The fund's custodian bank will place cash or liquid high grade debt
securities (securities rated in one of the top three ratings categories by
Moody's or S&P or, if unrated, deemed by the managers to be of comparable
quality) into a segregated account of the fund maintained by its custodian
bank in an amount equal to the value of the fund's total assets committed to
the forward foreign currency exchange contracts requiring the fund to
purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or securities is placed in the
account on a daily basis so that the value of the account equals the amount
of the fund's commitments with respect to such contracts. The segregated
account is marked-to-market on a daily basis. Although the contracts are not
presently regulated by the Commodity Futures Trading Commission (the "CFTC"),
the CFTC may in the future assert authority to regulate these contracts. In
such event, the fund's ability to utilize forward foreign currency exchange
contracts may be restricted.
The fund generally will not enter into a forward contract with a term of
greater than one year.
A currency futures contract is a standardized contract for the future
delivery of a specified amount of currency at a future date at a price set at
the time of the contract. The fund may enter into currency futures contracts
traded on regulated commodity exchanges, including non-U.S. exchanges.
The fund may either accept or make delivery of the currency specified at the
maturity of a forward or futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
The fund may enter into forward currency exchange contracts and currency
futures contracts in several circumstances. For example, when a fund enters
into a contract for the purchase or sale of a security denominated in a
foreign currency (or options contracts with respect to such futures
contracts), or when a fund anticipates the receipt in a foreign currency of
dividends or interest payments on such a security that it holds, it may
desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. In
addition, when the manager believes that the currency of a particular country
may suffer a substantial decline against the U.S. dollar, it may enter into
a forward or futures contract to sell, for a fixed amount of U.S. dollars,
the amount of that currency approximating the value of some or all of the
fund's portfolio securities denominated in that currency. The precise
matching of the forward contract amounts and the value of the securities
involved is not generally possible because the future value of these
securities in foreign currencies changes as a consequence of market movements
in the value of those securities between the date on which the contract is
entered into and the date it matures. Using forward contracts to protect the
value of a fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that a fund can achieve
at some future point in time. The precise projection of short-term currency
market movements is not possible, and short-term hedging provides a means of
fixing the dollar value of only a portion of the fund's foreign assets.
The fund may write covered put and call options and buy put and call options
on foreign currencies for the purpose of protecting against declines in the
dollar value of portfolio securities and against increases in the dollar cost
of securities to be acquired. The fund may use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency with a
pattern of correlation. In addition, the fund may buy call options on
currency for non-hedging purposes when the manager anticipates that the
currency will appreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities and are not
included in the fund's portfolio.
A call option written by a fund obligates the fund to sell specified currency
to the holder of the option at a specified price at any time before the
expiration date. A put option written by a fund would obligate the fund to
buy specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves risk that a fund
will, upon exercise of the option, be required to sell currency subject to a
call at a price that is less than the currency's market value or be required
to buy currency subject to a put at a price that exceeds the currency's
market value.
The fund may terminate its obligations under a call or put option by buying
an option identical to the one it has written. Such purchases are referred to
as "closing purchase transactions." A fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options bought by the fund.
The fund would normally buy call options in anticipation of an increase in
the dollar value of the currency in which securities to be acquired by the
fund are denominated. The purchase of a call option would entitle the fund,
in return for the premium paid, to purchase specified currency at a specified
price during the option period. The fund would ordinarily realize a gain if,
during the option period, the value of such currency exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the fund
would realize either no gain or a loss on the purchase of the call option. A
fund may forfeit the entire amount of the premium plus related transaction
costs if exchange rates move in a manner adverse to the fund's position.
The fund would normally buy put options in anticipation of a decline in the
dollar value of currency in which securities in its portfolio are denominated
("protective puts"). Buying a put option would entitle the fund, in exchange
for the premium paid, to sell specific currency at a specified price during
the option period. Buying protective puts is designed merely to offset or
hedge against a decline in the dollar value of the fund's portfolio
securities due to currency exchange rate fluctuations. The fund would
ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise, the fund would
realize either no gain or a loss on the purchase of the put option. The fund
will buy and sell foreign currency options traded on U.S. or foreign
exchanges or over-the-counter.
The fund will not enter into forward currency exchange contracts or currency
futures contracts or buy or write such options or maintain a net exposure to
such contracts where the completion of the contracts would obligate the fund
to deliver an amount of currency other than U.S. dollars in excess of the
value of the fund's portfolio securities or other assets denominated in that
currency or, in the case of cross-hedging, in a currency closely correlated
to that currency.
OPTIONS ON SECURITIES AND SECURITIES INDICES Although the fund has the
authority to enter into these transactions, it currently has no intention
of doing so.
WRITING CALL AND PUT OPTIONS ON SECURITIES. A fund may write options to
generate additional income and to hedge its investment portfolio against
anticipated adverse market and/or exchange rate movements. A fund may write
covered call and put options on any securities in which it may invest. The
fund may buy and write these options on securities that are listed on
domestic or foreign securities exchanges or traded in the over-the-counter
market. Call options written by a fund give the holder the right to buy the
underlying securities from the fund at a stated exercise price. Put options
written by the fund give the holder the right to sell the underlying security
to the fund at a stated exercise price. All options written by a fund will be
"covered." The purpose of writing covered call options is to realize greater
income than would be realized on portfolio securities transactions alone.
However, in writing covered call options for additional income, a fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A call option written by a fund is covered if the fund owns the underlying
security covered by the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other securities held in its portfolio.
A call option is also covered if a fund holds a call on the same security and
in the same principal amount as the call written where the exercise price of
the call held (i) is equal to or less than the exercise price of the call
written or (ii) is greater than the exercise price of the call written if the
difference is maintained by the fund in cash and high-grade debt securities
in a segregated account with its custodian bank.
A put option written by a fund is "covered" if the fund maintains cash and
high-grade debt securities with a value equal to the exercise price in a
segregated account with its custodian bank, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written. The premium paid by the buyer of an option will reflect,
among other things, the relationship of the exercise price to the market
price and volatility of the underlying security, the remaining term of the
option, supply and demand and interest rates.
The writer of an option that wishes to terminate its obligation may effect a
closing purchase transaction. A writer may not effect a closing purchase
transaction after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its position by
effecting a closing sale transaction. This is accomplished by selling an
option of the same series as the option previously purchased.
A fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option; a fund will realize a loss from
a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
buy the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned
by the fund. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected when the fund so desires.
BUYING PUT OPTIONS. The fund may buy put options on securities in order to
protect against a decline in the market value of the underlying security
below the exercise price less the premium paid for the option. A put option
gives the holder the right to sell the underlying security at the option
exercise price at any time during the option period. The ability to buy put
options will allow the fund to protect the unrealized gain in an appreciated
security in its portfolio without actually selling the security. In addition,
the fund will continue to receive interest or dividend income on the
security. The fund may sell a put option that it has previously purchased
prior to the sale of the securities underlying that option. These sales will
result in a net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs paid for
the put option that is sold. This gain or loss may be wholly or partially
offset by a change in the value of the underlying security that the fund owns
or has the right to acquire.
BUYING CALL OPTIONS. The fund may buy call options on securities that it
intends to buy in order to limit the risk of a substantial increase in the
market price of this security. It may also buy call options on securities
held in its portfolio and on which it has written call options. A call option
gives the holder the right to buy the underlying securities from the option
writer at a stated exercise price. Prior to its expiration, a call option may
be sold in a closing sale transaction. Profit or loss from such a sale will
depend on whether the amount received is more or less than the premium paid
for the call option plus the related transaction costs.
OPTIONS ON STOCK INDICES. The fund may buy and write call and put options on
stock indices in order to hedge against the risk of market or industry-wide
stock price fluctuations or to increase income to the fund. Call and put
options on stock indices are similar to options on securities except that,
rather than the right to buy or sell particular securities at a specified
price, options on a stock index give the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts)
the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus,
unlike options on individual securities, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in
a particular industry or segment of the market) rather than price movements
in individual securities.
All options written on stock indices must be covered. When a fund writes an
option on a stock index, it will establish a segregated account containing
cash or high quality, fixed-income securities with its custodian bank in an
amount at least equal to the market value of the option and will maintain the
account while the option is open or will otherwise cover the transaction.
OVER-THE-COUNTER OPTIONS ON SECURITIES ("OTC OPTIONS"). The fund may write
covered put and call options and buy put and call options that trade in the
over-the-counter market to the same extent that it may engage in exchange
traded options. OTC options differ from exchange traded options in certain
material respects. OTC options are arranged directly with dealers and not, as
is the case with exchange traded options, with a clearing corporation. Thus,
there is a risk of non-performance by the dealer. Because there is no
exchange, pricing is typically done by reference to information from market
makers. However, OTC options are available for a greater variety of
securities and in a wider range of expiration dates and exercise prices than
exchange traded options; and the writer of an OTC option is paid the premium
in advance by the dealer.
The fund understands the current position of the staff of the SEC to be that
purchased OTC options and the assets used as "cover" for written OTC options are
illiquid securities. The fund and its manager disagree with this position.
Nevertheless, pending a change in the staff's position, the fund will treat OTC
options as subject to its limitation on illiquid securities. Please see
"Illiquid Investments" below.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since, with regard to certain options, the writer may
be assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill its obligation to buy the
underlying security at the exercise price, which will usually exceed the then
market value of the underlying security.
FORWARD CONVERSIONS. In a forward conversion, a fund will buy securities and
write call options and buy put options on these securities. All options
written by the fund will be covered. By buying puts, the fund protects the
underlying security from depreciation in value. By selling or writing calls
on the same security, the fund receives premiums that may offset part or all
of the cost of purchasing the puts while foregoing the opportunity for
appreciation in the value of the underlying security. The fund will not
exercise a put it has purchased while a call option on the same security is
outstanding. The use of options in connection with forward conversions is
intended to hedge against fluctuations in the market value of the underlying
security. Although it is generally intended in forward conversion
transactions that the exercise price of put and call options would be
identical, situations might occur in which some option positions are acquired
with different exercise prices. Therefore, the fund's return may depend in
part on movements in the price of the underlying security because of the
different exercise prices of the call and put options. These price movements
may also affect a fund's total return if the conversion is terminated prior
to the expiration date of the options. In this event, the fund's return may
be greater or less than it would otherwise have been if it had hedged the
security only by buying put options.
SPREAD AND STRADDLE TRANSACTIONS. The fund may engage in "spread" transactions
in which it buys and writes a put or call option on the same underlying
security, with the options having different exercise prices and/or expiration
dates. All options written by the fund will be covered. A fund may also
engage in so-called "straddles," in which it buys or writes combinations of
put and call options on the same security. Because buying options in
connection with these transactions may, under certain circumstances, involve
a limited degree of investment leverage, the fund will not enter into any
spreads or straddles if, as a result, more than 5% of its net assets will be
invested at any time in these options transactions. A fund's ability to
engage in spread or straddle transactions may be further limited by state
securities laws.
FUTURES TRANSACTIONS Although the fund has the authority to enter into
these transactions, it currently has no intention of doing so.
The fund may buy or sell (i) financial futures contracts such as interest
rate futures contracts; (ii) options on interest rate futures contracts;
(iii) stock index futures contracts; and (iv) options on stock index futures
contracts (collectively, "Futures Transactions") for bona fide hedging
purposes. The fund may enter into these Futures Transactions on domestic
exchanges and, to the extent these transactions have been approved by the
CFTC for sale to customers in the U.S., on foreign exchanges. The fund will
not engage in Futures Transactions for speculation but only as a hedge
against changes resulting from market conditions such as changes in interest
rates, currency exchange rates, or securities that it intends to buy. The
fund will not enter into any Futures Transactions if, immediately thereafter,
more than 20% of the fund's net assets would be represented by futures
contracts or options thereon. In addition, the fund will not engage in any
Futures Transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the fund's futures positions and premiums paid for
options on its futures contracts would exceed 5% of the market value of the
fund's total assets.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank, cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund will be required to pay to the futures commission merchant
an amount equal to this change in value.
A futures contract may generally be described as an agreement between two
parties to buy and sell particular financial instruments for an agreed price
during a designated month (or to deliver the final cash settlement price, in
the case of a contract relating to an index or otherwise not calling for
physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, a fund can
seek, through the sale of futures contracts, to offset a decline in the value
of its current portfolio securities. When rates are falling or prices are
rising, the fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market
when it affects anticipated purchases. Similarly, the fund can sell futures
contracts on a specified currency to protect against a decline in the value
of this currency and its portfolio securities that are denominated in this
currency. The fund can buy futures contracts on foreign currency to fix the
price in U.S. dollars of a security denominated in this currency that the
fund has acquired or expects to acquire.
Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying securities or the cash value of the
index, in most cases the contractual obligation is fulfilled before the date
of the contract without having to make or take this delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a
commodities exchange, an identical futures contract calling for delivery in
the same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the securities
or the cash value of the index underlying the contractual obligations. A fund
may incur brokerage fees when it buys or sells futures contracts.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions that may result in a
profit or a loss. While the fund's futures contracts on securities or
currency will usually be liquidated in this manner, the fund may instead
make or take delivery of the underlying securities or currency whenever it
appears economically advantageous for it to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the buying or selling will be
performed on the settlement date.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give the fund the right, but not the obligation, for
a specified price, to sell or to buy, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option
on a futures contract, the fund obtains the benefit of the futures position
if prices move in a favorable direction but limits its risk of loss in the
event of an unfavorable price movement to the loss of the premium and
transaction costs.
FINANCIAL FUTURES CONTRACTS. Financial futures are contracts that obligate
the holder to take or make delivery of a specified quantity of a financial
instrument, such as a U.S. Treasury security or foreign currencies, during a
specified future period at a specified price. A "sale" of a financial futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified
date. A "purchase" of a financial futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract
at a specified price on a specified date. Examples of financial futures
contracts include interest rate futures contracts and stock index futures
contracts.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are futures
contracts on debt securities. The value of these instruments changes in
response to changes in the value of the underlying debt security, that
depends primarily on prevailing interest rates. The fund may enter into
interest rate futures contracts in order to protect its portfolio securities
from fluctuations in interest rates without necessarily buying or selling the
underlying fixed-income securities. For example, if the fund owns bonds, and
interest rates are expected to increase, it might sell futures contracts on
debt securities having characteristics similar to those held in the
portfolio. A sale would have much the same effect as selling an equivalent
value of the bonds owned by the fund. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the futures contracts to the fund would increase at approximately the same
rate, thereby keeping the Net Asset Value of the fund from declining as much
as it otherwise could have.
STOCK INDEX FUTURES CONTRACTS. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the
price at which the agreement was made. Open futures contracts are valued on a
daily basis, and a fund may be obligated to provide or receive cash
reflecting any decline or increase in the contract's value. No physical
delivery of the underlying stocks in the index is made in the future.
Tbe fund may sell stock index futures contracts in anticipation of or during
a market decline in an attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the fund is not fully
invested in stocks and anticipates a significant market advance, it may buy
stock index futures in order to gain rapid market exposure that may offset
increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Call and put options on stock index
futures are similar to options on securities except that, rather than the
right to buy or sell stock at a specified price, options on a stock index
futures contract give the holder the right to receive cash. Upon exercise of
the option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account that represents
the amount by which the market price of the futures contract, at exercise,
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between
the exercise price of the option and the closing price of the futures
contract on the expiration date.
HEDGING STRATEGIES WITH FUTURES. Hedging by use of futures contracts seeks to
establish with more certainty, than would otherwise be possible, the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that the fund owns or proposes to acquire. The fund
may, for example, take a "short" position in the futures market by selling
futures contracts in order to hedge against an anticipated rise in interest
rates or a decline in market prices of foreign currency rates that would
adversely affect the dollar value of the fund's portfolio securities. These
futures contracts may include contracts for the future delivery of securities
held by the fund or securities with characteristics similar to those of the
fund's portfolio securities. Similarly, the fund may sell futures contracts
on currency in which its portfolio securities are denominated or in one
currency to hedge against fluctuations in the value of securities denominated
in a different currency if there is an established historical pattern of
correlation between the two currencies.
If, in the opinion of the managers, there is a sufficient degree of
correlation between price trends for the funds' portfolio securities and
futures contracts based on other financial instruments, securities indices or
other indices, the fund may also enter into these futures contracts as part
of its hedging strategy. Although under some circumstances prices of
securities in the funds' portfolio may be more or less volatile than prices
of these futures contracts, the managers will attempt to estimate the extent
of this difference in volatility based on historical patterns and to
compensate for it by having the funds enter into a greater or fewer number of
futures contracts or by attempting to achieve only a partial hedge against
price changes affecting the fund's securities portfolio. When hedging of this
character is successful, any depreciation in the value of the portfolio
securities will substantially be offset by appreciation in the value of the
futures position. On the other hand, any unanticipated appreciation in the
value of the fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, the fund may take a "long" position by buying these futures
contracts. This would be done, for example, when the fund anticipates the
subsequent buy of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the
applicable market to be less favorable than prices or rates that are
currently available.
The CFTC and U.S. commodities exchanges have established limits referred to
as "speculative position limits" on the maximum net long or net short
position that any person may hold or control in a particular futures
contract. Trading limits are imposed on the maximum number of contracts that
any person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The fund does not believe that these
trading and positions limits will have an adverse impact on their strategies
for hedging their securities. The need to hedge against these risks will
depend on the extent of diversification of the fund's common stock portfolio
and the sensitivity of these investments to factors influencing the stock
market as a whole.
OTHER CONSIDERATIONS In certain cases, the options and futures markets
provide investment or risk management opportunities that are not available
from direct investments in securities. In addition, some strategies can be
performed more effectively and at a lower cost by utilizing the options and
futures markets rather than purchasing or selling portfolio securities.
However, there are risks involved in these transactions as discussed below.
The fund will engage in futures and related options transactions only for
bona fide hedging or other appropriate risk management purposes in accordance
with CFTC regulations that permit principals of an investment company
registered under the Investment Company Act of 1940 ("1940 Act") to engage in
these transactions without registering as commodity pool operators.
"Appropriate risk management purposes" means activities in addition to bona
fide hedging that the CFTC deems appropriate for operators of entities,
including registered investment companies, that are excluded from the
definition of commodity pool operator. The fund is not permitted to engage
in speculative futures trading. The fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held
by the fund or which it expects to buy.
Except as stated below, the fund's futures transactions will be entered into
for traditional hedging purposes - that is, futures contracts will be sold to
protect against a decline in the price of securities it intends to buy (or
the currency will be purchased to protect the fund against an increase in the
price of the securities (or the currency in which they are denominated)). As
evidence of this hedging intent, the fund expects that on 75% or more of the
occasions on which it takes a long futures (or option) position involving the
purchase of futures contracts, the fund will have bought, or will be in the
process of buying, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures (or option) position is closed out. However, in particular cases when
it is economically advantageous for the fund to do so, a long futures
position may be terminated (or an option may expire) without the
corresponding purchase of securities or other assets. In the alternative, a
CFTC regulation permits the fund to elect to comply with a different test,
under which (i) the fund's long futures positions will be used as part of its
portfolio management strategy and will be incidental to its activities in the
underlying cash market and (ii) the aggregate initial margin and premiums
required to establish these positions will not exceed 5% of the liquidation
value of the fund's investment portfolio (a) after taking into account
unrealized profits and losses on any such contracts into which the fund has
entered and (b) excluding the in-the-money amount with respect to any option
that is in-the-money at the time of purchase.
The fund will engage in transactions in futures contracts and related
options only to the extent these transactions are consistent with the
requirements of the Code for maintaining its qualification as a regulated
investment company for federal income tax purposes.
The fund will not buy or sell futures contracts or buy or sell related
options, except for closing purchase or sale transactions, if immediately
thereafter the sum of the amount of margin deposits on the fund's outstanding
futures and related options positions and the amount of premiums paid for
outstanding options on futures would exceed 5% of the market value of the
fund's total assets. These transactions involve brokerage costs, require
margin deposits and, in the case of contracts and options obligating the fund
to buy securities or currencies, require the fund to segregate assets to
cover these contracts and options.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
managers may still not result in a successful transaction.
Perfect correlation between a fund's futures positions and portfolio
positions may be difficult to achieve because no futures contracts based on
corporate fixed-income securities are currently available. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations
affecting the value of securities denominated in foreign currencies because
the value of these securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
OTHER INVESTMENT POLICIES
CONVERTIBLE SECURITIES As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock,
the value of a convertible security also tends to increase as the market
value of the underlying stock rises, and it tends to decrease as the market
value of the underlying stock declines. Because its value can be influenced
by both interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank. The
issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
The fund may invest in convertible preferred stocks that offer enhanced
yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as the fund, with the opportunity
to earn higher dividend income than is available on a company's common stock.
PERCS are preferred stocks that generally feature a mandatory conversion
date, as well as a capital appreciation limit which is usually expressed in
terms of a stated price. Most PERCS expire three years from the date of
issue, at which time they are convertible into common stock of the issuer.
PERCS are generally not convertible into cash at maturity. Under a typical
arrangement, after three years PERCS convert into one share of the issuer's
common stock if the issuer's common stock is trading at a price below that
set by the capital appreciation limit, and into less than one full share if
the issuer's common stock is trading at a price above that set by the capital
appreciation limit. The amount of that fractional share of common stock is
determined by dividing the price set by the capital appreciation limit by the
market price of the issuer's common stock. PERCS can be called at any time
prior to maturity, and hence do not provide call protection. If called early,
however, the issuer must pay a call premium over the market price to the
investor. This call premium declines at a preset rate daily, up to the
maturity date.
The fund may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically
Convertible Equity Securities), PEPS (Participating Equity Preferred Stock),
PRIDES (Preferred Redeemable Increased Dividend Equity Securities), SAILS
(Stock Appreciation Income Linked Securities), TECONS (Term Convertible
Notes), QICS (Quarterly Income Cumulative Securities), and DECS (Dividend
Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS,
and DECS all have the following features: they are issued by the company, the
common stock of which will be received in the event the convertible preferred
stock is converted; unlike PERCS they do not have a capital appreciation
limit; they seek to provide the investor with high current income with some
prospect of future capital appreciation; they are typically issued with three
or four-year maturities; they typically have some built-in call protection
for the first two to three years; investors have the right to convert them
into shares of common stock at a preset conversion ratio or hold them until
maturity; and, upon maturity, they will necessarily convert into either cash
or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not specifically referred to herein which may be
similar to those described above in which a fund may invest, consistent with
its goal and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the fund. The fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. The fund,
however, intends to acquire liquid securities, though there can be no
assurances that this will be achieved.
REPURCHASE TRANSACTIONS The fund may enter into repurchase agreements. A
repurchase agreement is an agreement in which the seller of a security agrees
to repurchase the security sold at a mutually agreed upon time and price.
Under the 1940 Act, a repurchase agreement is deemed to be the loan of money
by a fund to the seller, collateralized by the underlying security. The
resale price is normally in excess of the purchase price, reflecting an
agreed upon interest rate. The interest rate is effective for the period of
time in which the fund is invested in the agreement and is not related to the
coupon rate on the underlying security. The period of these repurchase
agreements will usually be short, from overnight to one week, and at no time
will a fund invest in repurchase agreements for more than one year. However,
the securities that are subject to repurchase agreements may have maturity
dates in excess of one year from the effective date of the repurchase
agreements. The fund will make payment for these securities only upon
physical delivery or evidence of book entry transfer to the account of their
custodian bank. The fund may not enter into a repurchase agreement with more
than seven days duration if, as a result, the market value of the fund's net
assets, together with investments in other securities deemed to be not
readily marketable, would be invested in these repurchase agreements in
excess of the fund's policy on investments in illiquid securities.
ILLIQUID INVESTMENTS Securities that are acquired by the fund outside the
U.S. and that are publicly traded in the U.S. or on a foreign securities
exchange or in a foreign securities market are not considered by the fund to
be illiquid assets, so long as the fund acquires and holds the securities
with the intention of reselling the securities in the foreign trading market,
the fund reasonably believes it can readily dispose of the securities for
cash in the U.S. or foreign market, and current market quotations are readily
available. Investments may be in securities of foreign issuers, whether
located in developed or undeveloped countries. The board has authorized each
fund to invest in restricted securities where this investment is consistent
with the fund's investment objective and has authorized these securities to
be considered liquid to the extent the managers, as the case may be,
determine that there is a liquid institutional or other market for these
securities, for example, restricted securities that may be freely transferred
among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933 and for which a liquid institutional market has
developed. The board reviews any determination by the managers to treat a
restricted security as liquid on a quarterly basis, including the managers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, the managers and the board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and
the number of other potential purchasers; (iii) dealer undertakings to make a
market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). To the extent the
fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in high quality money market instruments.
These include government securities, bank obligations, the highest quality
commercial paper and repurchase agreements. The fund may also invest in non-U.S.
currency, short-term instruments denominated in non-U.S. currencies and
medium-term (up to five years to maturity) obligations issued or guaranteed by
the U.S. government or the governments of foreign countries, their agencies or
instrumentalities.
RISKS
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FOREIGN SECURITIES Since foreign companies are not subject to uniform
accounting, auditing and financial reporting practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company.
Volume and liquidity in most foreign bond markets are less than in the U.S.,
and securities of many foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although each fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers, dealers and
listed companies than in the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions, making it difficult to
conduct these transactions. These delays in settlement could result in
temporary periods when a portion of the assets of the fund is uninvested and
no return is earned thereon. The inability of each fund to make intended
security purchases due to settlement problems could cause the fund to miss
attractive investment opportunities. Losses to a fund due to subsequent
declines in the value of portfolio securities, or losses arising out of the
fund's inability to fulfill a contract to sell these securities, could result
in potential liability to the fund. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments that
could affect the fund's investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy
in growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments positions.
Investments in foreign securities where delivery takes place outside the U.S.
will have to be made in compliance with any applicable U.S. and foreign
currency restrictions and tax laws (including laws imposing withholding taxes
on any dividend or interest income) and laws limiting the amount and types of
foreign investments. Changes of governmental administrations or of economic
or monetary policies, in the U.S. or abroad, or changed circumstances in
dealings between nations, or currency convertibility or exchange rates could
result in investment losses for a fund. Investments in foreign securities may
also subject the fund to losses due to nationalization, expropriation or
differing account-ing practices and treatments. Moreover, you should
recognize that foreign securities are often traded with less frequency and
volume, and therefore may have greater price volatility, than is the case
with many U.S. securities. Brokerage commissions, custodial services, and
other costs relating to investment in foreign countries are generally more
expensive than in the U.S. Notwithstanding the fact that a fund generally
intends to acquire the securities of foreign issuers where there are public
trading markets, investments by a fund in the securities of foreign issuers
may tend to increase the risks with respect to the liquidity of a fund's
portfolio and the fund's ability to meet a large number of shareholder
redemption requests should there be economic or political turmoil in a
country in which a fund has a substantial portion of its assets invested or
should relations between the U.S. and foreign countries deteriorate markedly.
Furthermore, the reporting and disclosure requirements applicable to foreign
issuers may differ from those applicable to domestic issuers, and there may
be difficulties in obtaining or enforcing judgments against foreign issuers.
Depositary Receipts (such as American Depositary Receipts, European
Depositary Receipts and Global Depositary Receipts) may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the securities underlying
unsponsored Depositary Receipts are not obligated to disclose material
information in the U.S. and, therefore, there may be less information
available regarding these issuers and there may not be a correlation between
such information and the market value of the Depositary Receipts. Depositary
Receipts also involve the risks of other investments in foreign securities,
as discussed above.
DEVELOPING MARKETS Investments in companies domiciled in developing
countries may be subject to potentially higher risks than investments in
companies in developed countries. These risks include (i) less social,
political and economic stability; (ii) the smaller size of the markets for
these securities and the currently low or nonexistent volume of trading, that
result in a lack of liquidity and in greater price volatility; (iii) the lack
of publicly available information, including reports of payments of dividends
or interest on outstanding securities; (iv) certain national policies that
may restrict a fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(v) foreign taxation; (vi) the absence of developed structures governing
private or foreign investment or allowing for judicial redress for injury to
private property; (vii) the absence, until recently in certain Eastern
European countries and Russia, of a capital market structure or
market-oriented economy; (viii) the possibility that recent favorable
economic developments in Eastern Europe and Russia may be slowed or reversed
by unanticipated political or social events in these countries; (ix)
restrictions that may make it difficult or impossible for the fund to vote
proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts; (x) the risk of uninsured loss due to lost,
stolen, or counterfeit stock certificates; and (xi) possible losses through
the holding of securities in domestic and foreign custodial banks and
depositories.
In addition, many countries in which the fund may invest 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.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for
repatriation.
Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and may
continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist
measures imposed or negotiated by the countries with which they trade.
Investments in Eastern European 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 this expropriation will not occur in the future. In the event of
this expropriation, the 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 relative to the actual market values and may be unfavorable to fund
investors.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private
and foreign investments and private property. Certain countries require
governmental approval prior to investments by foreign persons, or limit the
amount of investment by foreign persons in a particular company, or limit the
investment of foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals.
Authoritarian governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of the fund's
assets invested in this country. To the extent these governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the fund's cash and securities, the fund's
investment in these countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in these countries.
Investing in Russian securities involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. These risks include:
(a) delays in settling portfolio transactions and risk of loss arising out of
Russia's unique system of share registration and custody; (b) the risk that
it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (c) pervasiveness of corruption and crime in the
Russian economic system; (d) currency exchange rate volatility and the lack
of available currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyperinflation or other factors); (f) controls on foreign investment and
local practices disfavoring foreign investors and limitations on repatriation
of invested capital, profits and dividends, and on the Smaller Companies
Fund's ability to exchange local currencies for U.S. dollars; (g) the risk
that the Russian government or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented
since the dissolution of the Soviet Union and could follow radically
different political and/or economic policies to the detriment of investors,
including non-market oriented policies such as the support of certain
industries at the expense of other sectors or investors, or a return to the
centrally planned economy that existed prior to the dissolution of the Soviet
Union; (h) the financial condition of Russian companies, including large
amounts of inter-company debt that may create a payments crisis on a national
scale; (i) dependency on exports and the corresponding importance of
international trade; (j) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and
(k) possible difficulty in identifying a purchaser of securities held by the
fund due to the underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because they
are relatively new and a substantial proportion of securities transactions in
Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets, as well as the underdeveloped
state of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositaries that
meet the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register
or by formal share certificates. However, there is no central registration
system for shareholders and these services are carried out by the companies
themselves or by registrars located throughout Russia. These registrars are
not necessarily subject to effective state supervision and it is possible for
the fund to lose its registration through fraud, negligence or even mere
oversight. While a fund will endeavor to ensure that its interest continues
to be appropriately recorded either itself or through a custodian or other
agent inspecting the share register and by obtaining extracts of share
registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive a fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations
impose liability on registrars for losses resulting from their errors, it may
be difficult for a fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more
than 1,000 shareholders is required by law to contract out the maintenance of
its shareholder register to an independent entity that meets certain
criteria, in practice this regulation has not always been strictly enforced.
Because of this lack of independence, management of a company may be able to
exert considerable influence over who can buy and sell the company's shares
by illegally instructing the registrar to refuse to record transactions in
the share register. This practice may prevent a fund from investing in the
securities of certain Russian issuers deemed suitable by the managers.
Further, this could cause a delay in the sale of Russian securities by a fund
if a potential purchaser is deemed unsuitable, which may expose that fund to
potential loss on the investment.
FORWARD TRANSACTIONS While the fund will enter into forward contracts to
reduce currency exchange rate risks, transactions in these contracts involve
certain other risks. Thus, while the fund may benefit from these
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the fund than if it had not engaged in any of these
transactions. Moreover, there may be imperfect correlation between the fund's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the fund. This imperfect correlation may
cause a fund to sustain losses that will prevent the fund from achieving a
complete hedge or expose the fund to risk of foreign exchange loss.
OPTIONS AND FUTURES The fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index, securities or currencies underlying the hedging instrument
and the hedged securities that would result in a loss on both these
securities and the hedging instrument. In addition, it is not possible to
hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of these
securities is also likely to fluctuate as a result of independent factors not
related to currency fluctuations. Therefore, perfect correlation between the
fund's futures positions and portfolio positions will be impossible to
achieve. Accordingly, successful use by the fund of options on stock indices,
financial and currency futures contracts and related options, and currency
options will be subject to the fund's managers' ability to predict correctly
movements in the direction of the securities and currency markets generally
or of a particular segment. If the fund's managers are not successful in
employing these instruments in managing the fund's investments, the fund's
performance will be worse than if it did not employ these strategies. In
addition, the fund will pay commissions and other costs in connection with
these investments, that may increase the fund's expenses and reduce the
return. In writing options on futures, the fund's loss is potentially
unlimited and may exceed the amount of the premium received.
Positions in stock index options, stock index futures contracts, financial
futures contracts, foreign currency futures contracts, related options on
futures and options on currencies may be closed out only on an exchange that
provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular option, futures contract or
option thereon at any specific time. Thus, it may not be possible to close
such an option or futures position. The inability to close options or futures
positions could have an adverse impact on the fund's ability to effectively
hedge its securities or foreign currency exposure. The fund will enter into
options or futures positions only if its managers believe that a liquid
secondary market for these options or futures contracts exist.
In the case of OTC options on securities, there can be no assurance that a
continuous liquid secondary market will exist for any particular OTC option
at any specific time. Consequently, a fund may be able to realize the value
of an OTC option it has purchased only by exercising it or entering into a
closing sale transaction with the dealer that issued it. Similarly, when a
fund writes an OTC option, it generally can close out that option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote it. If the fund, on a covered call
option, cannot effect a closing transaction, it cannot sell the underlying
security until the option expires or the option is exercised. Therefore, when
a fund writes an OTC call option, it may not be able to sell the underlying
security even though it might otherwise be advantageous to do so. Likewise, a
fund may be unable to sell the securities it has pledged to secure OTC put
options while it is obligated as a put writer. Similarly, when a fund is a
buyer of a put or call option, the fund might find it difficult to terminate
its position on a timely basis in the absence of a secondary market. The
ability to terminate OTC options is more limited than with exchange traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. Until such time as the staff
of the SEC changes its position, the fund will treat purchased OTC options
and all assets used to cover written OTC options as illiquid securities,
except that with respect to options written with primary dealers in U.S.
government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to a formula approved by the staff of the SEC.
Reasons for the absence of a liquid secondary market on an exchange include
the following:
(i) there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or the Options Clearing
Corporation (the "OCC") may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
HIGH YIELDING, FIXED-INCOME SECURITIES The fund may invest
up to 5% of its assets in fixed income securities that are rated below
investment grade or are unrated but deemed by the managers to be of
equivalent quality.
The market value of lower rated, fixed-income securities and unrated
securities of comparable quality, commonly known as junk bonds, tends to
reflect individual developments affecting the issuer to a greater extent than
the market value of higher rated securities, that react primarily to
fluctuations in the general level of interest rates. Lower rated securities
also tend to be more sensitive to economic conditions than higher rated
securities. These lower rated fixed-income securities are considered by the
rating agencies, on balance, to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk than
securities in the higher rating categories. Even securities rated "BBB" by
S&P or "Baa" by Moody's, ratings that are considered investment grade,
possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the fund
may have unrealized losses on defaulted securities that are reflected in the
price of the fund's shares. In general, securities that default lose much of
their value in the time period before the actual default so that the fund's net
assets are impacted prior to the default. The fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery. The fund may be required under the Code and U.S. Treasury regulations
to accrue income for income tax purposes on defaulted obligations and to
distribute the income to the fund's shareholders even though the fund is not
currently receiving interest or principal payments on these obligations. In
order to generate cash to satisfy any or all of these distribution requirements,
the fund may be required to dispose of portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as the
sale of fund shares.
The fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities that trade in a broader secondary retail market. Generally, buyers of
these securities are predominantly dealers and other institutional buyers,
rather than individuals. To the extent the secondary trading market for a
particular high yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities. Reduced liquidity
in the secondary market may have an adverse impact on market price and the
fund's ability to dispose of particular issues, when necessary, to meet the
fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer.
The fund may acquire high yielding, fixed-income securities
during an initial underwriting. These securities involve special risks
because they are new issues. The managers will carefully review their credit
and other characteristics. The fund has no arrangement with
its underwriter or any other person concerning the acquisition of these
securities.
The high yield securities market is relatively new and much of its growth
prior to 1990 paralleled a long economic expansion. The recession that began
in 1990 disrupted the market for high yielding securities and adversely
affected the value of outstanding securities and the ability of issuers of
these securities to meet their obligations. Although the economy has improved
considerably and high yielding securities have performed more consistently
since that time, there is no assurance that the adverse effects previously
experienced will not reoccur. The fund will rely on the
managers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the managers will take
into consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on the funds, the funds' manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
INVESTMENT RESTRICTIONS
The International Smaller Companies fund has adopted the following
restrictions as fundamental policies. This means they may only be changed if the
change is approved by (i) more than 50% of the fund's outstanding shares or (ii)
67% or more of the fund's shares present at a shareholder meeting if more than
50% of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The International Smaller Companies fund may not:
1. Borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any exemptions
therefrom which may be granted by the U.S. Securities and Exchange Commission,
or for temporary or emergency purposes and then in an amount not exceeding
33-1/3% of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment objectives and policies, and (c) to the extent the entry
into a repurchase agreement is deemed to be a loan. The fund may also make
loans to affiliated investment companies to the extent permitted by the 1940
Act or any exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages or
pledges, (b) entering into options, futures contracts, forward contracts or
repurchase transactions, or (c) making short sales of securities to the extent
permitted by the 1940 Act and any rule or order thereunder, or SEC staff
interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities or securities of
other investment companies).
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Nicholas F. Brady (69)
16 North Washington Street
Easton, MD 21601
Trustee
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 21 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Andrew H. Hines, Jr. (76)
150 2nd Avenue N.
St. Petersburg, FL 33701
Trustee
Consultant, Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 22 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, LLC, Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
Betty P. Krahmer (69)
2201 Kentmere Parkway
Wilmington, DE 19806
Trustee
Director or trustee of various civic associations; director or trustee, as the
case may be, of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (70)
2665 NE 37th Drive
Fort Lauderdale, FL 33308
Trustee
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, LLC and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee, as the case
may be, of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Samuel J. Forester, Jr. (50)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Managing Director, Templeton Worldwide, Inc.; Vice President and Director,
Templeton Global Income Portfolio Ltd.; Director, Closed Joint-Stock Company
Templeton and Templeton Trust Services Pvt. Ltd.; officer of 10 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Templeton Global Bond Managers, a division of Templeton Investment
Counsel, Inc., Founder and Partner, Forester, Hairston Investment Management,
Inc. (1989-1990), Managing Director (Mid-East Region), Merrill Lynch, Pierce,
Fenner & Smith Inc. (1987-1988), and Advisor for Saudi Arabian Monetary Agency
(1982-1987).
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Mark G. Holowesko (39)
Lyford Cay
Nassau, Bahamas
Vice President
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 21 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President and
Director, Franklin Advisory Services, LLC; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
John R. Kay (58)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Vice President and Treasurer, Templeton Worldwide, Inc.; Assistant Vice
President, Franklin Templeton Distributors, Inc.; officer of 25 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Vice President and Controller, Keystone Group, Inc.
Elizabeth M. Knoblock (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President - Compliance
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of 21 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton Inc. (1988),
Vice President and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel, Division of Investment Management, U.S.
Securities and Exchange Commission (1984-1986).
Barbara J. Green (51)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Secretary
Senior Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
James R. Baio (45)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Treasurer
Certified Public Accountant; Treasurer, Franklin Mutual Advisers, LLC; Senior
Vice President, Templeton Worldwide, Inc., Templeton Global Investors, Inc. and
Templeton Funds Trust Company; officer of 22 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Senior Tax Manager, Ernst &
Young (certified public accountants) (1977-1989).
*This board member is considered an "interested person" under federal securities
laws. Charles B. Johnson is an interested person due to his ownership of
Franklin Resources, Inc. Mr. Brady's status as an interested person results from
his business affiliations with Franklin Resources, Inc. and Templeton Global
Advisors Limited. Mr. Brady and Franklin Resources, Inc. are both limited
partners of Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby
Overseas and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members and Mr. Brady an annual retainer of
$2,000 and a fee of $200 per board meeting attended. Board members who serve on
the audit committee of the trust and other funds in the Franklin Templeton Group
of Funds receive a flat fee of $2,000 per committee meeting attended, a portion
of which is allocated to the trust. Members of a committee are not compensated
for any committee meeting held on the day of a board meeting. Noninterested
board members may also serve as directors or trustees of other funds in the
Franklin Templeton Group of Funds and may receive fees from these funds for
their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the trust and by the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME TRUST1($) FUNDS2($) SERVES3
Harris J. Ashton 4,000 361,157 49
Nicholas F. Brady 4,000 140,975 21
S. Joseph Fortunato 4,000 367,835 51
Andrew H. Hines, Jr. 5,988 208,075 22
Edith E. Holiday 4,000 211,400 25
Betty P. Krahmer 4,000 141,075 21
Gordon S. Macklin 4,000 361,157 49
Fred R. Millsaps 4,400 210,075 22
1. For the fiscal year ended December 31, 1998. During the period from September
1, 1997, through February 27, 1998, an annual retainer of $6,000 and fees at the
rate of $500 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 164 U.S. based
funds or series.
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, and paid pro rata by each fund in
the Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation, including
pension or retirement benefits, directly or indirectly from the fund or other
funds in the Franklin Templeton Group of Funds. Certain officers or board
members who are shareholders of Franklin Resources, Inc. may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Templeton Investment Counsel, Inc. is the manager
for the International Smaller Companies Fund. The manager is wholly owned by
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates (together, the "managers") manage numerous other
investment companies and accounts. The managers may give advice and take action
with respect to any of the other funds they manage, or for their own account,
that may differ from action taken by a manager on behalf of the fund. Similarly,
with respect to the funds, the managers are not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that the
managers and access persons, as defined by applicable federal securities laws,
may buy or sell for their own account or for the accounts of any other fund. The
managers are not obligated to refrain from investing in securities held by the
funds or other funds they manage. Of course, any transactions for the accounts
of the managers and other access persons will be made in compliance with the
trust's code of ethics.
Under the trust's code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT FEES The fund pays its manager a fee equal to an annual rate as
follows:
International Smaller Companies Fund
[to be provided in a later 485(b) amendment]
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the trust to provide certain administrative
services and facilities for the trust. Under this agreement, FT Services is
responsible for preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
subcontracts with Templeton Funds Annuity Company (TFAC) to provide certain of
these services. FT Services and TFAC are direct or indirect wholly owned
subsidiaries of Resources and are affiliates of the trust's managers and
principal underwriter.
ADMINISTRATION FEES The International Smaller Companies Fund pays FT Services a
monthly fee based on the assets of each fund equal to an annual rate of:
[to be supplied in a later 485(b) amendment]
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
CUSTODIANS The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, NY, 11245, and at the offices of its branches and agencies
throughout the world, acts as custodiann of the assets of the International
Smaller Companies Investments Fund. As foreign custody manager, the bank
selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
trust's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
RESEARCH SERVICES The managers may receive services from various affiliates. The
services may include information, analytical reports, computer screening
studies, statistical data, and factual resumes pertaining to securities eligible
for purchase by the funds. Such supplemental research, when utilized, is subject
to analysis by the managers before being incorporated into the investment
advisory process.
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The managers select brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreements
and any directions that the board may give.
When placing a portfolio transaction, the managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the managers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The managers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
managers, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services they receive. This may be viewed in terms of either the particular
transaction or the managers' overall responsibilities to client accounts over
which they exercise investment discretion. The services that brokers may provide
to the managers include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the managers in carrying out their overall
responsibilities to their clients.
To the extent a fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The funds seek to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the managers to supplement their own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
the trust's officers are satisfied that the best execution is obtained, the sale
of trust shares, as well as shares of other funds in the Franklin Templeton
Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute a fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 5% of the voting securities of one or
more broker-dealers through whom such fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent that the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the fund to adhere to procedures adopted by
the board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary broker's
commissions for similar transactions.
- --------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Each fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally due
to the difference in the distribution and service (Rule 12b-1) fees of class 2.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in their shares.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by a fund. These gains when
distributed will be treated as ordinary dividends, and any losses will reduce a
fund's ordinary income otherwise available for distribution. This treatment
could increase or reduce a fund's ordinary income distributions, and may cause
some or all of a fund's previously distributed income to be classified as a
return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute. To ensure that individuals holding the Contracts whose assets are
invested in a fund will not be subject to federal income tax on distributions
made by the fund prior to receipt of payments under the Contracts, each fund
intends to comply with the additional requirements of Section 817(h) of the
Internal Revenue Code relating to diversification of its assets. The board
reserves the right not to maintain the qualification of a fund as a regulated
investment company if it determines such course of action to be beneficial to
shareholders. In such case, the fund will be subject to federal, and possibly
state, corporate taxes on its taxable income and gains.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to make certain minimum distributions by December
31 of each year. Federal excise taxes will not apply to a fund in a given
calendar year, however, if all of its shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable products.
INVESTMENT IN COMPLEX SECURITIES A fund may invest in complex securities. These
investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by a fund are treated as
ordinary income or capital gain, accelerate the recognition of income to a fund
and/or defer a fund's ability to recognize losses, and, in limited cases,
subject a fund to U.S. federal income tax on income from certain of its foreign
securities. In turn, these rules may affect the amount, timing or character of
the income distributed by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The trust is an open-end management investment company, commonly called a mutual
fund. The trust was organized as a Massachusetts business trust on February 25,
1988, and is registered with the SEC. The International Smaller Companies Fund,
along with the Franklin Real Estate Investments, Franklin Strategic Income
Investments and Templeton Bond Funds, are non-diversified series of the trust.
The other funds are diversified series of the trust.
The shareholders of a Massachusetts business trust, could, under certain
circumstances, be held personally liable as partners for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
each series' (fund's) assets for any shareholder held personally liable for
obligations of that fund or the trust. The Declaration of Trust provides that
the trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a fund or the trust and shall satisfy
any judgment thereon. All such rights are limited to the assets of the fund. The
Declaration of Trust further provides that the trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the fund as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the fund's total
assets. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance exists and the fund itself is unable to meet its
obligations.
The trust currently offers two classes of shares for each series, Class 1 and
Class 2. All shares purchased before the initial offering of each fund's Class 2
shares are considered Class 1 shares. After that date, all shares are designated
either Class 1 or Class 2. Additional classes of shares may be offered in the
future. The full title of each series and class is:
Franklin Growth Investments Fund - Class 1
Franklin Growth Investments Fund - Class 2
Franklin Real Estate Investments Fund - Class 1
Franklin Real Estate Investments Fund - Class 2
Franklin Small Cap Investments Fund - Class 1
Franklin Small Cap Investments Fund - Class 2
Franklin Strategic Income Investments Fund - Class 1
Franklin Strategic Income Investments Fund - Class 2
Mutual Shares Investments Fund - Class 1
Mutual Shares Investments Fund - Class 2
Templeton Asset Allocation Fund - Class 1
Templeton Asset Allocation Fund - Class 2
Templeton Bond Fund - Class 1
Templeton Bond Fund - Class 2
Templeton Developing Markets Fund - Class 1
Templeton Developing Markets Fund - Class 2
Templeton International Fund - Class 1
Templeton International Fund - Class 2
Templeton International Smaller Companies - Class 1
Templeton International Smaller Companies - Class 1
Templeton Stock Fund - Class 1
Templeton Stock Fund - Class 2
Shares of each class represent proportionate interests in a fund's assets and
are identical except that each fund's Class 2 shares will bear the expense of
the Class 2 distribution plan. (See "The Underwriter" below, for a description
of these plans.) On matters that affect a fund as a whole, each class has the
same voting and other rights and preferences as any other class. On matters that
affect only one class, only shareholders of that class may vote. Each class
votes separately on matters affecting only that class, or expressly required to
be voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes and
series of the trust for matters that affect the trust as a whole. Additional
series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust, or a
series of the trust, may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help shareholders communicate with other shareholders about the removal of a
board member. A special meeting may also be called by the board in its
discretion. For information regarding voting privileges of Contract Owners, see
the insurance company separate account SAI.
PRINCIPAL SHAREHOLDERS Shares of the trust are sold to and owned only by
insurance company separate accounts to serve as the investment vehicle for
variable annuity and life insurance contracts.
However, the insurance companies will exercise voting rights attributable to
these shares in accordance with voting instructions received by owners of the
contracts issued by the insurance companies. To this extent, the insurance
companies do not exercise control over the trust by virtue of the voting rights
from their ownership of trust shares.
The International Smaller Companies Fund is new and had no shareholders as of
July 1, 1999.
PRICING SHARES
- ----------------------------------------------- -------------------------------
When they buy and sell shares, the trust's insurance company shareholders pay
and receive the net asset value per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding. Each fund follows the procedures described below.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
REDEMPTIONS IN KIND In the case of redemption requests, the board reserves the
right to make payments in whole or in part in securities or other assets of the
fund, in case of an emergency, or if the payment of such a redemption in cash
would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the fund's net assets and you may incur brokerage fees in converting the
securities to cash. The fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the trust's shares.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, except to the
extent these expenses are borne by the Insurance Companies. These expenses
include advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The trust pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
Distributors may be entitled to receive payment under the Class 2 Rule 12b-1
plans, as discussed below. Except as noted below, Distributors receives no other
compensation from the trust for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each fund's Class 2 has a separate
distribution or "Rule 12b-1" plan. Under each fund's plan, the fund may pay up
to a maximum of 0.25% (0.15% for the Bond Fund) per year of the average daily
net assets attributable to its Class 2 shares. These fees may be used to
compensate Distributors, the Insurance Companies or others for distribution and
related services and as a servicing fee.
The terms and provisions of the plans, including terms and provisions relating
to required reports, term, and approval, are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the trust and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the non-interested
members of the board. The Class 2 plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
non-interested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of a management agreement with a manager, or by vote
of a majority of the outstanding shares of the class. Distributors, the
Insurance Companies or others may also terminate their respective distribution
or service agreement at any time upon written notice.
The Class 2 plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval by
a majority of the outstanding shares of the fund's class, and all material
amendments to the plans or any related agreements shall be approved by a vote of
the non-interested members of the board, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the funds to compute or express performance follows.
Because the trust only offers its shares to Insurance Company separate accounts
(Insurance Companies) for use in variable annuity and variable life insurance
contracts, to the extent required by SEC rules, the advertised performance of
the funds will be displayed no more prominently than standardized performance of
the applicable insurance company separate accounts/contracts. For information
about how an Insurance Company may advertise such performance, please consult
the contract prospectus which accompanies the trust prospectus.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.
AVERAGE ANNUAL TOTAL RETURN is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does NOT, however, include any fees or sales charges imposed by the variable
insurance contract for which the fund is an investment option. If they had been
included, performance would be lower.
These figures are calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above.
From time to time, the current yields of the funds, may be published in
advertisements and communications to Contract Owners. The current yield for each
fund will be calculated by dividing the annualization of the income earned by
the fund during a recent 30-day period by the net asset value per share at the
end of such period. In addition, aggregate, cumulative and average total return
information for each fund over different periods of time may also be advertised.
Except as stated above, each fund will use the same methods for calculating its
performance.
A distribution rate for each fund may also be published in communications
preceded or accompanied by a copy of the trust's current prospectus. The fund's
current distribution rate will be calculated by dividing the annualization of
the total distributions made by that fund during the most recent preceding
fiscal quarter by the net asset value per share at the end of such period. The
current distribution rate may differ from current yield because the distribution
rate will be for a different period of time and may contain items of capital
gain and other items of income, while current yield reflects only earned income.
Uniformly computed yield and total return figures for each fund will also be
published along with publication of its distribution rate.
Hypothetical performance information may also be prepared for sales literature
or advertisements. See the appropriate insurance company separate account
prospectus and SAI.
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
o CONSUMER PRICE INDEX - Measure of the average change in prices for a fixed
basket of goods and services regularly bought by consumers in the United States,
published by the Bureau of Labor Statistics.
o INTERNATIONAL FINANCE CORPORATION'S (IFC) INVESTABLE COMPOSITE INDEX - The
index tracks the emerging stock markets of three world regions based on market
capitalization weighting. Those regions are Latin America, Asia and
Europe/Mideast/Africa. As of 12/31/98, the regional weights of the IFC Composite
Index were distributed accordingly: Asia, 28%; Latin America, 34%; and
Europe/Mideast/Africa, 38%.
o JP MORGAN GLOBAL GOVERNMENT BOND INDEX (UNHEDGED) - The index comprises 13
markets, including Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, Netherlands, Spain, Sweden, the U.K. and the U.S. Each country's weight
is determined by the total market capitalization in $U.S. of all the bonds in
that country's traded index. The J.P. Morgan Global Government Bond Total Return
Index includes only actively traded, fixed-rate bonds with a remaining maturity
of one year or longer. The index is unhedged and expressed in terms of $U.S.
o LIPPER INCOME FUNDS OBJECTIVE AVERAGE - This is an equally weighted average
calculation of performance figures for all funds within the Lipper Income Funds
Objective Category, which is defined as all mutual funds that normally seek a
high level of current income through investing in income-producing stocks, bonds
and money market instruments. As of 12/31/98, there were 99 funds in this
category.
o MORGAN STANLEY INTERNATIONAL EUROPE, AUSTRALIA, FAR EAST (MSCI EAFE) INDEX -
This index includes approximately 1000 companies representing the stock markets
of 21 countries in Europe, Australia, New Zealand, and the Far East. The average
company has a market capitalization of over $3 billion.
o MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX - The index comprises
the developed markets of 23 countries around the world. The MSCI indices define
the local market for each country by constructing a matrix of all listed
securities, sorting the matrix by industry, and seeking to capture 60% of the
market cap for each group by selecting the most investable stocks in each
industry. The index applies full market cap weights to each included stock.
o RUSSELL 2500 INDEX - Published by Frank Russell Company, the index measures
the performance of the 2,500 smallest companies in the Russell 3000 Index,
representing approximately 22% of the total market capitalization of the
companies in the Russell 3000. The Russell 3000 contains the 3,000 largest
companies incorporated in the U.S. and its territories. As of the latest
reconstitution, the average market capitalization of the Russell 2500 was
approximately $931 million; the median market capitalization was approximately
$630 million. The largest company in the index had an approximate market
capitalization of $3.7 billion.
o STANDARD & POOR'S 500 (S&P 500) - The S&P 500 consists of 500 widely held
domestic common stocks, consisting of four broad sectors: industrials,
utilities, financials and transportation. It is a market value-weighted index,
where the stock price is multiplied by the number of shares outstanding, with
each stock affecting the index in proportion to its market value. This index,
calculated by Standard & Poor's, is a total return index with dividends
reinvested.
o DOW JONES(R) COMPOSITE AVERAgE AND ITS COMPONENT AVERAGes - This is a
price-weighted average of 65 stocks that trade on the New York Stock Exchange.
The average is a combination of the Dow Jones Industrial Average (30 blue-chip
stocks that are generally leaders in their industry), the Dow Jones
Transportation Average (20 transportation stocks), and the Dow Jones Utilities
Average (15 utility stocks involved in the production of electrical energy).
o WILSHIRE 5000 EQUITY INDEX - This index represents the return on the market
value of all U.S. headquartered equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
o THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES - This is an
unmanaged index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
o LIPPER - MUTUAL FUND PERFORMANCE ANALYSIS - This measures total return and
average current yield for the mutual fund industry and rank individual mutual
fund performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
o MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o STOCKS, BONDS, BILLS, AND INFLATION, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
o MORNINGSTAR - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
o SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES - This measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o LEHMAN BROTHERS AGGREGATE BOND INDEX OR ITS COMPONENT INDICES - This measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o SALOMON BROTHERS COMPOSITE HIGH YIELD INDEX OR ITS COMPONENT INDICES - This
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o The manager's and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a similar
statistical organization.
o The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o A description of the Templeton organization's investment management philosophy
and approach, including its worldwide search for undervalued or "bargain"
securities and its diversification by industry, nation and type of stocks or
other securities.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
in October 1992 and resigned from the board on April 16, 1995. He is no longer
involved with the investment management process.
FUND SIMILARITY The investment objectives and policies of certain funds are
similar but not identical to those of certain public Franklin Templeton Funds
indicated in the table below. Because of differences in portfolio size, the
investments held, the timing of purchases of similar investments, cash flows,
minor differences in certain investment policies, insurance product related tax
diversification requirements, state insurance regulations, and additional
administrative and insurance costs associated with insurance company separate
accounts, the investment performance of the funds will differ from the
performance of the corresponding Franklin Templeton Funds:
<TABLE>
<CAPTION>
TEMPLETON VARIABLE PRODUCTS SERIES FUND FRANKLIN TEMPLETON FUNDS
<S> <C>
Templeton International Smaller Companies
Investments Fund
Franklin Templeton International Trust-
Templeton Foreign Smaller Companies Fund
</TABLE>
DESCRIPTION OF BOND RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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.
STANDARD & POOR'S CORPORATION (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.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
File Nos.33-20313
FORM N-1A
PART C
Other Information
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference.
(a) DECLARATION OF TRUST.
(i) Form of Declaration of Trust dated February 25, 1988
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Date: April 29, 1998
(ii)
Form of Amendment of Declaration
of Trust
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(iii)
Amended Establishment and Designation of Series of Shares
dated February 14, 1997
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(iv)
Fifth Amended Establishment and Designation of Series of
Shares dated February 27, 1998
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(b) BY-LAWS.
(i) By-Laws dated February 25, 1988
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS.
Not applicable
(d) INVESTMENT ADVISORY CONTRACTS.
(i) Amended and Restated Investment Management Agreement for
Templeton Money Market Fund and Templeton Bond Fund
Filing: Registration Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 27, 1995
(ii) Investment Management Agreement for Templeton Developing
Markets Fund
Filing: Post-Effective Amendment No. 12 to Registration
Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 16, 1996
(iii) Investment Management Agreement between Registrant, on
behalf of the Templeton Asset Allocation Fund, and
Templeton Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(iv) Investment Management Agreement between Registrant, on
behalf of the Templeton Stock Fund, and Templeton Investment
Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(v) Investment Management Agreement between Registrant, on
behalf of the Templeton International Fund, and Templeton
Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(vi) Investment Management Agreement between Registrant, on
behalf of the Franklin Growth Investments Fund, and
Franklin Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(vii) Investment Management Agreement between Registrant, on
behalf of the Mutual Shares Investments Fund, and Franklin
Mutual Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(viii) Form of Management Agreement between Registrant on behalf of
Franklin Small Cap Investments Fund and Franklin Advisers,
Inc.
Filing: Post-Effective Amendment No. 18 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 13, 1998
(e) UNDERWRITING CONTRACTS.
(i) Amended and Restated Distribution Agreement
Filing: Post-Effective Amendment No.10 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: December 22, 1995
(f) BONUS OR PROFIT SHARING CONTRACTS.
Not Applicable
(g) CUSTODIAN AGREEMENTS.
(i) Amended and Restated Custodian Agreement
Filing: Post-Effective Amendment No. 13 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: April 12, 1996
(ii) Master Custody Agreement between the Registrant and the Bank
of New York
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(h) OTHER MATERIAL CONTRACTS.
(i) Amended and Restated Business Management Agreement
Filing: Post-Effective Amendment No. 12 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(ii) Form of Fund Administration Agreement between Registrant,
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 19 to Registration
Statement of Registrant on Form N-1A.
File No. 33-20313
Filing Date: February 24, 1999
(i) LEGAL OPINION.
(i) Opinion and consent of counsel dated April 28, 1998
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Date: April 29, 1998
(j) OTHER OPINIONS.
Not Applicable
(k) OTHER FINANCIAL STATEMENTS.
Not Applicable
(l) INITIAL CAPITAL AGREEMENTS.
(i) Letter concerning initial capital
Filing: Post-Effective Amendment No. 2 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: August 26, 1988
(m) RULE 12B-1 PLAN.
(i) Distribution Plan between the Registrant and Franklin
Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 14, 1997
(o) RULE 18F-3 PLAN.
(i) Form of Multiple Class Plan for all series of Registrant,
except Templeton Money Fund
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(p) POWER OF ATTORNEY.
(i) Power of Attorney from Officers and Directors of the
Registrant executed December 11, 1998
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: February 24, 1999
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
THE REGISTRANT
Not Applicable
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act, and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding)is
asserted by such trustees, officers or controlling persons
in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication
of such issues.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of Registrant's investment advisers also
serve as officers and/or directors or trustees for (1) Franklin
Resources, Inc. ("Resources"), the corporate parent of all
Registrant's Investment Managers, and/or (2) other investment
companies in the Franklin Templeton Group of Funds.
(i) Templeton Asset Management Ltd., formerly known as
Templeton Investment Management(Singapore) Pte Ltd.
Templeton Asset Management ("Templeton Singapore"), an indirect,
wholly owned subsidiary of Resources, serves as investment manager
to Templeton Developing Markets Fund. For information please
see Part B and Schedules A and D of Form ADV of Templeton Singapore
(SEC File 801-46997), incorporated herein by reference, which
set forth the officers and directors of Templeton Singapore
and information as to any business, profession, vocation of
employment of a substantial nature engaged in by those officers
and directors during the past two years.
(ii) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as adviser to the Templeton Asset
Allocation, Templeton Bond, Templeton International, Templeton
International Smaller Companies Investments and Templeton Stock Funds
and in that capacity furnishes portfolio management services and
investment research. For additional information please see Part B and
Schedules A and D of Form ADV of TICI (SEC File 801-15125),
incorporated herein by reference, which set forth the officers and
directors of TICI and information as to any business, profession,
vocation of employment of a substantial nature engaged in by those
officers and directors during the past two years.
(iii) Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. ("Mutual Advisers"), a direct, wholly
owned subsidiary of Resources, serves as investment manager to the
Mutual Shares Investments Fund. For information please see Part B
and Schedules A and D of Form ADV of Mutual Advisers(SEC File
801-53068), incorporated herein by reference, which set forth the
officers and directors of Mutual Advisers and information as to
any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during
the past two years.
(iv) Franklin Advisers, Inc.
Franklin Advisers, Inc. ("Advisers"), a direct wholly owned
subsidiary of Resources, serves as Investment Manager to the
Franklin Growth Investments Fund, Franklin Real Estate Investments
Fund, Franklin Strategic Income Investments Fund and Franklin Small
Cap Investments Fund. For additional information, please see Part B
and Schedules A and D of Form ADV of Advisers (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and
directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged
in by those officers and directors during the past two years.
ITEM 27 PRINCIPAL UNDERWRITERS
(a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Valuemark Funds
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
(b) The information required by this Item 27 with respect to each
director and officer of Distributors is incorporated by reference to
Part B of this N-1A and schedule A of Form BD filed by Distributors with
the Securities and Exchange Commission pursuant to the Securities
Act of 1934 (SEC File No. 8-5889).
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, or other documents required to be maintained by the
Fund pursuant to Section 31(a) of the Investment Company Act of
1940 are kept by the Fund, and its administrator, Franklin Templeton
Services, Inc., 500 E. Broward Blvd., Fort Lauderdale, Florida 33394-3091,
or its shareholder services agent, Franklin/Templeton Investor Services,
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part
A or Part B.
ITEM 30 UNDERTAKINGS
(a) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person
to whom a prospectus is delivered a copy of the annual report upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 23rd day of April, 1999.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: /s/ Charles E. Johnson*
Charles E. Johnson, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Charles E. Johnson* Principal Executive Officer and Trustee
Charles E. Johnson Dated: April 23, 1999
Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: April 23, 1999
Edith E. Holiday* Trustee
Edith E. Holiday Dated: April 23, 1999
Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: April 23, 1999
Charles B. Johnson* Trustee
Charles B. Johnson Dated: April 23, 1999
Harris J. Ashton* Trustee
Harris J. Ashton Dated: April 23, 1999
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: April 23, 1999
Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: April 23, 1999
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: April 23, 1999
Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: April 23, 1999
James R. Baio* Principal Financial Officer
James R. Baio Dated: April 23, 1999
*By /s/ Karen L.Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item 23(p)(i))