Filed with the Securities and Exchange Commission on February 24, 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. 19 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22
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)
[X] on May 1, 1999 pursuant to paragraph (a)(1)
[ ] 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 Stock Fund - Class 1
Templeton Stock Fund - Class 2
Templeton Asset Allocation Fund - Class 1
Templeton Asset Allocation Fund - Class 2
Templeton International Fund - Class 1
Templeton International 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
Franklin Growth Investments Fund - Class 1
Franklin Growth Investments Fund - Class 2
Franklin Small Cap Investments Fund - Class 1
Franklin Small Cap Investments Fund - Class 2
Mutual Shares Investments Fund - Class 1
Mutual Shares Investments Fund - Class 2
Prospectus
Templeton Variable Products Series Fund
CLASS 1 SHARES
MAY 1, 1999
[Insert Franklin Templeton logo]
LIKE ALL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS COMPLETE
OR ACCURATE. ANYONE WHO ADVISES YOU OTHERWISE HAS COMMITTED A FEDERAL CRIME.
CONTENTS
[Begin callout]
Information about each fund you should know before investing
[End callout]
TEMPLETON VARIABLE PRODUCTS SERIES FUND
[Insert page #] OVERVIEW
[Insert page #] INDIVIDUAL FUND DESCRIPTIONS
[Insert page #] Franklin Growth Investments Fund
[Insert page #] Franklin Small Cap Investments Fund
[Insert page #] Mutual Shares Investments Fund
[Insert page #] Templeton Asset Allocation Fund
[Insert page #] Templeton Bond Fund
[Insert page #] Templeton Developing Markets Fund
[Insert page #] Templeton International Fund
[Insert page #] Templeton Stock Fund
IMPORTANT RECENT DEVELOPMENTS
DISTRIBUTIONS AND TAXES
FINANCIAL HIGHLIGHTS, ALL FUNDS
FUND ACCOUNT INFORMATION
[Begin callout]
Information about fund account transactions, and services
[End callout]
[Insert page #] Buying Shares
[Insert page #] Selling Shares
[Insert page #] Exchanging Shares
[Insert page #] Fund Account Policies
[Insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
Where to learn more about each fund
[End callout]
Back Cover
OVERVIEW
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Variable Products Series Fund (the Trust) currently consists of
eight 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
Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
No single fund can be a complete investment program; consider
diversifying your fund choices.
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.
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 investments goals.
RISKS
There can be no assurance that any fund will achieve its investment goal.
Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risk disclosure before
investing.
Fund shares are not deposits or obligations of, or guaranteed or 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 policies (including temporary
investments) and investments, 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 $xxx 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.
FRANKLIN GROWTH INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies believed
to be globally competitive, to offer favorable opportunities for capital
appreciation, and to be suitable for a buy-and-hold strategy. Following this
policy, the fund will typically invest predominantly in established, large
and mid capitalization companies. The fund may also invest, to a lesser
extent, in smaller companies, and in new and emerging industries where growth
is expected to be above average. 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 stocks.
[Begin callout]
The fund invests primarily in the common stocks of established companies.
[End callout]
From time to time the fund may have a significant portion of its assets
invested in cash or cash equivalents. The fund generally invests less than
15% of its assets in foreign securities, including Depositary Receipts and
emerging markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up" fundamental
investor, pursuing a disciplined long-term growth strategy. Relying on a team
of analysts to provide in-depth industry expertise, the manager chooses
companies that it believes are leaders in their industries, and are
positioned for rapid growth in revenues, earnings or assets. Using both
qualitative and quantitative analysis, the manager evaluates companies for
historical and potential growth in revenues and earnings, strength and
quality of management, and strategic positioning in its industry, all factors
the manager believes point to steady growth over time potential. The manager
diversifies the fund's assets across many industries, and from time to time
may invest substantially in certain sectors, including technology and
biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, small company securities have been more volatile in price
and fluctuated independently from larger company securities, especially over
the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, their securities are less liquid, and can be considered speculative.
The companies may suffer significant losses, and 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 market conditions,
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 non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. 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 stocks may not
be as liquid or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
EXPENSE SUMMARY
Franklin Growth Investments Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal year
ended December 31, 1998. 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.
[to be supplied in a later amendment]
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
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California, 94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CONRAD B. HERRMANN, CFA Mr. Herrmann has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1989.
KEVIN CARRINGTON Mr. Carrington has been a manager of
VICE PRESIDENT, ADVISERS the fund since its inception in 1998
and has been with the Franklin
Templeton Group since 1992.
VIVIAN J. PALMIERI Mr. Palmieri has been a manager of the
PORTFOLIO MANAGER, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1965.
The fund pays the manager a fee for managing its assets and making its
investment decisions.
The fund has agreed to pay the manager equal to an annual rate of: 0.60% of
the fund's net assets up to and including $200 million; 0.50% of the fund's
net assets over $200 million up to $1.3 billion; and 0.40% of the fund's net
assets in excess of $1.3 billion.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Franklin Growth Investments
Fund - Class 1 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
FRANKLIN SMALL CAP INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of small capitalization (small cap) growth
companies. Small cap companies are generally those with market cap 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.
[Begin callout]
The fund invests primarily in common stocks of small cap companies.
[End callout]
Although the fund's policies permit greater investment, currently, it will not
invest more than 10% of its total assets in foreign securities. The fund may
also invest, to a limited extent, in real estate investment trusts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up" fundamental
investor, pursuing a disciplined "growth at a reasonable price" strategy.
Relying on a team of analysts to provide in-depth industry expertise, the
manager chooses small cap companies that it believes are positioned for rapid
growth in revenues, earnings or assets, and are selling at reasonable
prices. Using both qualitative and quantitative analysis, the manager
evaluates companies for distinct and sustainable competitive advantages, such
as a particular marketing or product niche, proven technology, and industry
leadership, all factors the manager believes point to strong long-term growth
potential. The manager diversifies the fund's assets across many industries,
and from time to time may invest substantially in certain sectors, including
technology and biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities market as a whole. Growth stock
prices reflect projections of future earnings or revenues, and can,
therefore, fall dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, small company securities have been more volatile in price
and 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 have limited financial
resources for growth or development and limited product lines or market
share; they may lack depth of management; they may be in new industries; or
they may not find an established market for their products or services, or
their products or services may become quickly obsolete. Small companies may
suffer significant losses, their securities can be less liquid, and
investments in these companies may 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 market conditions,
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 non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. 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 stocks may not
be as liquid or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
SEE ALSO, "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
EXPENSE SUMMARY
Franklin Small Cap Investments Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
EDWARD B. JAMIESON Mr. Jamieson has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1987.
MICHAEL MCCARTHY Mr. McCarthy has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1992.
AIDAN O'CONNELL Mr. O'Connell has been a manager of the
PORTFOLIO MANAGER, ADVISERS fund since September 1998. Before
joining Franklin Templeton in May 1998,
Mr. O'Connell worked at Hambrecht &
Quist.
The fund pays the manager a fee for managing its assets and making its
investment decisions.
The fund has agreed to pay the manager equal to an annual rate of: 0.75% of
the fund's net assets up to and including $200 million; 0.65% of the fund's
net assets over $200 million up to $1.3 billion; and 0.55% of the fund's net
assets in excess of $1.3 billion.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Franklin Small Cap
Investments Fund - Class 1 since its inception. This information has been
audited by McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
MUTUAL SHARES INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in U.S. equity and debt securities of
companies that the manager believes are available at market prices less than
their actual value based on certain recognized or objective criteria
(intrinsic value). Following this value-oriented strategy, the fund will
primarily invest in:
UNDERVALUED STOCKS Stocks trading at a discount to asset value
REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers,
and may participate in such transactions (Reorganizing Companies),
DISTRESSED SECURITIES Securities that are distressed or even in
bankruptcy, including the debt, or participation interests in the
indebtedness, of Reorganizing Companies.
[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]
While there are no set percentage targets for equities or debt, stocks tend
to be the predominant investment. The fund generally invests in large-to
medium- cap companies with market capitalization value (share price times the
number of common stock shares outstanding) greater than $1.5 billion but may
invest a small portion in smaller companies which have more risk. 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. While the
fund purchases securities for investment purposes, the manager may use the
fund's ownership in a company, or may buy other companies, to seek to
influence or control management when the manager believes the fund may
benefit.
The fund may invest in debt securities of any rating category by an
independent rating agency, including lower rated debt or defaulted securities
("junk bonds"), or in comparable unrated debt securities. 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. Bonds, including those convertible
into common stock or unsecured, notes, and short-term investments, including
cash or cash equivalents, are common debt securities.
The fund may also invest up to 20% of its total assets in foreign securities,
including American, European and Global Depositary Receipts. Depositary
receipts are certificates typically issued by a bank or trust company that
give their holders the right to receive securities issued by a foreign or
domestic company. The fund seeks to hedge (protect) against currency risks
using forward foreign currency exchange contracts, foreign currency futures
contracts, options on foreign currencies, or currency futures and currency
swaps (Hedging Instruments).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined and creative value strategy. In
choosing equity investments, the manager focuses on the market price of a
company's securities relative to its evaluation of the company's asset value,
book value, cash flow potential, long-term earnings, and multiples of
earnings of comparable securities. Similarly, debt securities are generally
selected based on the manager's own analysis of the security's intrinsic
value rather than the coupon rate or rating. The manager believes careful
research can uncover opportunities overlooked by other investors, and that
undervalued or "special situation" securities may tend to be affected less by
general market movements than the specifics surrounding each investment.
Thus, each security is examined separately and there are no set criteria as
to asset size, earnings or industry type.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities market as a whole. 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 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. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk. There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests in a Reorganizing Company will be completed on the terms
contemplated.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
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]
INDEBTEDNESS AND PARTICIPATIONS The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the issuer and
the possibility that the investment may be lost. There are no established
markets for indebtedness, making them less liquid than other securities, and
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Their principal
risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. 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. 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, or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S.
HEDGING INSTRUMENTS Considered derivative investments, the success of Hedging
Instruments will depend on the manager's ability to predict market movements,
and losses from their use can be greater than if they had not been used.
Hedging Instruments risks include a loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities which are securities with a limited trading market.
There is a possible risk that the securities cannot be readily sold or can
only be resold at a price significantly lower than their value.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the Statement of Additional
Information.
SEE ALSO, "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
EXPENSE SUMMARY
Mutual Shares Investments Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER A. LANGERMAN Mr. Langerman has been a manager of the
PRESIDENT AND CHIEF EXECUTIVE OFFICER fund since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
ROBERT L. FRIEDMAN Mr. Friedman has been a manager of the
CHIEF INVESTMENT OFFICER fund since its inception in 1996. Before
SENIOR VICE PRESIDENT joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
LAWRENCE N. SONDIKE Mr. Sondike has been a manager of the
SENIOR VICE PRESIDENT fund since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
DAVID E. MARCUS Mr. Marcus has been a manager of the
SENIOR VICE PRESIDENT fund since 1998. Before joining the
FRANKLIN MUTUAL Franklin Templeton Group in 1998, he was
a research analyst for Heine Securities
Corporation, the predecessor of Franklin
Mutual.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
The fund has agreed to pay the manager equal to an annual rate of 0.60% of
the fund's net assets.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Mutual Shares Investments
Fund - Class 1 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON ASSET ALLOCATION FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in
equity and debt securities of any nation, including emerging markets, and in
money market instruments. The mix of investments will be adjusted to
capitalize on total return potential produced by changing economic conditions
throughout the world. While there are no minimum or maximum percentage
targets for each asset class, historically stocks have been the predominant
investment. 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, securities convertible into common
stock, and American, European and Global Depositary Receipts. Depositary
Receipts 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. 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. Bonds,
including those convertible into common stock and unsecured, notes, and
short-term investments, are common debt securities.
[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]
The fund may invest in high yield, medium and lower quality debt securities
("junk bonds") as rated by independent rating agencies such as Standard &
Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or
comparable. As a Board set policy, however, the fund may invest no more than
15% of its total assets in securities rated BB or lower, including up to 10%
in defaulted securities, or if unrated, securities determined by the manager
to be comparable. Many debt securities of non-U.S. issuers, and especially
emerging market issuers, are rated below investment grade or are unrated so
that their selection depends on the manager's internal analysis.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes
in interest rates, and credit risks. 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; with respect to debt
securities, the manager may also from time to time seek to hedge (protect)
against currency risks by using hedging instruments such as forward currency
exchange contracts.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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.
[Begin callout]
Because the stocks and bonds 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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer 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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Their principal
risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
HEDGING INSTRUMENTS Considered derivative investments, the success of Hedging
Instruments will depend on the manager's ability to predict market movements,
and losses from their use can be greater than if they had not been used.
Hedging Instruments risks include a loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON ASSET ALLOCATION FUND - CLASS 11
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(5/1/95)
Templeton Asset [ ]% [ ]%
Allocation Fund -
Class 11
MSCI World Index2 [ ] [ ]
JP Morgan Global [ ]% [ ]%
Gov. Bond Index2
1.Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains.
2.The unmanaged Morgan Stanley Capital International(R) (MSCI) World Index
includes approximately 1450 securities listed on the stock exchanges of 20
countries including the U.S., Europe, Canada, Australia, New Zealand, and the
Far East. The average company has a market capitalization of about $3.5
billion. The unmanaged JP Morgan Global Gov. Bond Index tracks the
performance of government bond markets in 13 countries. It includes issues
with remaining maturities of greater than 13 months. Indices include
reinvested dividends and interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
EXPENSE SUMMARY
Templeton Asset Allocation Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.
The team responsible for managing the equity portion of the fund is:
MANAGEMENT TEAM
GARY R. CLEMONS Mr. Clemons has managed the equity
SENIOR VICE PRESIDENT, TICI portion of the fund since 1995 and has
been with the Franklin Templeton Group
since 1990.
PETER A. NORI Mr. Nori has managed the equity portion
SENIOR VICE PRESIDENT, TICI of the fund since 1996 and has been
with the Franklin Templeton Group since
1990.
WILLIAM T. HOWARD, JR. Mr. Howard has managed the equity
SENIOR VICE PRESIDENT, TICI portion of the fund since 1996 and has
been with the Franklin Templeton Group
since 1993.
The fund's debt securities are managed by a team of Templeton Global Bond
Managers, a division of TICI.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Asset Allocation
Fund - Class 1 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON BOND FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high current income. Capital appreciation
is a secondary consideration.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and
companies located anywhere in the world, including emerging markets. 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. Bonds, including those
convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities.
[Begin callout]
The fund invests primarily in bonds of governments located around the world.
[End callout]
The fund may invest in debt securities of any rating category, it focuses on
"investment grade" debt securities. These are issues rated in the top four
rating categories (AAA to BBB) by independent rating agencies such as
Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, determined by the fund's manager to be comparable.
The fund generally also invests a significant amount of its assets in high
yield, medium and lower rated debt securities ("junk bonds"), including up to
10% in defaulted debt, or if unrated, determined by the fund's manager to be
comparable. Many debt securities of non-U.S. issuers, and especially
emerging market issuers, are rated below investment grade or are unrated so
that their selection depends on the manager's internal analysis. The average
maturity of debt securities in the fund's portfolio is medium-term, but will
fluctuate depending on the manager's outlook on the country and future
interest rate changes.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. In considering these factors, a country's
changing market, economic, and political conditions, such as inflation rate,
growth prospects, global trade patterns and government policies will be
evaluated. The manager intends to manage the fund's exposure to various
currencies, and may from time to time seek to hedge (protect) against
currency risk by using hedging instruments such as forward currency exchange
contracts.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer
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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Their principal
risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
HEDGING INSTRUMENTS Considered derivative investments, the success of Hedging
Instruments will depend on the manager's ability to predict market movements,
and losses from their use can be greater than if they had not been used.
Hedging Instruments risks include a loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
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.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep
interest rate risk and country allocations at desired levels, as well as bond
maturities, may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, risks, and bond ratings can be found in the Statement of
Additional Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON BOND FUND - CLASS 11
CALENDAR YEAR TOTAL RETURNS
[insert bar chart]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(1/24/89)
Templeton Bond [ ]% [ ]% [ ]%
Fund - Class 11
JP Morgan Global [ ] [ ] [ ]
Gov. Bond Index2
CPI** [ ]% [ ]% [ ]%
1.All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased returns.
2.The unmanaged JP Morgan Global Gov. Bond Index tracks the performance of
government bond markets in 13 countries. It includes issues with remaining
maturities of greater than 13 months. The Consumer Price Index, a commonly
used measure of inflation, measures the average change in prices for a fixed
basket of goods and services regularly bought by consumers in the U.S.
Indices include reinvested dividends or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
EXPENSE SUMMARY
Templeton Bond Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager. The fund's
investments are managed by a team of Templeton Global Bond Managers, a
division of TICI.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Bond Fund - Class
1 since its inception. This information has been audited by McGladrey &
Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON DEVELOPING MARKETS 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 equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries. Developing or emerging market countries include
those considered to be emerging by the World Bank, the International Finance
Corporation, the United Nations, or the countries' authorities. These
countries are typically located in the Asia-Pacific region, Eastern Europe,
Central and South America, and Africa. 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 typically 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 the common stocks of companies located in
emerging market countries.
[End callout]
In addition to its principal investments, the fund may invest significantly
in securities of issuers in developed market countries, and particularly
those that are linked by tradition, economic markets, geography or political
events to emerging market countries. Depending upon current market
conditions, the fund may also invest a substantial portion of its assets 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. Bonds, including
those convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities. The fund may also invest up to 10%
of its total assets in securities of closed-end investment companies, to
facilitate foreign investment.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well-diversified portfolio.
[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging 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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer 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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares.
SEE ALSO, "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON DEVELOPING MARKETS FUND - CLASS 11
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []% []%
96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(3/4/96)
Templeton [ ]% [ ]%
Developing Markets
Fund - Class 11
MSCI World Index2 [ ] [ ]
IFC Investable [ ]% [ ]%
Composite Index2
1.Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains.
2.The unmanaged Morgan Stanley Capital International(R) World Index includes
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
International Finance Corporation's Investable Composite Index is an emerging
markets index that includes 650 stocks from 18 countries including Mexico,
South Korea, Brazil, Jordan and Turkey. Indices include reinvested dividends.
One cannot invest directly in an index, nor is an index representative of the
fund's investments.
EXPENSE SUMMARY
Templeton Developing Markets Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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 Asset Management Ltd. (TAML), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
J. MARK MOBIUS, PH.D. Dr. Mobius has been a manager of the
MANAGING DIRECTOR, TAML fund since its inception in 1996, and
has been with the Franklin Templeton
Group since 1987.
H. ALLAN LAM Mr. Lam has been a manager of the fund
VICE PRESIDENT since its inception in 1996, and has
TEMPLETON INVESTMENT MANAGEMENT LTD. been with the Franklin Templeton Group
since 1987.
TOM WU Mr. Wu has been a manager of the fund
DIRECTOR, TAML since its inception in 1996, and has
been with the Franklin Templeton Group
since 1987.
DENNIS LIM Mr. Lim has been a manager of the fund
VICE PRESIDENT, TAML since its inception in 1996, and has
been with the Franklin Templeton Group
since 1990.
EDDIE CHOW Mr. Chow has been a manager of the fund
INVESTMENT ANALYST, TAML since its inception in 1996. Before
joining the Franklin Templeton Group in
1994, he worked in the finance and
banking industry.
TEK-KHOAN ONG Mr. Ong has been a manager if the fund
PORTFOLIO MANAGER, TAML since its inception in 1996, and has
been with the Franklin Templeton Group
since 1993.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Developing
Markets Fund - Class 1 since its inception. This information has been audited
by McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON INTERNATIONAL FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
outside the U.S., including emerging markets. 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 typically
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 a diversified portfolio of non-U.S. common
stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets 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 at a future date and generally to pay
interest. Bonds, including those convertible into common stock and unsecured,
notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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.
[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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer 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. These movements will affect the fund's share
price and fund performance.
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, or even 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
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
including 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON INTERNATIONAL FUND - CLASS 11
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(5/1/92)
Templeton [ ]% [ ]% [ ]%
International Fund
- - Class 11
MSCI EAFE2 [ ] [ ] [ ]
CPI2 [ ]% [ ]% [ ]%
1.All fund performance assumes reinvestment of dividends and capital gains.
2.The unmanaged Morgan Stanley International(R) Europe, Australia, Far East
(MSCI EAFE) Index includes approximately 1000 companies representing the
stock markets of 20 countries in Europe, Australia, New Zealand, and the Far
East. The average company has a market capitalization of over $3 billion. The
Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. Indices include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the
fund's investments.
EXPENSE SUMMARY
Templeton International Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER A. NORI Mr. Nori has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1996. He joined the
Franklin Templeton Group in 1990.
GARY P. MOTYL Mr. Motyl has been a manager of the
EXECUTIVE VICE PRESIDENT fund since 1995. He joined
AND DIRECTOR, TICI the Franklin Templeton Group in 1981.
HEIDI S. ANDERSEN Ms. Andersen has been a manager of the
VICE PRESIDENT, TICI fund since 1997. Before joining the
Franklin Templeton Group in 1995, Ms.
Andersen worked for Sidney Janis
Gallery in New York and earned her
master of business administration
degree with emphasis in finance and
international business from the
Columbia Graduate School of Business.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton International
Fund - Class 1 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON STOCK FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets. 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
typically 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 a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, to repay a loan of money at a future date and generally to pay
interest. Bonds, including those convertible into common stock and unsecured,
notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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.
[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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON STOCK FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS
[INSERT BAR GRAPH]
14.63% -10.88% 27.28% 7.12% 34.00% -2.20% 25.24% 22.42% 11.88% 1.26%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q4 '98 15.90%
WORST QUARTER:
Q3 '98 -21.03%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Templeton Stock 1.26% 11.18% 12.23%
Fund - Class 11
MSCI World Index2 24.80% 16.19% 11.21%
1.All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased performance.
2. The unmanaged Morgan Stanley Capital International(R) (MSCI) World Index
includes approximately 1450 securities listed on the stock exchanges of 20
countries including the U.S., Europe, Canada, Australia, New Zealand, and the
Far East. The average company has a market capitalization of about $3.5
billion. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's investments.
EXPENSE SUMMARY
Templeton Stock Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
HOWARD J. LEONARD Mr. Leonard has been a manager of the
EXECUTIVE VICE PRESIDENT, TICI fund since 1995 and has been with the
Franklin Templeton Group since 1989.
MARK R. BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since 1995 and has been with
the Franklin Templeton Group since
1985.
WILLIAM T. HOWARD, JR. Mr. Howard has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1996 and has been
with the Franklin Templeton Group
since 1993.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Stock Fund -
Class 1 since its inception. This information has been audited by McGladrey &
Pullen, LLP.
[to be supplied in a later amendment]
[Insert graphic of starburst] IMPORTANT RECENT DEVELOPMENTS
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 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.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced
a new single currency, the euro, which will replace 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.
[Insert graphic of dollar signs and stacks of coins] 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 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.
FUND ACCOUNT INFORMATION
[Insert graphic of a paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at net asset value (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.
[Insert graphic] 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.
[Insert graphic of two arrows] 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 on page xx).
[Insert graphic of a paper and pen] 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:
A fund may refuse any order to buy shares.
A fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
At any time, a fund may establish or change investment minimums.
You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
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 or if payment by check would be harmful to existing
shareholders.
To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
SHARES 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.
[Insert graphic of a question mark] 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.
[Begin callout]
FOR MORE INFORMATION
[End callout]
The funds 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 funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Include a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and
the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, and policies.
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
Templeton Variable Products Series Fund
CLASS 2 SHARES
MAY 1, 1999
[Insert Franklin Templeton logo]
LIKE ALL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS COMPLETE
OR ACCURATE. ANYONE WHO ADVISES YOU OTHERWISE HAS COMMITTED A FEDERAL CRIME.
CONTENTS
[Begin callout]
Information about each fund you should know before investing
[End callout]
TEMPLETON VARIABLE PRODUCTS SERIES FUND
[Insert page #] OVERVIEW
[Insert page #] INDIVIDUAL FUND DESCRIPTIONS
[Insert page #] Franklin Growth Investments Fund
[Insert page #] Franklin Small Cap Investments Fund
[Insert page #] Mutual Shares Investments Fund
[Insert page #] Templeton Asset Allocation Fund
[Insert page #] Templeton Bond Fund
[Insert page #] Templeton Developing Markets Fund
[Insert page #] Templeton International Fund
[Insert page #] Templeton Stock Fund
IMPORTANT RECENT DEVELOPMENTS
DISTRIBUTIONS AND TAXES
FINANCIAL HIGHLIGHTS, ALL FUNDS
FUND ACCOUNT INFORMATION
[Begin callout]
Information about fund account transactions, and services
[End callout]
[Insert page #] Buying Shares
[Insert page #] Selling Shares
[Insert page #] Exchanging Shares
[Insert page #] Fund Account Policies
[Insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
Where to learn more about each fund
[End callout]
Back Cover
OVERVIEW
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Variable Products Series Fund (the Trust) currently consists of
eight 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
Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
No single fund can be a complete investment program; consider
diversifying your fund choices.
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.
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 investments goals.
RISKS
There can be no assurance that any fund will achieve its investment goal.
Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risk disclosure before
investing.
Fund shares are not deposits or obligations of, or guaranteed or 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 policies (including temporary
investments) and investments, 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 $xxx 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.
FRANKLIN GROWTH INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies believed
to be globally competitive, to offer favorable opportunities for capital
appreciation, and to be suitable for a buy-and-hold strategy. Following this
policy, the fund will typically invest predominantly in established, large
and mid capitalization companies. The fund may also invest, to a lesser
extent, in smaller companies, and in new and emerging industries where growth
is expected to be above average. 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 stocks.
[Begin callout]
The fund invests primarily in the common stocks of established companies.
[End callout]
From time to time the fund may have a significant portion of its assets
invested in cash or cash equivalents. The fund generally invests less than
15% of its assets in foreign securities, including Depositary Receipts and
emerging markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up" fundamental
investor, pursuing a disciplined long-term growth strategy. Relying on a team
of analysts to provide in-depth industry expertise, the manager chooses
companies that it believes are leaders in their industries, and are
positioned for rapid growth in revenues, earnings or assets. Using both
qualitative and quantitative analysis, the manager evaluates companies for
historical and potential growth in revenues and earnings, strength and
quality of management, and strategic positioning in its industry, all factors
the manager believes point to steady growth over time potential. The manager
diversifies the fund's assets across many industries, and from time to time
may invest substantially in certain sectors, including technology and
biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities markets as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, small company securities have been more volatile in price
and fluctuated independently from larger company securities, especially over
the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, their securities are less liquid, and can be considered speculative.
The companies may suffer significant losses, and 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 market conditions,
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 non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. 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 stocks may not
be as liquid or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
EXPENSE SUMMARY
Franklin Growth Investments Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California, 94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CONRAD B. HERRMANN, CFA Mr. Herrmann has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1989.
KEVIN CARRINGTON Mr. Carrington has been a manager of
VICE PRESIDENT, ADVISERS the fund since its inception in 1998
and has been with the Franklin
Templeton Group since 1992.
VIVIAN J. PALMIERI Mr. Palmieri has been a manager of the
PORTFOLIO MANAGER, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1965.
The fund pays the manager a fee for managing its assets and making its
investment decisions.
The fund has agreed to pay the manager equal to an annual rate of: 0.60% of
the fund's net assets up to and including $200 million; 0.50% of the fund's
net assets over $200 million up to $1.3 billion; and 0.40% of the fund's net
assets in excess of $1.3 billion.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Franklin Growth Investments
Fund - Class 2 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
FRANKLIN SMALL CAP INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of small capitalization (small cap) growth
companies. Small cap companies are generally those with market cap 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.
[Begin callout]
The fund invests primarily in common stocks of small cap companies.
[End callout]
Although the fund's policies permit greater investment, currently, it will not
invest more than 10% of its total assets in foreign securities. The fund may
also invest, to a limited extent, in real estate investment trusts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up" fundamental
investor, pursuing a disciplined "growth at a reasonable price" strategy.
Relying on a team of analysts to provide in-depth industry expertise, the
manager chooses small cap companies that it believes are positioned for rapid
growth in revenues, earnings or assets, and are selling at reasonable
prices. Using both qualitative and quantitative analysis, the manager
evaluates companies for distinct and sustainable competitive advantages, such
as a particular marketing or product niche, proven technology, and industry
leadership, all factors the manager believes point to strong long-term growth
potential. The manager diversifies the fund's assets across many industries,
and from time to time may invest substantially in certain sectors, including
technology and biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities market as a whole. Growth stock
prices reflect projections of future earnings or revenues, and can,
therefore, fall dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
risk. Historically, small company securities have been more volatile in price
and 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 have limited financial
resources for growth or development and limited product lines or market
share; they may lack depth of management; they may be in new industries; or
they may not find an established market for their products or services, or
their products or services may become quickly obsolete. Small companies may
suffer significant losses, their securities can be less liquid, and
investments in these companies may 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 market conditions,
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 non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. 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 stocks may not
be as liquid or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
SEE ALSO, "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
EXPENSE SUMMARY
Franklin Small Cap Investments Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
EDWARd B. JAMIESON Mr. Jamieson has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1987.
MICHAEL MCCARTHY Mr. McCarthy has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1998 and
has been with the Franklin Templeton
Group since 1992.
AIDAN O'CONNELL Mr. O'Connell has been a manager of the
PORTFOLIO MANAGER, ADVISERS fund since September 1998. Before
joining Franklin Templeton in May 1998,
Mr. O'Connell worked at Hambrecht &
Quist.
The fund pays the manager a fee for managing its assets and making its
investment decisions.
The fund has agreed to pay the manager equal to an annual rate of: 0.75% of
the fund's net assets up to and including $200 million; 0.65% of the fund's
net assets over $200 million up to $1.3 billion; and 0.55% of the fund's net
assets in excess of $1.3 billion.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Franklin Small Cap
Investments Fund - Class 2 since its inception. This information has been
audited by McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
MUTUAL SHARES INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in U.S. equity and debt securities of
companies that the manager believes are available at market prices less than
their actual value based on certain recognized or objective criteria
(intrinsic value). Following this value-oriented strategy, the fund will
primarily invest in:
UNDERVALUED STOCKS Stocks trading at a discount to asset value
REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers,
and may participate in such transactions (Reorganizing Companies),
DISTRESSED SECURITIES Securities that are distressed or even in
bankruptcy, including the debt, or participation interests in the
indebtedness, of Reorganizing Companies.
[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]
While there are no set percentage targets for equities or debt, stocks tend
to be the predominant investment. The fund generally invests in large-to
medium- cap companies with market capitalization value (share price times the
number of common stock shares outstanding) greater than $1.5 billion but may
invest a small portion in smaller companies which have more risk. 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. While the
fund purchases securities for investment purposes, the manager may use the
fund's ownership in a company, or may buy other companies, to seek to
influence or control management when the manager believes the fund may
benefit.
The fund may invest in debt securities of any rating category by an
independent rating agency, including lower rated debt or defaulted securities
("junk bonds"), or in comparable unrated debt securities. 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. Bonds, including those convertible
into common stock or unsecured, notes, and short-term investments, including
cash or cash equivalents, are common debt securities.
The fund may also invest up to 20% of its total assets in foreign securities,
including American, European and Global Depositary Receipts. Depositary
receipts are certificates typically issued by a bank or trust company that
give their holders the right to receive securities issued by a foreign or
domestic company. The fund seeks to hedge (protect) against currency risks
using forward foreign currency exchange contracts, foreign currency futures
contracts, options on foreign currencies, or currency futures and currency
swaps (Hedging Instruments).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined and creative value strategy. In
choosing equity investments, the manager focuses on the market price of a
company's securities relative to its evaluation of the company's asset value,
book value, cash flow potential, long-term earnings, and multiples of
earnings of comparable securities. Similarly, debt securities are generally
selected based on the manager's own analysis of the security's intrinsic
value rather than the coupon rate or rating. The manager believes careful
research can uncover opportunities overlooked by other investors, and that
undervalued or "special situation" securities may tend to be affected less by
general market movements than the specifics surrounding each investment.
Thus, each security is examined separately and there are no set criteria as
to asset size, earnings or industry type.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities market as a whole. 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 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. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk. There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests in a Reorganizing Company will be completed on the terms
contemplated.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
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]
INDEBTEDNESS AND PARTICIPATIONS The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the issuer and
the possibility that the investment may be lost. There are no established
markets for indebtedness, making them less liquid than other securities, and
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Their principal
risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. 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. 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, or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S.
HEDGING INSTRUMENTS Considered derivative investments, the success of Hedging
Instruments will depend on the manager's ability to predict market movements,
and losses from their use can be greater than if they had not been used.
Hedging Instruments risks include a loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities which are securities with a limited trading market.
There is a possible risk that the securities cannot be readily sold or can
only be resold at a price significantly lower than their value.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the Statement of Additional
Information.
SEE ALSO, "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started on May 1, 1998, performance for a full calendar year
is not yet available.
EXPENSE SUMMARY
Mutual Shares Investments Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER A. LANGERMAN Mr. Langerman has been a manager of the
PRESIDENT AND CHIEF EXECUTIVE OFFICER fund since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
ROBERT L. FRIEDMAN Mr. Friedman has been a manager of the
CHIEF INVESTMENT OFFICER fund since its inception in 1996. Before
SENIOR VICE PRESIDENT joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
LAWRENCE N. SONDIKE Mr. Sondike has been a manager of the
SENIOR VICE PRESIDENT fund since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
DAVID E. MARCUS Mr. Marcus has been a manager of the
SENIOR VICE PRESIDENT fund since 1998. Before joining the
FRANKLIN MUTUAL Franklin Templeton Group in 1998, he was
a research analyst for Heine Securities
Corporation, the predecessor of Franklin
Mutual.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
The fund has agreed to pay the manager equal to an annual rate of 0.60% of
the fund's net assets.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Mutual Shares Investments
Fund - Class 2 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON ASSET ALLOCATION FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in
equity and debt securities of any nation, including emerging markets, and in
money market instruments. The mix of investments will be adjusted to
capitalize on total return potential produced by changing economic conditions
throughout the world. While there are no minimum or maximum percentage
targets for each asset class, historically stocks have been the predominant
investment. 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, securities convertible into common
stock, and American, European and Global Depositary Receipts. Depositary
Receipts 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. 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. Bonds,
including those convertible into common stock and unsecured, notes, and
short-term investments, are common debt securities.
[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]
The fund may invest in high yield, medium and lower quality debt securities
("junk bonds") as rated by independent rating agencies such as Standard &
Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or
comparable. As a Board set policy, however, the fund may invest no more than
15% of its total assets in securities rated BB or lower, including up to 10%
in defaulted securities, or if unrated, securities determined by the manager
to be comparable. Many debt securities of non-U.S. issuers, and especially
emerging market issuers, are rated below investment grade or are unrated so
that their selection depends on the manager's internal analysis.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes
in interest rates, and credit risks. 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; with respect to debt
securities, the manager may also from time to time seek to hedge (protect)
against currency risks by using hedging instruments such as forward currency
exchange contracts.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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.
[Begin callout]
Because the stocks and bonds 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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer 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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Their principal
risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
HEDGING INSTRUMENTS Considered derivative investments, the success of Hedging
Instruments will depend on the manager's ability to predict market movements,
and losses from their use can be greater than if they had not been used.
Hedging Instruments risks include a loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON ASSET ALLOCATION FUND - CLASS 21
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []% []% []% []% []% []% []% []% []%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Templeton Asset [ ]% [ ]% [ ]%
Allocation Fund -
Class 21
MSCI World Index2 [ ] [ ] [ ]%
JP Morgan Global [ ]% [ ]% [ ]%
Gov. Bond Index2
1.Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains. Because
Class 2 shares were not offered until May 1, 1997, performance shown for
periods prior to that date represent the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%
2.The unmanaged Morgan Stanley Capital International(R) (MSCI) World Index
includes approximately 1450 securities listed on the stock exchanges of 20
countries including the U.S., Europe, Canada, Australia, New Zealand, and the
Far East. The average company has a market capitalization of about $3.5
billion. The unmanaged JP Morgan Global Gov. Bond Index tracks the
performance of government bond markets in 13 countries. It includes issues
with remaining maturities of greater than 13 months. Indices include
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
EXPENSE SUMMARY
Templeton Asset Allocation Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.
The team responsible for managing the equity portion of the fund is:
MANAGEMENT TEAM
GARY R. CLEMONS Mr. Clemons has managed the equity
SENIOR VICE PRESIDENT, TICI portion of the fund since 1995 and has
been with the Franklin Templeton Group
since 1990.
PETER A. NORI Mr. Nori has managed the equity portion
SENIOR VICE PRESIDENT, TICI of the fund since 1996 and has been
with the Franklin Templeton Group since
1990.
WILLIAM T. HOWARD, JR. Mr. Howard has managed the equity
SENIOR VICE PRESIDENT, TICI portion of the fund since 1996 and has
been with the Franklin Templeton Group
since 1993.
The fund's debt securities are managed by a team of Templeton Global Bond
Managers, a division of TICI.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Asset Allocation
Fund - Class 2 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON BOND FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high current income. Capital appreciation
is a secondary consideration.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and
companies located anywhere in the world, including emerging markets. 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. Bonds, including those
convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities.
[Begin callout]
The fund invests primarily in bonds of governments located around the world.
[End callout]
The fund may invest in debt securities of any rating category, it focuses on
"investment grade" debt securities. These are issues rated in the top four
rating categories (AAA to BBB) by independent rating agencies such as
Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc.
(Moody's) or, if unrated, determined by the fund's manager to be comparable.
The fund generally also invests a significant amount of its assets in high
yield, medium and lower rated debt securities ("junk bonds"), including up to
10% in defaulted debt, or if unrated, determined by the fund's manager to be
comparable. Many debt securities of non-U.S. issuers, and especially
emerging market issuers, are rated below investment grade or are unrated so
that their selection depends on the manager's internal analysis. The average
maturity of debt securities in the fund's portfolio is medium-term, but will
fluctuate depending on the manager's outlook on the country and future
interest rate changes.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. In considering these factors, a country's
changing market, economic, and political conditions, such as inflation rate,
growth prospects, global trade patterns and government policies will be
evaluated. The manager intends to manage the fund's exposure to various
currencies, and may from time to time seek to hedge (protect) against
currency risk by using hedging instruments such as forward currency exchange
contracts.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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.
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer
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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares. Junk bonds generally have more risk than
higher-rated securities, and can be considered speculative. Their principal
risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
HEDGING INSTRUMENTS Considered derivative investments, the success of Hedging
Instruments will depend on the manager's ability to predict market movements,
and losses from their use can be greater than if they had not been used.
Hedging Instruments risks include a loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
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.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep
interest rate risk and country allocations at desired levels, as well as bond
maturities, may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, risks, and bond ratings can be found in the Statement of
Additional Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON BOND FUND1
CALENDAR YEAR TOTAL RETURNS
[insert bar chart]
[]% []% []% []% []% []% []% []% []% []%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Templeton Bond [ ]% [ ]% [ ]%
Fund1
JP Morgan Global [ ] [ ] [ ]
Gov. Bond Index2
CPI2 [ ]% [ ]% [ ]%
1.All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased returns. Because no Class 2
shares were issued as of December 31, 1998, performance shown represents the
historical results of Class 1 shares. Although invested in the same portfolio
of securities as Class 1, Class 2 performance will differ only because of
Class 2's higher annual fees and expenses resulting from its Rule 12b-1 plan.
Maximum annual plan expenses are 0.15%.
2.The unmanaged JP Morgan Global Gov. Bond Index tracks the performance of
government bond markets in 13 countries. It includes issues with remaining
maturities of greater than 13 months. The Consumer Price Index, a commonly
used measure of inflation, measures the average change in prices for a fixed
basket of goods and services regularly bought by consumers in the U.S.
Indices include reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
EXPENSE SUMMARY
Templeton Bond Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. Because no Class 2 shares were issued as of December
31, 1998, the figures are based on the fund's Class 1 expenses for the fiscal
year ended December 31, 1998, plus Class 2's maximum annual Rule 12b-1 fee of
0.15%. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager. The fund's
investments are managed by a team of Templeton Global Bond Managers, a
division of TICI.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Bond Fund - Class
2 since its inception. This information has been audited by McGladrey &
Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON DEVELOPING MARKETS 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 equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries. Developing or emerging market countries include
those considered to be emerging by the World Bank, the International Finance
Corporation, the United Nations, or the countries' authorities. These
countries are typically located in the Asia-Pacific region, Eastern Europe,
Central and South America, and Africa. 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 typically 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 the common stocks of companies located in
emerging market countries.
[End callout]
In addition to its principal investments, the fund may invest significantly
in securities of issuers in developed market countries, and particularly
those that are linked by tradition, economic markets, geography or political
events to emerging market countries. Depending upon current market
conditions, the fund may also invest a substantial portion of its assets 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. Bonds, including
those convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities. The fund may also invest up to 10%
of its total assets in securities of closed-end investment companies, to
facilitate foreign investment.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well-diversified portfolio.
[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging 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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer 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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares.
SEE ALSO, "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON DEVELOPING MARKETS FUND - CLASS 21
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(3/4/96)
Templeton [ ]% [ ]%
Developing Markets
Fund - Class 21
MSCI World Index2 [ ] [ ]
IFC Investable [ ]% [ ]%
Composite Index2
1.Past expense reductions by the manager increased returns. All fund
performance assumes reinvestment of dividends and capital gains. Because
Class 2 shares were not offered until May 1, 1997, performance shown for
periods prior to that date represent the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%
2.The unmanaged Morgan Stanley Capital International(R) World Index includes
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
International Finance Corporation's Investable Composite Index is an emerging
markets index that includes 650 stocks from 18 countries including Mexico,
South Korea, Brazil, Jordan and Turkey. Indices include reinvested dividends.
One cannot invest directly in an index, nor is an index representative of the
fund's investments.
EXPENSE SUMMARY
Templeton Developing Markets Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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 Asset Management Ltd. (TAML), 7 Temasek Boulevard, # 38-03, Suntec
Tower One, Singapore, 038987, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
J. MARK MOBIUS, PH.D. Dr. Mobius has been a manager of the
MANAGING DIRECTOR, TAML fund since its inception in 1996, and
has been with the Franklin Templeton
Group since 1987.
H. ALLAN LAM Mr. Lam has been a manager of the fund
VICE PRESIDENT since its inception in 1996, and has
TEMPLETON INVESTMENT MANAGEMENT LTD. been with the Franklin Templeton Group
since 1987.
TOM WU Mr. Wu has been a manager of the fund
DIRECTOR, TAML since its inception in 1996, and has
been with the Franklin Templeton Group
since 1987.
DENNIS LIM Mr. Lim has been a manager of the fund
VICE PRESIDENT, TAML since its inception in 1996, and has
been with the Franklin Templeton Group
since 1990.
EDDIE CHOW Mr. Chow has been a manager of the fund
INVESTMENT ANALYST, TAML since its inception in 1996. Before
joining the Franklin Templeton Group in
1994, he worked in the finance and
banking industry.
TEK-KHOAN ONG Mr. Ong has been a manager if the fund
PORTFOLIO MANAGER, TAML since its inception in 1996, and has
been with the Franklin Templeton Group
since 1993.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Developing
Markets Fund - Class 2 since its inception. This information has been audited
by McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON INTERNATIONAL FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
outside the U.S., including emerging markets. 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 typically
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 a diversified portfolio of non-U.S. common
stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets 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 at a future date and generally to pay
interest. Bonds, including those convertible into common stock and unsecured,
notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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.
[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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer 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. These movements will affect the fund's share
price and fund performance.
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, or even 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
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
including 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON INTERNATIONAL FUND - CLASS 21
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []% []% []% []% []% []% []% []% []%
89 90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Templeton [ ]% [ ]% [ ]%
International Fund
- - Class 21
MSCI EAFE2 [ ] [ ] [ ]
CPI2 [ ]% [ ]% [ ]%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were not offered until May 1, 1997, performance shown
for periods prior to that date represent the historical results of Class 1
shares. Performance of Class 2 shares for periods after May 1, 1997 reflect
Class 2's higher annual fees and expenses resulting from its rule 12b-1 plan.
Maximum annual plan expenses are 0.25%
2.The unmanaged Morgan Stanley International(R) Europe, Australia, Far East
(MSCI EAFE) Index includes approximately 1000 companies representing the
stock markets of 20 countries in Europe, Australia, New Zealand, and the Far
East. The average company has a market capitalization of over $3 billion. The
Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. Indices include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the
fund's investments.
EXPENSE SUMMARY
Templeton International Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER A. NORI Mr. Nori has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1996. He joined the
Franklin Templeton Group in 1990.
GARY P. MOTYL Mr. Motyl has been a manager of the
EXECUTIVE VICE PRESIDENT fund since 1995. He joined
AND DIRECTOR, TICI the Franklin Templeton Group in 1981.
HEIDI S. ANDERSEN Ms. Andersen has been a manager of the
VICE PRESIDENT, TICI fund since 1997. Before joining the
Franklin Templeton Group in 1995, Ms.
Andersen worked for Sidney Janis
Gallery in New York and earned her
master of business administration
degree with emphasis in finance and
international business from the
Columbia Graduate School of Business.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton International
Fund - Class 2 since its inception. This information has been audited by
McGladrey & Pullen, LLP.
[to be supplied in a later amendment]
TEMPLETON STOCK FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets. 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
typically 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 a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, to repay a loan of money at a future date and generally to pay
interest. Bonds, including those convertible into common stock and unsecured,
notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
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.
[Insert graphic of chart with line going up and down] MAIN RISKS
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 or industries, or the securities markets as a whole. 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 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.
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.
[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]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
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. These movements will affect the fund's share
price and fund performance.
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, or even 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.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
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 or in
a security's credit rating may affect the security's value and, thus, impact
the value of fund shares.
SEE ALSO "Important Recent Developments," 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, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT 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.
TEMPLETON STOCK FUND - CLASS 21
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
14.63% -10.88% 27.28% 7.12% 34.00% -2.20% 25.24% 22.42% 11.12% 0.99%
89 90 91 92 93 94 95 96 97 98
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BEST QUARTER:
Q4 '98 15.84%
WORST QUARTER:
Q3 '98 -21.09%
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Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 YEARS PAST 10 YEARS
Templeton Stock 0.99% 11.46% 12.12%
Fund - Class 21
MSCI World Index2 24.80% 16.19% 11.21%
1.All fund performance assumes reinvestment of dividends and capital gains.
Past expense reductions by the manager increased returns. Because Class 2
shares were not offered until May 1, 1997, performance shown for periods
prior to that date represent the historical results of Class 1 shares.
Performance of Class 2 shares for periods after May 1, 1997 reflect Class 2's
higher annual fees and expenses resulting from its rule 12b-1 plan. Maximum
annual plan expenses are 0.25%.
2.The unmanaged Morgan Stanley Capital International(R) (MSCI) World Index
includes approximately 1450 securities listed on the stock exchanges of 20
countries including the U.S., Europe, Canada, Australia, New Zealand, and the
Far East. The average company has a market capitalization of about $3.5
billion. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's investments.
EXPENSE SUMMARY
Templeton Stock Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended December 31, 1998. 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.
[to be supplied in a later amendment]
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), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394-3091, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
HOWARD J. LEONARD Mr. Leonard has been a manager of the
EXECUTIVE VICE PRESIDENT, TICI fund since 1995 and has been with the
Franklin Templeton Group since 1989.
MARK R. BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since 1995 and has been with
the Franklin Templeton Group since
1985.
WILLIAM T. HOWARD, JR. Mr. Howard has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1996 and has been
with the Franklin Templeton Group
since 1993.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
FINANCIAL HIGHLIGHTS
This table presents the financial performance for Templeton Stock Fund -
Class 2 since its inception. This information has been audited by McGladrey &
Pullen, LLP.
[to be supplied in a later amendment]
[Insert graphic of starburst] IMPORTANT RECENT DEVELOPMENTS
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 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.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced
a new single currency, the euro, which will replace 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.
[Insert graphic of dollar signs and stacks of coins] 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 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.
FUND ACCOUNT INFORMATION
[Insert graphic of a paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at net asset value (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.
[Insert graphic] 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.
[Insert graphic of two arrows] 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 on page xx).
[Insert graphic of a paper and pen] 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:
A fund may refuse any order to buy shares.
A fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
At any time, a fund may establish or change investment minimums.
You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
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 or if payment by check would be harmful to existing
shareholders.
To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
SHARES 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.
[Insert graphic of a question mark] 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.
[Begin callout]
FOR MORE INFORMATION
[End callout]
The funds 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 funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Include a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and
the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, and policies.
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
CLASS 1 AND 2
STATEMENT OF ADDITIONAL INFORMATION
MAY 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 trust's prospectus, dated May 1, 1999, which we may amend
from time to time, contains the basic information you should know before
investing in the funds. You should read this SAI together with the trust's
prospectuses.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended December 31, 1998, are
incorporated by reference (are legally a part of this SAI).
[The financial statements of the trust for the fiscal year ended December 31,
1998 will be supplied in a later amendment.]
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/774-5001.
CONTENTS PAGE
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
FRANKLIN GROWTH INVESTMENTS FUND
The fund's investment goal is capital appreciation. Current income is only a
secondary consideration in selecting portfolio securities.
The manager will generally make long-term investments in equity securities
that have been selected based upon fundamental and quantitative analysis.
Following these policies, the fund will typically invest predominantly in
equity securities issued by large-cap or mid-cap U.S. companies. These
companies have market capitalizations of $1.5 billion or more. It may also
invest in smaller companies, which may be subject to different and greater
risks.
TECHNOLOGY COMPANIES The technology sector as a whole has historically been
volatile and issues from this sector tend to be subject to abrupt or erratic
price movements.
OTHER INVESTMENT POLICIES The fund currently intends to invest no more than
5% of its assets in debt obligations, including convertible debt obligations,
rated Ba or lower by Moody's or BB or lower by Standard & Poor's, or unrated
securities the manager determines are of comparable quality. The fund may
borrow up to one-third of the value of its total assets. However, it does
not currently expect any borrowing to exceed 5% of its total assets. The fund
may also:
write covered call options;
purchase put options on securities;
lend its portfolio securities;
enter into repurchase transactions; and
invest in restricted or illiquid securities.
As a non-fundamental policy, which may be changed by the Board without
shareholder approval, the fund will not purchase or retain securities of any
company in which Trustees or officers of the trust or of a fund's manager,
individually owning more than 1/2 of 1% of these securities of such company, in
the aggregate own more than 5% of the securities of such company.
The fund will not, as a non-fundamental policy:
(i) invest for purposes of control of an issuer;
(ii) invest more than 5% in unseasoned issuers;
(iii) use margin accounts; or
(iv) invest more than 10% of its assets in illiquid securities.
FRANKLIN SMALL CAP INVESTMENTS FUND
The fund's investment goal is long-term capital growth.
Under normal market conditions, the fund will invest at least 65% of its
assets in equity securities of smaller capitalization growth companies
("small cap companies"). The securities of small cap companies are traded on
U.S. or foreign stock exchanges and over-the-counter. Equity securities of
small cap companies may consist of common stock, preferred stock, warrants
for the purchase of common stock, and convertible securities. The fund
currently does not intend to invest more than 10% of its assets in
convertible securities. As an operating policy the fund will not invest more
than 10% of its assets in securities issued by companies with less than three
years of continuous operation.
FOREIGN SECURITIES The fund may invest up to 25% of its assets in foreign
securities, including those of developing market issuers and depositary
receipts. The fund, however, does not presently intend to invest more than
10% of its assets in foreign securities, nor more than 5% of its assets in
developing markets securities.
OTHER INVESTMENTS Although the fund's assets will be invested primarily in
equity securities of small cap companies, the fund may invest up to 35% of
its assets in other securities. These investments may cause the fund's
performance to vary from that of the small capitalization equity markets in
which it will primarily invest. The fund may invest in equity securities of
larger companies that the manager believes have strong growth potential. The
fund may also invest in the equity securities of relatively well known,
larger companies in mature industries that the manager believes have the
potential for capital appreciation. From time to time, the fund may hold
significant cash positions until suitable investment opportunities are
available.
The fund may also invest in debt securities that the manager believes have
the potential to appreciate in value as a result of improvement in the
creditworthiness of the issuer. The receipt of income is incidental to the
fund's objective of capital growth. The fund may invest in debt securities
rated B or above by Moody's or Standard & Poor's ("S&P"), or in unrated
securities the manager has determined are of comparable quality. Currently,
however, the fund does not intend to invest more than 5% of its assets in
debt obligations (including convertible debt securities) rated lower than BBB
by S&P or Baa by Moody's or in unrated securities the manager has determined
are of comparable quality. The fund currently does not intend to invest more
than 10% of its assets in real estate investment trusts ("REITs") including
smaller capitalization REITs.
OTHER INVESTMENT POLICIES The fund may also:
write covered put and call options on securities or financial indices;
purchase put and call options on securities or financial indices;
purchase and sell futures contracts or related options with respect to
securities, indices and currencies;
invest in restricted or illiquid securities;
lend portfolio securities;
borrow up to one-third of the value of its total assets; and
enter into repurchase or reverse repurchase agreements.
As a non-fundamental policy, which may be changed by the Board without
shareholder approval, the fund will not purchase or retain securities of any
company in which Trustees or officers of the trust or of a fund's Investment
Manager, individually owning more than 1/2 of 1% of these securities of such
company, in the aggregate own more than 5% of the securities of such company.
The fund will not, as a non-fundamental policy:
(i) invest for purposes of control of an issuer;
(ii) effect short sales; or
(iii) invest more than 10% of its assets in illiquid securities.
MUTUAL SHARES INVESTMENTS FUND
The fund's principal investment goal is capital appreciation. Its secondary
goal is income.
Debt obligations, in which the fund may invest, include securities or debt of
any quality issued by corporations or governments in any form, including
notes, bonds, or debentures, as well as distressed mortgage obligations and
other debt secured by real property. The manager does not establish
percentage limits for the fund's investment in equity securities, debt
securities or money market instruments.
It may invest in securities that are traded on U.S. or foreign exchanges,
NASDAQ national market or in the over-the-counter market. It may invest in
any industry sector, although it will not concentrate in any one industry.
From time to time, the fund may hold significant cash positions, consistent
with its policy on temporary investments, until suitable investment
opportunities are available.
SMALL COMPANIES The fund may invest in securities from any size issuer,
including smaller capitalization companies. It will tend to invest, however,
in securities of issuers with market capitalizations in excess of $500
million.
REORGANIZING COMPANIES The fund also seeks to invest in securities of
companies involved in mergers, consolidations, liquidations and
reorganizations. These securities include tender or exchange offers. The fund
may also participate in such transactions. The fund does not presently
anticipate investing more than 50% of its assets in such investments, but is
not restricted to that amount.
INDEBTEDNESS The fund may also invest in other forms of secured or unsecured
indebtedness or participations ("indebtedness"). These include without
limitation loan participations and trade claims of debtor companies involved
in reorganization or financial restructuring. Some of the indebtedness may
have very long maturities or be illiquid.
CONTROL The fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, the
manager may seek to influence or control management if it perceives that the
fund may benefit. The fund may also invest in other entities that purchase
securities for the purpose of influencing or controlling management. These
entities may invest in a potential takeover or leveraged buyout or invest in
other entities engaged in such practices.
LOWER RATED SECURITIES The fund may invest in debt securities in any rating
category including lower rated debt securities ("junk bonds") or in unrated
debt securities. In general, the fund will invest in these instruments for
the same reasons as equity securities, i.e., the manager believes that the
securities are at prices less than their intrinsic values. Consequently, the
manager's own analysis of a debt instrument exercises a greater influence
over the investment decision than the stated coupon rate or credit rating.
The fund expects to invest in debt securities issued by reorganizing or
restructuring companies, or companies that recently emerged from, or are
facing the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or low rated securities that are
often in, or are about to, default, that the manager seeks to identify
securities which are sometimes available at prices which it believes are less
than their intrinsic values. The fund may invest without limit in defaulted
debt securities, subject to the fund's restriction on investments in illiquid
securities. Defaulted debt securities may be considered speculative. The
purchase of indebtedness of a troubled company always involves a risk that
the investment may be lost. However, the debt securities of reorganizing or
restructuring companies typically rank senior to the equity securities of
such companies.
FOREIGN SECURITIES Although the fund may buy securities in any foreign
country without limitation, the fund intends to invest primarily in domestic
securities. About 15-20% of its assets will be invested in foreign
securities, including sponsored or unsponsored depositary receipts. The fund
presently does not intend to invest more than 5% of its assets in securities
of emerging markets, including Eastern European countries and Russia. Foreign
investments may include both voting and non-voting securities, sovereign debt
and participation in foreign government deals.
CURRENCY HEDGING The fund may use the following currency hedging techniques:
investments in foreign currency futures contracts, options on foreign
currencies or currency futures, forward foreign currency exchange contracts
and currency swaps.
CLOSED-END INVESTMENT COMPANIES While the fund may not purchase securities of
registered open-end investment companies or affiliated investment companies,
it may invest from time to time in other investment company securities. The
fund may not purchase more than 3% of the voting securities of another
investment company. In addition, the fund will not invest more than 5% of its
assets in the securities of any single investment company and will not invest
more than 10% of its assets in investment company securities. Investors
should recognize that they indirectly bear a proportionate share of the
expenses of these investment companies, including operating costs, and
investment advisory and administrative fees.
SHORT SALES The fund may make short sales, but will not make a short sale if,
after giving effect to such sale, the market value of all securities sold
short exceeds 5% of the value of the fund's total assets or the fund's
aggregate short sales of a particular class of securities exceeds 25% of the
outstanding securities of that class. The fund may also make short sales
"against the box" without reference to such limitations.
OTHER INVESTMENT POLICIES The fund may also:
lend its portfolio securities;
enter into repurchase transactions;
purchase securities and debt obligations on a "when-issued" or "delayed
delivery" basis;
invest in collateralized mortgage obligations;
borrow up to one-third of the value of its total assets;
enter into reverse repurchase agreements;
invest in restricted or illiquid securities;
purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; and
purchase and sell financial futures contracts and related options.
As a non-fundamental policy, which may be changed by the Board without
shareholder approval, the fund will not purchase or retain securities of any
company in which Trustees or officers of the trust or of a fund's Investment
Manager, individually owning more than 1/2 of 1% of these securities of such
company, in the aggregate own more than 5% of the securities of such company.
TEMPLETON ASSET ALLOCATION FUND
The fund's investment objective is high total return.
The fund's manager may, from time to time, use various methods of selecting
securities for the fund's portfolio, and may also employ and rely on
independent or affiliated sources of information and ideas in connection with
the management of the fund's portfolio. As a non-fundamental policy, the fund
will limit its investments in securities of Russian issuers to 5% of its
assets.
OTHER INVESTMENT POLICIES The fund may:
invest in collateralized mortgage obligations;
invest in restricted securities;
purchase securities on a "when-issued basis";
lend its portfolio securities;
borrow up to 30% of the value of its total assets for investment
purposes;
invest in forward foreign currency exchange contracts and options on
foreign currencies; and
purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes
only and not for speculation. It may engage in these transactions only if
the total contract value of the futures contracts does not exceed 20% of
the fund's total assets.
TEMPLETON BOND FUND
The fund's investment goal is high current income. Capital appreciation is a
secondary consideration.
The fund may invest without limit in debt securities of the U.S. or any other
nation. As a non-fundamental policy, however, the fund will limit its
investments in securities of Russian issuers to 5% of its assets. The manager
may, from time to time, use various methods of selecting securities for the
fund's portfolio. It may also employ and rely on independent or affiliated
sources of information and ideas in connection with management of the fund's
portfolio.
The fund may invest in various corporate debt obligations, structured
investments, commercial paper, certificates of deposit, bankers' acceptances,
and repurchase agreements with respect to these securities.
OTHER INVESTMENT POLICIES The fund may also:
invest in forward foreign currency exchange contracts;
invest in options on foreign currencies;
invest in depositary receipts;
purchase "when-issued" securities;
purchase collateralized mortgage obligations;
lend its portfolio securities;
borrow up to 30% of the value of its total assets for investment
purposes; and
buy and sell financial futures contracts, stock index futures contracts,
and foreign currency futures contracts for hedging purposes only and not
for speculation. It may engage in these transactions only if the total
contract value of the futures contracts does not exceed 20% of the fund's
total assets.
TEMPLETON DEVELOPING MARKETS FUND
The fund's investment goal is long-term capital appreciation.
Under current listings, emerging markets countries include all countries
EXCEPT: Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the
United States.
The manager may, from time to time, use various methods of selecting
securities for the fund's portfolio. It may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the fund's portfolio. The manager will determine the
eligibility of investments based on publicly available information and
inquiries made to the companies. The fund will at all times, except during
defensive periods, maintain investments in at least three countries having
developing markets. Consistent with its policy of investing primarily in
emerging markets, the fund may purchase securities in any foreign country,
developed or emerging. As a non-fundamental policy, however, the fund will
limit its investments in securities of Russian issuers to 5% of its assets.
The fund seeks to benefit from economic and other developments in emerging
markets. The investment goal of the fund reflects the belief that investment
opportunities may result from an evolving long-term international trend
favoring more market-oriented economies, a trend that may especially benefit
certain countries having emerging markets. This trend may be facilitated by
local or international political, economic or financial developments that
could benefit the capital markets of such countries. Certain countries,
particularly the emerging market countries in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries, although having relatively mature emerging markets,
may also be in a position to benefit from local or international developments
encouraging greater market orientation and diminishing governmental
intervention in economic affairs.
DEBT SECURITIES For capital appreciation, the fund may invest up to 35% of
its total assets in debt securities. These securities include bonds, notes,
debentures, commercial paper, certificates of deposit, time deposits,
bankers' acceptances and structured investments. Certain debt securities can
provide the potential for appreciation based on various factors such as
changes in interest rates, economic and market conditions, improvement in an
issuer's ability to repay principal and pay interest, and ratings upgrades.
Additionally, convertible bonds offer the potential for appreciation through
the conversion feature. The holder of these bonds benefit from increases in
the market price of the securities into which they are convertible. The fund
may invest in debt securities which are rated at least C by Moody's or C by
Standard & Poor's ("S&P") or unrated debt securities that the manager
determines to be of comparable quality. As a fundamental policy (which may
not be changed without shareholder approval) the fund will not invest more
than 10% of its total assets in defaulted debt securities. As an operating
policy, however, which may be changed without shareholder approval, the fund
will not invest more than 5% of its total assets in lower-rated debt
securities. Lower-rated debt securities include securities rated lower than
BBB by S&P or Baa by Moody's, unrated securities the manager determines are
of equivalent investment quality, and defaulted debt securities.
OTHER INVESTMENT POLICIES. When the manager believes that market conditions
warrant, the fund may adopt a temporary defensive position and invest without
limit in money market securities denominated in U.S. dollars or in the
currency of any foreign country. The fund may also:
lend its portfolio securities;
borrow up to one-third of the value of its total assets for investment
purposes (i.e., "leverage" its portfolio);
purchase convertible securities and warrants;
invest in restricted or illiquid securities;
enter into transactions in options on securities, securities indices and
foreign currencies;
enter into forward foreign currency contracts; and
enter into futures contracts and related options with respect to
securities, securities indices and foreign currencies. The value of the
underlying securities of written futures contacts will not exceed, at any
time, 25% of the total assets of the fund.
When deemed appropriate by the manager, the fund may invest cash
balances in repurchase agreements and other money market investments to
maintain liquidity in an amount to meet expenses or for day-to-day operating
purposes.
TEMPLETON INTERNATIONAL FUND
The fund's investment goal is long-term capital growth.
Under normal market conditions, the fund will invest at least 65% of its
assets in securities of issuers in at least three countries outside the
United States. The fund will invest predominantly in equity securities issued
by large-cap and mid-cap companies. Large-cap companies are those which have
market capitalizations of $5 billion or more; mid-cap companies are those
which have market capitalizations of $1.5 billion to $5 billion. It may also
invest to a lesser degree in smaller companies.
The fund may purchase securities in any foreign country, developed or
emerging. As a non-fundamental policy, however, the fund will limit its
investments in securities of Russian issuers to 5% of its assets. The manager
may, from time to time, use various methods of selecting securities for the
fund's portfolio. It may also employ and rely on independent or affiliated
sources of information and ideas in connection with management of the fund's
portfolio.
DEBT SECURITIES The fund may invest in medium and lower quality debt
securities that are rated between BBB and as low as D by Standard & Poor's
("S&P"), and between Baa and as low as C by Moody's or unrated securities the
manager determines are of comparable quality. As a fundamental policy (which
may not be changed without shareholder approval) the fund will not invest
more than 10% of its total assets in defaulted debt securities, which may be
illiquid. As an operating policy, however, which may be changed without
shareholder approval, the fund will not invest more than 5% of its total
assets in lower-rated debt securities. Lower-rated debt securities include
securities rated lower than BBB by S&P or Baa by Moody's, unrated securities
the manager determines are of equivalent investment quality, and defaulted
debt securities.
OTHER INVESTMENT POLICIES When the manager believes that market conditions
warrant, the fund may adopt a temporary defensive position and may invest
without limit in money market securities denominated in U.S. dollars or in
the currency of any foreign country. The fund may also:
enter into transactions in options on securities, securities indices and
foreign currencies;
enter into firm commitment agreements;
purchase securities on a "when-issued" basis;
invest in restricted securities, such as private placements;
lend its portfolio securities;
borrow up to 30% of the value of its total assets for investment
purposes; and
purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes
only and not for speculation. It may engage in these transactions only if
the total contract value of the futures contracts does not exceed 20% of
the fund's total assets.
TEMPLETON STOCK FUND
The fund's investment goal is long-term capital growth.
The fund will invest predominantly in equity securities issued by large-cap
and mid-cap companies. Large-cap companies are those which have market
capitalizations of $5 billion or more; mid-cap companies are those which have
market capitalizations of $1.5 billion to $5 billion. It may also invest to a
lesser degree in smaller companies. The fund may also invest in securities
convertible into common stocks rated in any category by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") and
securities which are unrated by any rating agency. Current income will
usually be a less significant factor in selecting investments for the fund.
As a global fund, the fund may invest without limit in securities of the U.S.
or any other nation. As a non-fundamental policy, however, the fund will
limit its investments in securities of Russian issuers to 5% of its assets.
The manager may, from time to time, use various methods of selecting
securities for the fund's portfolio. It may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of the fund's portfolio.
DEBT SECURITIES The fund may invest in medium and lower quality debt
securities that are rated between BBB and as low as D by S&P, and between Baa
and as low as C by Moody's or unrated securities the manager determines are
of comparable quality. As a fundamental policy (which may not be changed
without shareholder approval) the fund will not invest more than 10% of its
total assets in defaulted debt securities. As an operating policy, however
(which may be changed without shareholder approval) the fund will not invest
more than 5% of its total assets in lower-rated debt securities. Lower-rated
debt securities include securities rated lower than BBB by S&P or Baa by
Moody's, unrated securities the manager determines are of equivalent
investment quality, and defaulted debt securities.
OTHER INVESTMENT POLICIES. When the manager believes that market conditions
warrant, the fund may adopt a temporary defensive position and invest without
limit in money market securities denominated in U.S. dollars or in the
currency of any foreign country. The fund may also:
enter into transactions in options on securities, securities indices and
foreign currencies;
enter into firm commitment agreements;
purchase securities on a "when-issued" basis;
invest in restricted securities, such as private placements;
borrow up to 30% of the value of its total assets for investment
purposes;
lend its portfolio securities; and
purchase and sell stock index futures contracts for hedging purposes only
and not for speculation. It may engage in such transactions only if the
total contract value of the futures contracts does not exceed 20% of the
fund's total assets.
NON-FUNDAMENTAL POLICIES AFFECTING MULTIPLE FUNDS As non-fundamental
investment policies, which may be changed by the Board without shareholder
approval, a fund will not invest more than 15% of its total assets in
securities of foreign issuers which are not listed on a recognized United
States or foreign securities exchange, or more than 15% of its total assets
in (a) securities with a limited trading market, (b) securities subject to
legal or contractual restrictions as to resale, and (c) repurchase agreements
not terminable within seven days.
INVESTMENT STRATEGIES AND POLICIES
THIS SECTION DESCRIBES CERTAIN TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
THAT MAY BE USED BY A FUND, IF THE FUND IS AUTHORIZED TO DO SO IN THE
DISCUSSION IN ITS INDIVIDUAL FUND SECTION IN THIS SAI. IF THERE IS A CONFLICT
BETWEEN THIS SECTION AND THE INDIVIDUAL FUND SECTION WITH RESPECT TO
INVESTMENTS, THE INDIVIDUAL FUND SECTION CONTROLS AND SHOULD BE RELIED UPON.
All policies and percentage limitations are considered at the time of
purchase of an investment and refer to a fund's total assets, unless another
purpose is indicated. A fund will not necessarily use the strategies
described to the full extent permitted unless the managers believe that doing
so will help a fund reach its objectives. Further, not all instruments or
strategies will be used at all times.
In the event of a corporate restructuring or bankruptcy reorganization of a
company whose securities are owned by a fund, the fund may receive securities
different from those originally purchased. For example, a fund might receive
common stock that is not dividend paying, bonds with a lower coupon or more
junior status, convertible securities or even conceivably real estate. The
fund is not obligated to sell such investments immediately, if the manager
believes, based on its own analysis, that the longer term outlook is
favorable and there is the potential for a higher total return by holding
such investments.
Each fund is also subject to investment restrictions that are described under
the heading "Investment Restrictions" in this SAI. The investment objective
of each fund and its listed investment restrictions are "fundamental
policies" of each fund, which means that they may not be changed without a
majority vote of shareholders of the fund. With the exception of a fund's
investment objective and those restrictions specifically identified as
fundamental, all investment policies and practices described in the
Prospectus and in this SAI are not fundamental, which means that the Board of
Trustees may change them without shareholder approval.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. Equity securities generally take the form of
common stock or preferred stock, as well as securities convertible into
common stocks. Equity securities may also include warrants, or rights.
Warrants or rights give the holder the right to buy a common stock at a given
time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. These securities include bonds, notes,
debentures, and commercial paper, which 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. During periods of rising interest rates, the value of such
securities generally declines. These changes in market value of securities
owned by the fund will be reflected in the fund's net asset value per share.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the funds may invest. Higher yields are ordinarily
available from securities in the lower rating categories, such as securities
rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities
deemed by a fund's manager to be of comparable quality. These ratings
represent the opinions of the rating services with respect to the issuer's
ability to pay interest and repay principal. They do not purport to reflect
other risk, such as the risk of fluctuations in market value and are not
absolute standards of quality. However, lower rated securities typically are
riskier than investment grade securities. Bonds which are rated C by Moody's
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing. Bonds rated C by S&P are obligations on which no interest is being
paid. Please see the appendix for a discussion of the ratings.
If the rating on an issue held in a fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by
the fund in its evaluation of the overall investment merits of that security
but will not generally result in an automatic sale of the security.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the manager to
assess whether, at the time of purchase, the planned investment offers
potential returns which are reasonable in light of the risks involved.
FOREIGN SECURITIES Certain funds may invest in foreign securities, if the
investments are consistent with their objectives and comply with their
concentration and diversification policies. The funds may buy the securities
of foreign issuers directly in foreign markets, both in developed and
developing countries. The securities of foreign issuers may be denominated
in foreign currency. The funds may also buy foreign securities that are
traded in the U.S.
Investments in foreign securities may offer potential benefits not available
from investments solely in securities of domestic issuers or dollar
denominated securities. These benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of the manager, to offer:
A better outlook for long-term capital appreciation or current earnings
than investments in domestic issuers;
An opportunity to invest in foreign nations whose economic policies or
business cycles are different from those of the U.S.; and,
The opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in a
manner parallel to U.S. markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and tax and other laws limiting the amount and types of foreign
investments. A fund could experience investment losses if there are changes
of:
governmental administrations;
economic or monetary policies in the U.S. or abroad;
circumstances in dealings between nations; or,
currency convertibility or exchange rates.
The funds do not consider securities that they acquire outside of the U.S.
and that are publicly traded in the U.S. or on a foreign securities market to
be illiquid assets if (a) the fund reasonably believes it can readily dispose
of the securities for cash in the U.S. or foreign market, or (b) current
market quotations are readily available.
Certain funds may invest in debt securities issued by foreign corporations,
governments and their instrumentalities, and by supranational entities. A
supranational entity is an entity designated or supported by the national
government of one or more countries to promote economic reconstruction or
development. Examples of supranational entities include the World Bank, the
European Development Bank and the Asian Development Bank.
Many debt obligations of foreign issuers, and especially developing markets
issuers, are either (i) rated below investment grade or (ii) not rated by
U.S. rating agencies so that their selection depends on the manager's
individual analysis.
Certain funds may invest in countries that do not permit direct investment.
For example, some countries, such as South Korea, Chile and India, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In order to gain
investment access to these countries, a fund may invest up to 10% of its
assets in shares of such closed-end investment companies and up to 5% of its
assets in any one closed-end investment company as long as the investment
does not represent more than 3% of the voting stock of the acquired
investment company. If a fund acquires shares of closed-end investment
companies, shareholders would bear both their share of expenses of the fund
(including management and advisory fees) and, indirectly, the expenses of
such closed-end investment companies.
DEPOSITARY RECEIPTS. Certain funds may invest in depositary receipts.
American Depositary Receipts (ADRs) are typically issued by a U.S. bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, depositary receipts in registered form are
designed for use in the U.S. securities market and depositary receipts in
bearer form are designed for use in securities markets outside the U.S.
Depositary receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted.
Depositary receipts may be issued by sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there
may not be a correlation between the availability of such information and the
market value of the depositary receipts.
Depositary receipts also involve the same risks as direct investments in
foreign securities, as discussed below. For purposes of a fund's investment
policies, the fund will consider its investments in depositary receipts to be
investments in the underlying securities.
U.S. GOVERNMENT SECURITIES Certain funds may invest in U.S. government
securities including: (1) U.S. Treasury obligations with varying interest
rates, maturities and dates of issuance, such as U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (original maturities of
one to ten years) and U.S. Treasury bonds (generally original maturities of
greater than ten years); and (2) obligations issued or guaranteed by U.S.
government agencies and instrumentalities such as the Government National
Mortgage Association, the Export-Import Bank and the Farmers Home
Administration. Some of the funds' investments will include obligations that
are supported by the full faith and credit of the U.S. government. In the
case of U.S. government obligations that are not backed by the full faith and
credit of the U.S. government (e.g., obligations of the Federal National
Mortgage Association (FNMA) or a Federal Home Loan Bank), the fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its
commitments.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS ("GINNIE MAES") The
Government National Mortgage Association's guarantee of payment of principal
and interest on Ginnie Maes is backed by the full faith and credit of the
U.S. government. The Government National Mortgage Association may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee.
CONVERTIBLE SECURITIES Certain funds may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and, through its conversion feature, the
potential for the security to increase in value if there is an increase in
the value of the underlying common stock.
A convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. 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 both interest rate and market movements
can influence its value, 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. A convertible security issued by an operating company is
generally 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. However, 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. The parity price
is the price at which the common stock underlying the convertible security
may be obtained; the call price is the price of the bond, including any
premium related to the conversion feature. A convertible security issued by
an investment bank 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, because the holder of a convertible security will have
recourse only to the issuer. In addition, the issuer may redeem a convertible
security after a specified date and under circumstances established at the
time the security is issued.
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 the issuer's debt obligations
in the event of insolvency. An issuer's failure to make a dividend payment
is generally not an event of default entitling a 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 that
way for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES In addition to "plain vanilla" convertibles
a number of different structures have been created to fit the characteristics
of specific investors and issuers.
Certain funds 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 a 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 they are
issued, 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, i.e.,
required to be returned to the issuer, 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.
Certain funds may also invest in other classes of enhanced convertible
securities. These include but are not limited to:
ACES (Automatically Convertible Equity Securities),
PEPS (Participating Equity Preferred Stock),
PRIDES (Preferred Redeemable Increased Dividend Equity Securities),
SAILS (Stock Appreciation Income Linked Securities),
TECONS (Term Convertible Notes),
QICS (Quarterly Income Cumulative Securities) and
DECS (Dividend Enhanced Convertible Securities).
ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the following
features:
they are issued by a company whose common stock 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 that convert to its common stock or the shares of a
different issuer. Names such as ELKS (Equity Linked Securities) or similar
names may identify these securities. Typically they share most of the
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, which is the agreement that describes the
security. A fund may invest in additional types of convertible securities not
specifically described here, as long as such investments are consistent with
its objectives and policies.
SYNTHETIC CONVERTIBLE SECURITIES Certain funds may invest a portion of their
assets in "synthetic convertible" securities. A synthetic convertible is
created by combining distinct securities that together possess fixed income
payments and the right to acquire the underlying equity security. This
combination is achieved by investing in nonconvertible fixed-income
securities and in warrants or stock or stock index call options which grant
the holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case
of stock index options. Synthetic convertible securities are generally not
considered to be "equity securities" for purposes of each fund's investment
policy regarding those securities.
Synthetic convertible securities differ from a true convertible security in
the following respects:
The value of a synthetic convertible is the sum of the values of its
fixed-income and convertibility components, which means that the values of
a synthetic convertible and a true convertible security will respond
differently to market fluctuations.
Typically, the two components of a synthetic convertible represent one
issuer, but a fund may combine components representing distinct issuers,
or to combine a fixed income security with a call option on a stock index,
when the manager determines that such a combination would better promote a
fund's investment objectives.
The component parts of a synthetic convertible security may be purchased
simultaneously or separately.
The holder of a synthetic convertible faces the risk that the price of
the stock, or the level of the market index underlying the convertibility
component will decline.
DERIVATIVE SECURITIES are those securities whose values are dependent upon
the performance of one or more securities or indices. Certain funds may
invest in the following "derivative securities":
collateralized mortgage obligations;
convertible securities with enhanced yield features such as PERCS, ACES,
DECS, and PEPS;
forward contracts;
futures contracts;
options;
spreads and straddles;
swaps; and
synthetic convertible securities.
Derivatives are used for "hedging", which means that they help manage risks
relating to interest rates, currency fluctuations and other market factors.
They may also be used to increase liquidity or to invest in a particular
stock or bond in a more efficient or less expensive way.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES Although the funds have no
present intention of investing in options, futures and options on financial
futures, certain funds have the authority to enter into these transactions.
Certain funds may write (sell) covered put and call options and buy put and
call options on securities listed on a national securities exchange and in
the over-the-counter ("OTC") market. Additionally, a fund may "close out"
options it has entered into.
A call option gives the option holder the right to buy the underlying
security from the option writer at the option exercise price at any time
prior to the expiration of the option. A put option gives the option holder
the right to sell the underlying security to the option writer at the option
exercise price at any time prior to the expiration of the option. The OTC
market is the dealer-to-dealer market in securities, in this case, option
securities in which the fund may buy or sell.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. Certain funds may write
options to generate additional income and to hedge their portfolios against
market or exchange rate movements. The writer of covered calls gives up the
potential for capital appreciation above the exercise price of the option
should the underlying stock rise in value. If the value of the underlying
stock rises above the exercise price of the call option, the security may be
"called away" and a fund required to sell shares of the stock at the exercise
price. A fund will realize a gain or loss from the sale of the underlying
security depending on whether the exercise price is greater or less than the
purchase price of the stock. Any gain will be increased by the amount of the
premium received from the sale of the call; any loss will be decreased by the
amount of the premium received. If a covered call option expires unexercised,
a fund will realize a gain in the amount of the premium received. If,
however, the stock price decreases, the hedging benefit of the covered call
option is limited to the amount of the premium received.
A call option written by a fund is "covered" if:
the fund owns the underlying security that is subject to the call; or
the fund 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:
(a) is equal to or less than the exercise price of the call written; or
(b) is greater than the exercise price of the call written if the
difference in exercise prices is maintained by a fund in cash and
marketable securities in a segregated account with its custodian bank.
Certain funds may write options in connection with "buy-and-write"
transactions; that is, a fund may purchase a security and then write a call
option against that security. The exercise price of the call will depend upon
the expected price movement of the underlying security. The exercise price of
a call option may be below ("in-the-money"), equal to ("at-the-money"), or
above ("out-of-the-money") the current value of the underlying security at
the time the option is written.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines
below the exercise price of the put option, the security may be "put to" a
fund and the fund required to buy the stock at the exercise price. A fund
will incur an unrealized loss to the extent that the current market value of
the underlying security is less than the exercise price of the put option.
However, the loss will be offset at least in part by the premium received
from the sale of the put. If a put option written by a fund expires
unexercised, the fund will realize a gain in the amount of the premium
received.
A put option written by the fund is "covered" if the fund maintains cash and
marketable 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 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 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 the obligation to buy the underlying security at the exercise
price, which will usually exceed the market value of the underlying security
at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same
series as the option previously written. The effect of the purchase is that
the clearing corporation will cancel the writer's position. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction may be made at
the time desired by a fund. Effecting a closing transaction allows the cash
or proceeds from the sale of any securities subject to the option to be used
for other fund investments.
A fund will realize a profit from a closing transaction if the cost of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. A fund will realize a loss
from a closing transaction if the cost of the transaction is more than the
premium received from writing 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 closing transaction
of a written call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the fund.
BUYING CALL AND PUT OPTIONS ON SECURITIES. 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 the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
A 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 the security
before the purchase is effected. A fund may also buy call options on
securities held in its portfolio and on which it has written call options.
Certain funds may buy put options. As the holder of a put option, a fund has
the right to sell the underlying security at the exercise price at any time
during the option period. A fund may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire.
A fund may buy a put option on an underlying security ("a protective put")
owned by the fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when a fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security when the manager finds
it desirable to continue to hold the security because of tax considerations.
The premium paid for the put option and any transaction costs would reduce
any short-term capital gain that may be available for distribution when the
security is eventually sold.
Certain funds may also buy put options at a time when they do not own the
underlying security. If a fund buys a put option on a security it does not
own, the fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price during the life of the put option, the fund
will lose its entire investment in the put option. In order for the purchase
of a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
OVER-THE-COUNTER ("OTC") OPTIONS. Certain funds may write covered put and
call options and buy put and call options that trade in the OTC market to the
same extent that they 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 with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from
market makers. OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices, however, than
exchange traded options and the writer of an OTC option is paid the premium
in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. 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. A
fund may suffer a loss if it is not able to exercise or sell its position on
a timely basis. 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 with which the fund originally wrote the option.
If a fund as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
The funds understand the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to
cover the sale of an OTC option are considered illiquid. The funds and the
manager disagree with this position. Nevertheless, pending a change in the
staff's position, the funds will treat OTC options and "cover" assets as
subject to a fund's limitation on illiquid securities.
OPTIONS ON STOCK INDICES. Certain funds may also buy and sell both 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 funds.
Call and put options on stock indices 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 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 (or less, in the case of puts) than the exercise price of
the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars multiplied by a specified number. Thus, unlike stock options, all
settlements are in cash, and gain or loss depends on the price movements of
the underlying index rather than the price movements of an individual stock.
When a fund writes an option on a stock index, the fund may cover the option
by owning securities whose price changes, in the opinion of the manager, are
expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. The funds may also cover by
establishing a segregated account containing cash or marketable securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index. The fund will maintain the account while the
option is open or it will otherwise cover the transaction.
FORWARD CONVERSIONS. In a forward conversion, a fund buys securities and
writes call options and buys put options on such securities. By purchasing
puts, a fund protects the underlying security from depreciation in value. By
selling calls on the same security, a fund receives premiums which 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. A fund
will not exercise a put it has purchased while a call option on the same
security is outstanding.
Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, a fund's
return may depend in part on movements in the price of the underlying
security.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, a fund
buys and writes a put or buys and writes a call on the same underlying
security with the options having different exercise prices and/or expiration
dates. In "straddles," a fund purchases or writes combinations of put and
call options on the same security. When a fund engages in spread and straddle
transactions, it seeks to profit from differences in the option premiums paid
and received and in the market prices of the related options positions when
they are closed out or sold. Because these transactions require a fund to buy
and/or write more than one option simultaneously, the fund's ability to enter
into such transactions and to liquidate its positions when necessary or
deemed advisable may be more limited than if the fund was to buy or sell a
single option. Similarly, costs incurred by a fund in connection with these
transactions will in many cases be greater than if the fund was to buy or
sell a single option.
FUTURES CONTRACTS. Certain funds may enter into contracts to buy or sell
futures contracts based upon financial instruments ("financial futures").
Financial futures contracts are commodity contracts that obligate the
purchase or seller to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A "sale" of a
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 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. Futures contracts have been
designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, that is a member of the relevant
contract market. Existing contract markets for futures contracts on debt
securities include the Chicago Board of Trade, the New York Cotton Exchange,
the Mid-America Commodity Exchange (the "MCE"), and International Money
Market of the Chicago Mercantile Exchange (the "IMM"). Existing contract
markets for futures contracts on currency include the MCE, the IMM and the
London International Financial Futures Exchange. The exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
A fund may enter into futures contracts on foreign currencies, interest
rates, or on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through
mortgage-backed securities, and three-month U.S. Treasury bills. A fund may
also enter into futures contracts on corporate securities and non-U.S.
government debt securities, but such futures contracts are not currently
available.
At the same time a futures contract is purchased or sold, the fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the fund would provide or receive cash
that reflects any decline or increase in the contract's value.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although financial futures contracts by their terms call for the actual
delivery or acquisition of 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 delivery of the securities or cash.
The obligation to make or take delivery is ended by buying (or selling, as
the case may be) on an exchange an identical financial futures contract
calling for delivery in the same month. All transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with
the exchange on which the contracts are traded. The fund will incur brokerage
fees when it buys or sells financial futures.
A fund will not engage in transactions in futures contracts for speculation.
Futures contracts will be used as a hedge against changes resulting from
market conditions in the values of its securities or securities that it
intends to buy or to attempt to protect a fund from fluctuations in price of
portfolio securities without actually buying or selling the underlying
security. When a fund buys futures contracts or related call options,
marketable instruments equal to the difference between the fluctuating market
value of such futures contract and the aggregate value of the initial and
variation margin payments made by the fund will be deposited in a segregated
account with the custodian bank to collateralize such long positions.
OPTIONS ON FUTURES CONTRACTS. Certain funds are permitted to purchase and
write options on futures contracts for hedging purposes only. The purchase of
a call option on a futures contract is similar in some respects to the
purchase of a call option on an individual security or currency. Depending on
the price of the option compared to either the price of the futures contract
upon which it is based or the price of the underlying securities or currency,
the option may be less risky than direct ownership of the futures contract or
the underlying securities or currency. As with the purchase of futures
contracts, when a fund is not fully invested, it may purchase a call option
on a futures contract to hedge against a market advance due to declining
interest rates or appreciation in the value of a foreign currency against the
U.S. dollar.
If a fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain
the full amount of the option premium, which may provide a partial hedge
against any decline that may have occurred in the value of the fund's
holdings. If the futures price at expiration of the option is higher than the
exercise price, the fund will retain the full amount of the option premium,
which may provide a partial hedge against any increase in the price of
securities that the fund intends to purchase. If a put or call option a fund
has written is exercised, the fund will incur a loss that will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, a fund's losses from existing options on
futures may be affected by changes in the value of its portfolio securities.
STOCK INDEX FUTURES AND OPTIONS ON THESE FUTURES
Certain funds may buy and sell stock index futures contracts and options on
stock index futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer 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 is made. No physical delivery of the underlying stocks in the index
is made.
A fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset a possible decrease in market value of
its equity securities. When a 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 in part or entirely offset
increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. Certain funds may buy and sell call and put
options on stock index futures to hedge against risks of market price
fluctuations. 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 such investments to factors influencing the stock market as a whole.
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 stock index futures give the holder the right to
receive cash. Upon exercise of the option, the writer of the option will
deliver to the holder of the option the accumulated balance in the writer's
futures margin account representing the amount that 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 before 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.
INTEREST RATE FUTURES AND RELATED OPTIONS. Certain funds may buy and sell
interest rate futures contracts and options on these futures contracts. A
fund will 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.
Certain funds may also buy and write put and call options on interest rate
futures and enter into closing transactions with respect to such options.
CURRENCY TECHNIQUES AND HEDGING Certain funds may enter into forward
currency exchange contracts ("forward contracts") and currency futures
contracts and options on these futures contracts, although the fund has no
present intention of using any of these techniques except forward contracts.
The funds typically engage in these practices for hedging purposes, or in
other words for the purpose of protecting against declines in the value of a
fund's portfolio securities and the income on these securities. A fund will
normally conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or
sell foreign currencies.
FORWARD CURRENCY EXCHANGE CONTRACTS. Certain funds may enter into forward
currency exchange contracts to attempt to minimize the risk to the fund from
adverse changes in the relationship between currencies or to enhance income.
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).
A fund may either accept or make delivery of the currency specified at the
maturity of a forward 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.
A fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange
of that currency for another currency. The investment position is not itself
a security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
Certain funds 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
correlation between the two currencies.
A fund may also enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of that
security. Additionally, for example, when a fund believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency. Similarly, when a fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency,
it may enter into a forward contract to buy that foreign currency for a fixed
dollar amount.
A fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of a fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the
ability of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates also may
result in poorer overall performance for the fund than if it had not entered
into such contracts.
The funds generally will not enter into a forward contract with a term of
greater than one year.
CURRENCY FUTURES CONTRACTS. Certain funds may enter into currency futures
contracts traded on regulated commodity exchanges, including non-U.S.
exchanges. 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. A fund may use currency futures contracts to
hedge against anticipated future changes in exchange rates which otherwise
might adversely affect the value of the fund's portfolio securities or
adversely affect the prices of securities that a fund intends to purchase at
a later date.
A fund may either accept or make delivery of the currency specified at the
maturity of a currency 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 currency futures contracts are effected
on the exchange on which the contract was entered into (or on a linked
exchange).
OPTIONS ON FOREIGN CURRENCIES. Certain funds may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities or other assets to be acquired. As
in the case of other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of
the premium received. A fund could be required to buy or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate
movements adverse to a fund's position, the fund may loose the entire amount
of the premium plus related transaction costs.
CURRENCY RATE SWAPS Certain funds may participate in currency rate swaps. A
currency rate swap is the transfer between two counterparties of their
respective rights to receive payments in specified currencies.
REAL ESTATE INVESTMENT TRUSTS ("REITS") typically invest directly in real
estate and/or in mortgages and loans collateralized by real estate. Certain
funds may invest in "Equity" or "Mortgage" REITs "Equity" REITs are real
estate companies that own and manage income-producing properties such as
apartments, hotels, shopping centers or office buildings. The income,
primarily rent from these properties, is generally passed on to investors in
the form of dividends. These companies provide experienced property
management and generally concentrate on a specific geographic region or
property type. "Mortgage" REITs make loans to commercial real estate
developers and earn income from interest payments.
LOAN PARTICIPATIONS Certain funds may invest in loan participations and
other related direct or indirect bank obligations. These instruments are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. Generally, these instruments are sold
without a guarantee by the lending institution, and are subject to the credit
risks of both the borrower and the lending institution. While loan
participations generally trade at par value, a fund will also be able to
acquire loan participations that sell at a discount because of the borrower's
credit problems. To the extent the borrower's credit problems are resolved,
such loan participations may appreciate in value. The manager may acquire
loan participations for a fund when it believes that over the long term
appreciation will occur. Most loan participations in which the funds intend
to invest are illiquid and, to that extent, will be included in a fund's
limitation on illiquid investments described under "Illiquid securities." An
investment in these securities carries substantially the same risks as those
for defaulted debt securities. Interest payments on these securities may be
reduced, deferred, suspended or eliminated and principal payments may
likewise be reduced, deferred, suspended or canceled, causing the loss of the
entire amount of the investment.
TRADE CLAIMS Certain funds may invest a portion of their assets in trade
claims. Trade claims are purchased from creditors of companies in financial
difficulty. For buyers, such as a fund, trade claims offer the potential for
profits since they are often purchased at a significantly discounted value
and, consequently, may generate capital appreciation if the value of the
claim increases as the debtor's financial position improves. If the debtor is
able to pay the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade
claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding.
REPURCHASE AGREEMENTS In a repurchase agreement, a fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. A
custodian bank approved by the funds' Board holds the securities subject to
resale on behalf of a fund. The bank or broker-dealer must transfer to the
custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities
at a later date. The securities are then marked to market daily, that is,
their value is adjusted daily to equal their market value, to maintain
coverage of at least 100%. If the bank or broker-dealer does not repurchase
the securities as agreed, a fund may experience a loss or delay in the
liquidation of the securities underlying the repurchase agreement and may
also incur liquidation costs. The funds, however, intend to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy (I.E., banks or broker-dealers that have been determined by each
fund's manager to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction).
REVERSE REPURCHASE AGREEMENTS. Certain funds may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. A fund sells securities to a bank or
dealer and agrees to repurchase them at a mutually agreed price and date.
Cash or liquid high-grade debt securities having an initial market value,
including accrued interest, equal to at least 102% of the dollar amount sold
by the fund are segregated, i.e., set aside, as collateral and
marked-to-market daily to maintain coverage of at least 100%. Reverse
repurchase agreements involve the risk that the market value of the
securities retained by a fund may decline below the price of the securities
the fund has sold but is obligated to repurchase under the agreement. A
default by the purchaser might cause the fund to experience a loss or delay
in the liquidation costs. The funds intend to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The manager
will evaluate the creditworthiness of these entities prior to engaging in
such transactions and it will conduct these activities under the general
supervision of the Board.
LOANS OF PORTFOLIO SECURITIES Consistent with procedures approved by the
Board and subject to the following conditions, each fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. These loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount equal (on a daily marked-to-market basis) to the current
market value of the securities loaned. The funds retain all or a portion of
the interest received on the investment of the cash collateral or receive a
fee from the borrower. The funds will continue to receive any interest or
dividends paid on any loaned securities and will continue to have voting
rights with respect to the securities. However, as with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail.
ILLIQUID SECURITIES Each fund may invest in securities that cannot be
offered to the public for sale without first being registered under the
Securities Act of 1933 ("restricted securities"), or in other securities
which, in the opinion of the Board, may be illiquid.
Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which a
fund has valued them. Subject to this limitation, the Board has authorized
each fund to invest in restricted securities where such investment is
consistent with each fund's investment objective. The Board has authorized
these securities to be considered liquid to the extent the investment manager
determines on a daily basis that there is a liquid institutional or other
market for such securities - for example, restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. In spite of the managers' determinations
in this regard, the Board will remain responsible for such determinations and
will consider appropriate action, consistent with a fund's objectives and
policies, if the security should become illiquid after purchase. In
determining whether a restricted security is properly considered a liquid
security, the investment manager 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 purchase 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 (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent a
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.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED ("TBA") TRANSACTIONS
Certain funds may purchase securities on a "when-issued," "delayed delivery"
or "TBA" basis. These transactions are arrangements under which a fund may
purchase securities with payment and delivery scheduled for a future time,
generally within 30 to 60 days. These transactions are subject to market
fluctuation and are subject to the risk that the value or yields at delivery
may be more or less than the purchase price or yields available when the
transaction was entered into. Although the funds will generally purchase
these securities on a when-issued or TBA basis with the intention of
acquiring such securities, they may sell such securities before the
settlement date if it is deemed advisable. When a fund is the buyer in such a
transaction, it will maintain, in a segregated account with its custodian
bank, cash or marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The creation and
maintenance of these accounts have the effect of limiting the extent to which
a fund may engage in these transactions. To the extent a fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the fund's
investment objectives and policies, and not for the purpose of investment
leverage. In when-issued, delayed delivery and TBA transactions, a fund
relies on the seller to complete the transaction. The other party's failure
to do so may cause a fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued, delayed delivery or TBA basis do not
generally earn interest until their scheduled delivery date. The funds are
not subject to any percentage limit on the amount of their assets that may be
invested in when-issued, delayed delivery or TBA purchase obligations.
MORTGAGE BACKED SECURITIES
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") Certain funds may invest in CMOs
issued and guaranteed by U.S. government agencies or instrumentalities and in
CMOs issued by certain financial institutions and other mortgage lenders.
CMOs are debt instruments issued by special purpose entities that are secured
by pools of mortgage loans or other mortgage-backed securities. Principal and
interest on the underlying collateral are paid to the issuer of the CMOs to
make required payments on these securities.
A CMO is a mortgage-backed security that separates mortgage pools into
short-, medium-, and long-term components. Each component pays a fixed rate
of interest to security holders at regular intervals. These components enable
an investor, such as a fund, to predict more accurately the pace at which
principal is returned.
CMOs purchased by a fund may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government; or
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer, an entity specifically created for
this purpose, and the guarantee is collateralized by U.S. government
securities.
If the collateral securing the obligations is insufficient to make payment on
the obligation, a holder could sustain a loss. In addition, a fund may buy
CMOs without insurance or guarantees if, in the opinion of the manager, the
sponsor is creditworthy. The ratings of the CMOs will be consistent with the
ratings criteria of the fund.
RESETS. The interest rates paid on CMOs generally are readjusted at intervals
of one year or less to an increment over some predetermined interest rate
index, although some securities in which the funds may invest may have
intervals as long as five years. There are three main categories of indices:
those based on LIBOR, those based on U.S. Treasury securities, and those
derived from a calculated measure such as a cost of funds index or a moving
average of mortgage rates. Commonly used indices include:
the one-, three-, and five-year constant-maturity Treasury rates;
the three-month Treasury bill rate;
the 180-day Treasury bill rate;
rates on longer-term Treasury securities;
the 11th District Federal Home Loan Bank Cost of Funds; the National
Median Cost of Funds;
the one-, three-, six-month, or one-year LIBOR; the prime rate of a
specific bank; or
commercial paper rates.
Some indices, such as the one-year constant-maturity Treasury rate, closely
mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds, tend to lag behind changes in
market interest rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages that collateralize CMOs will
frequently have caps and floors that limit the maximum amount by which the
loan rate to the borrower may change up or down (a) per reset or adjustment
interval and (b) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
SMALL COMPANIES Certain funds may invest in the securities of companies with
a market capitalization of $1.5 billion or less. Small companies are often
overlooked by investors or undervalued in relation to their earnings power.
Because small companies generally are not as well known to the investing
public and have less of an investor following than larger companies, they may
provide greater opportunities for long-term capital growth as a result of
relative inefficiencies in the marketplace. These companies may be
undervalued because they are part of an industry that is out of favor with
investors, although the individual companies may have high rates of earnings
growth and be financially sound.
BANK OBLIGATIONS, or instruments secured by bank obligations, include fixed,
floating or variable rate CDs, letters of credit, time deposits, bank notes
and bankers' acceptances. To the extent that a fund invests in bank
obligations, it will invest in those obligations or instruments issued by
banks and savings institutions with assets of at least $1 billion. Time
deposits are non-negotiable deposits that are held in a banking institution
for a specified time at a stated interest rate.
Certain funds may invest in obligations of U.S. banks, foreign branches of
U.S. banks, foreign branches of foreign banks, and U.S. branches of foreign
banks that have a federal or state charter to do business in the U.S. and are
subject to U.S. regulatory authorities.
COMMERCIAL PAPER typically refers to short-term obligations of banks,
corporations and other borrowers with maturities of up to 270 days. A fund
may invest in domestic or foreign commercial paper. See the Appendix for a
description of commercial paper ratings.
STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the funds may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various
securities. These entities are typically organized by investment banking
firms that receive fees in connection with establishing each entity and
arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchases by an entity, such as a corporation or
trust, of specified instruments and the issuance by that entity of one or
more classes of securities ("structured investments") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
investments to create securities with different investment characteristics
such as varying maturities, payment priorities or interest rate provisions;
the extent of the payments made with respect to structured investments is
dependent on the extent of the cash flow on the underlying instruments.
Because structured investments of the type in which the funds anticipate
investing typically involve no credit enhancement, their credit risk will
generally be equivalent to that of the underlying instruments.
The funds are permitted to invest in a class of structured investments that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated structured investments typically have higher yields and
present greater risks than unsubordinated structured investments. Although
the funds' purchase of subordinated structured investments would have a
similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be leveraged for purposes of
the limitations placed on the extent of the funds' assets that may be used
for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940 (1940 Act). As a
result, each fund's investment in these structured investments may be limited
by the restrictions contained in the 1940 Act. Structured investments are
typically sold in private placement transactions, and there currently is no
active trading market for structured investments. To the extent such
investments are illiquid, they will be subject to the funds' restrictions on
investments in illiquid securities.
SHORT SALES Certain funds may make short sales of securities. In a short
sale a fund does not immediately deliver the securities sold and does not
immediately receive the proceeds from the sale. To fulfill its obligation to
deliver the securities sold short, the fund must borrow the security sold
short and deliver it to the broker through which it made the sale. A fund's
obligation to replace the borrowed security will be secured by collateral,
usually cash, U.S. government securities or other marketable securities. A
fund may make a short sale when the manager believes the price of the stock
may decline and when, for tax or other reasons, the manager does not
currently want to sell the stock or convertible security it owns. In this
case, any decline in the value of a fund's portfolio securities would be
reduced by a gain in the short sale transaction. Conversely, any increase in
the value of a fund's portfolio securities would be reduced by a loss in the
short sale transaction.
Certain funds may also make short sales "against the box" without limitation.
In this type of short sale, a fund owns an equal amount of the securities
subject to the short sale or owns securities that are convertible or
exchangeable, without payment of further consideration, into an equal amount
of such security.
BORROWING Certain funds may borrow money for investment or other purposes.
Borrowings will not exceed the percentage amounts listed in each fund's
investment policies, above, and are limited by fundamental restrictions which
may not be changed without shareholder approval. See "Investment
Restrictions" for more information about the funds' policies with respect to
borrowing.
Under federal securities laws, a fund may borrow from banks only and is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if disadvantageous from an investment
standpoint.
Leveraging by means of borrowing will exaggerate the effect of any increase
or decrease in the value of portfolio securities on a fund's net asset value,
and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average
balances) which may or may not exceed the income received from the securities
purchased with borrowed funds.
DIVERSIFICATION Each fund will operate as a diversified fund under federal
securities law. Each diversified fund may not, with respect to 75% of its
total assets, purchase the securities of any one issuer (except U.S.
government securities) if more than 5% of the value of the fund's assets
would be invested in such issuer.
In addition, each fund intends to diversify its investments to meet the
requirements under federal tax laws relating to regulated investment
companies and variable contracts issued by insurance companies. In order to
comply with the diversification requirements related to regulated investment
companies, each fund will limit its investments so that, at the close of each
quarter of the taxable year:
(i) With respect to 50% of the market value of its assets, not more
than 5% of the market value of its assets will be invested in the
securities of a single issuer and each fund will not own more than
10% of the outstanding voting securities of a single issuer. A
fund's investments in U.S. government securities are not subject to
these limitations, and
(ii) Not more than 25% of the market value of each fund's assets will be
invested in the securities of a single issuer.
In order to comply with the diversification requirements related to variable
contracts issued by insurance companies, each fund will diversify its
investments such that:
(i) No more than 55% of the fund's assets are represented by any one
investment;
(ii) No more than 70% of the fund's assets are represented by any two
investments;
(iii) No more than 80% of the fund's assets are represented by any three
investments; and
(iv) No more than 90% of the fund's assets are represented by any four
investments. In the case of funds investing in obligations of U.S.
government agencies or instrumentalities, each agency or
instrumentality is treated as a separate issuer for purposes of the
above rules.
PORTFOLIO TURNOVER Each fund may purchase and sell securities without regard
to the length of time the security has been held, and the frequency of
portfolio transactions ("portfolio turnover") will vary from year to year,
depending on market conditions. High turnover will increase the fund's
transaction costs. The manager will weigh the benefits of short-term trading
against the transaction costs of higher turnover.
Higher turnover generally increases transaction costs, which are fund
expenses, but would not create capital gains for investors because of the
tax-deferred status of variable annuity and variable life insurance
investments. Portfolio turnover rates for recent years are shown in the
"Financial Highlights."
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility that is, sharp
price movements over relatively short time periods, or a prolonged general
decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the
funds may invest up to 100% of their assets in the following money market
securities, denominated in U.S. dollars or in the currency of any foreign
country, issued by entities organized in the United States or any foreign
country:
short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) obligations issued or guaranteed by
the U.S. Government or the governments of foreign countries, their
agencies or instrumentalities;
finance company and corporate commercial paper, and other short-term
corporate obligations, in each case rated Prime-1 by Moody's or A or
better by S&P or, if unrated, of comparable quality as determined by the
manager;
obligations (including certificates of deposit, time deposits and
bankers' acceptances) of banks; and
repurchase agreements with banks and broker-dealers with respect to such
securities.
RISKS
The value of your shares will increase as the value of the securities owned
by a fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the
value of any particular security that the fund owns, the value of fund shares
may also change with movements in the stock and bond markets as a whole.
FOREIGN SECURITIES Certain funds have an unlimited ability to purchase
securities in any foreign country, developed or developing, if they are
listed on a stock exchange, as well as a limited ability to purchase such
securities if they are unlisted. While foreign securities may offer
significant opportunities for gain, they also involve additional risks that
can increase the potential for losses in the fund. These risks can be
significantly greater for investments in emerging markets. Investments in
depositary receipts also involve some or all of the risks described below.
There may be less publicly available information about foreign companies
compared to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
custodians and listed companies than in the U.S. There is an increased risk,
therefore, of uninsured loss due to lost, stolen, or counterfeit stock
certificates. Foreign markets have substantially less volume than the New
York Stock Exchange and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the U.S., are likely to be higher. Custodial services, and
other costs relating to investment in foreign markets, including developing
markets, are generally higher than in the U.S. Settlement practices may be
cumbersome and result in delays that may affect portfolio liquidity, that is,
it may affect a fund's ability to sell its securities. The funds may have
greater difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies, and obtaining judgments with respect to foreign investments
in foreign courts than with respect to domestic issuers in U.S. courts.
A fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Many debt obligations of foreign issuers, and especially emerging market
issuers, are not rated by U.S. rating agencies and their selection depends on
the manager's internal analysis.
EMERGING MARKETS. Investments in companies domiciled in developing countries
may be subject to potentially higher risks, making these investments more
volatile, than investments in developed countries. These risks include (i)
less social, political and economic stability; (ii) the risk that the small
size of the markets for such securities and the low or nonexistent volume of
trading may result in a lack of liquidity and in greater price volatility;
(iii) the existence of certain national policies which may restrict each
fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in many developing countries, of a
capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in some developing
countries may be slowed or reversed by unanticipated political or social
events in such countries.
In addition, many countries in which the funds 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. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, the Communist
governments of a number of Eastern European countries expropriated large
amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of expropriation, each fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in certain developing countries.
Finally, even though the currencies of some developing countries, such as
certain Eastern European countries may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to a funds' shareholders.
Repatriation, that is, the return to an investor's homeland, of investment
income, capital and proceeds of sales by foreign investors may require
governmental registration or approval in some developing countries. Delays in
or a refusal to grant any required governmental registration or approval for
such repatriation could adversely affect the funds. 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. These economies also have been and may
continue to be adversely affected by economic conditions in the countries
with which they trade.
RUSSIAN SECURITIES. Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with investing in
the U.S. securities markets, and should be considered highly speculative.
Such risks include, together with Russia's continuing political and economic
instability and the slow-paced development of its market economy, the
following:
(a) delays in settling portfolio transactions and the risk of loss arising
out of Russia's 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) the pervasiveness of corruption, insider-trading, and crime in the
Russian economic system;
(d) currency exchange rate volatility and the lack of available currency
hedging instruments such as the techniques discussed under "Currency
techniques and hedging" in this SAI;
(e) higher rates of inflation (including the risk of social unrest
associated with periods of hyper-inflation);
(f) controls on foreign investment and local practices disfavoring foreign
investors, and limitations on repatriation of invested capital, profits
and dividends;
(g) the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the economic
reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies
such as the support of certain industries at the expense of other
sectors or investors, a return to the centrally planned economy that
existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises;
(h) the risks of investing in securities with substantially less liquidity
and in issuers having significantly smaller market capitalizations,
when compared to securities and issuers in more developed markets;
(i) the difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information;
(j) the financial condition of Russian companies, including large amounts
of inter-company debt which may create a payments crisis on a national
scale;
(k) dependency on exports and the corresponding importance of
international trade;
(l) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation or, in the
alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws;
(m) possible difficulty in identifying a purchaser of securities held by
the funds due to the underdeveloped nature of the securities markets;
(n) the possibility that pending legislation could restrict the levels of
foreign investment in certain industries, thereby limiting the number
of investment opportunities in Russia;
(o) the risk that pending legislation would confer to Russian courts the
exclusive jurisdiction to resolve disputes between foreign investors
and the Russian government, instead of bringing such disputes before an
internationally-accepted third-country arbitrator; and
(p) the difficulty in obtaining information about the financial condition
of Russian issuers, in light of the different disclosure and accounting
standards applicable to Russian companies.
There is little long-term historical data on Russian securities markets
because they are relatively new and a substantial proportion of securities
transactions in Russia is privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or by formal share certificates. However,
there is no central registration system for shareholders and these services
are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision nor are they licensed with any governmental entity and it
is possible for the funds to lose their registration through fraud,
negligence or even mere oversight. While each fund will endeavor to ensure
that its interest continues to be appropriately recorded by either itself or
through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent
illegal amendment or other fraudulent act may deprive the funds of their
ownership rights or improperly dilute their interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the funds to enforce any
rights they 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 500 shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of independence,
management of a company may be able to exert considerable influence over who
can purchase and sell the company's shares by illegally instructing the
registrar to refuse to record transactions in the share register. In
addition, so-called "financial-industrial groups" have emerged in recent
years that seek to deter outside investors from interfering in the management
of companies they control. These practices may prevent the funds from
investing in the securities of certain Russian companies deemed suitable by
the manager. Further, this also could cause a delay in the sale of Russian
company securities by a fund if a potential purchaser is deemed unsuitable,
which may expose the fund to potential loss on the investment.
CURRENCY RISK Many of the investments in certain funds are denominated in
foreign currencies. Changes in foreign currency exchange rates will affect
the value of what certain funds own, and those funds' share price. In
addition, changes in foreign currency exchange rates will affect a fund's
income and distributions to shareholders. To the extent that the manager
intends to hedge currency risk in certain funds, the funds endeavor to buy
and sell foreign currencies on as favorable a basis as practicable. Some
price spread in currency exchange (to cover service charges) may be incurred,
particularly when a fund changes investments from one country to another or
when proceeds of the sale of shares in U.S. dollars are used for the purchase
of securities in foreign countries. Some countries may adopt policies that
would prevent the funds from transferring cash out of the country or withhold
portions of interest and dividends at the source.
The funds may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have
fixed or managed currencies that are not free-floating against the U.S.
dollar. Certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. Where
the exchange rate for a currency declines materially after a fund's income
has been accrued and translated into U.S. dollars, a fund may need to redeem
portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a fund incurs expenses in U.S.
dollars and the time such expenses are paid, the fund will have to convert a
greater amount of the currency into U.S. dollars in order to pay the expenses.
Through the funds' flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the funds' investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers the degree of risk involved through the
holding of portfolio securities in domestic and foreign securities
depositories. However, in the absence of willful misfeasance, bad faith, or
gross negligence on the part of the funds' manager, any losses resulting from
the holding of the funds' portfolio securities in foreign countries and/or
with securities depositories will be at the risk of the shareholders. No
assurance can be given that the board of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
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 a fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
INTEREST RATE RISK To the extent a fund invests in debt securities, changes
in interest rates in any country where the fund is invested will affect the
value of the fund's portfolio and its share price. Rising interest rates,
which often occur during times of inflation or a growing economy, are likely
to have a negative effect on the value of the fund's shares. Of course,
interest rates throughout the world have increased and decreased, sometimes
very dramatically, in the past. These changes are likely to occur again in
the future at unpredictable times.
LOWER RATED SECURITIES RISK Certain funds may invest in non-investment grade
securities, including such securities issued by foreign companies and
governments. Because these funds may invest in securities below investment
grade, an investment in any of these funds is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which certain funds invest. Accordingly, an investment in any fund should not
be considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
a fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities
tend to lose much of their value before they default. Thus, a fund's net
asset value may be adversely affected before an issuer defaults. In addition,
a fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from a fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for a fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for a fund to manage the timing of its income. To generate cash for
distributions, a fund may have to sell portfolio securities that it otherwise
may have continued to hold or use cash flows from other sources, such as the
sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on a fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing a fund's
portfolio.
Certain funds may buy high yield, fixed-income securities that are sold
without registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if a fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. A fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
Certain funds may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The funds have 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
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to factors such as these, the
ultimate price of any security generally reflects the true operating results
of the issuer. Factors adversely impacting the market value of high yield
securities may lower a fund's net asset value. A fund relies on the manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the manager takes 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.
The credit risk factors above also apply to lower-quality zero coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, a fund will not receive any cash until
the cash payment date. If the issuer defaults, a fund may not obtain any
return on its investment.
Zero coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Certain of the high yielding, fixed-income securities in which the funds may
invest may be purchased at a discount. When held to maturity or retired,
these securities may include an element of capital gain. Capital losses may
be realized when securities purchased at a premium, that is, in excess of
their stated or par value, are held to maturity or are called or redeemed at
a price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
The tables below show the percentage of the Templeton Bond and Templeton
Asset Allocation Funds' assets invested in securities rated by S&P or Moody's
in the rating categories shown. A credit rating by a rating agency evaluates
the safety of principal and interest based on an evaluation of the security's
credit quality, but does not consider the market risk or the risk of
fluctuation in the price of the security. The information shown is based on a
dollar-weighted average of each fund's portfolio composition based on
month-end assets for each of the 12 months in the fiscal year ended December
31, 1998.
{to be provided by amendment}
- ---------------------------------------------------------------------------
MOODY'S Templeton Bond Fund Templeton Asset
RATING Allocation Fund
xx%
Aaa ........xx% xx% xx%
Aa ........................xx% xx% xx%
A .........................xx% xx% xx%
Baa .......................xx% xx% xx%
Ba ........................xx% xx% xx%
B..........................xx% xx% xx%
Caa .......................xx% xx% xx%
Ca ........................xx% xx% xx%
C .........................xx% xx%
- ---------------------------------------------------------------------------
*xx% of these securities, which are unrated by Moody's, have been included in
the __ rating category.
- --------------------------------------------------------------------------
S&P Templeton Bond Fund Templeton Asset
RATING Allocation Fund
xx%
AAA ....................xxx% xx%
AA......................xxx% xx%
A ......................xxx% xx%
BBB ....................xxx% xx%
BB .....................xxx% xx%
B.......................xxx% xx%
CCC ....................xxx% xx%
CC .....................xxx% xx%
C .......... xx% xx%
D xx%
- --------------------------------------------------------------------------
*xx% of these securities, which are unrated by S&P, have been included in the
__ rating category.
DEFAULTED DEBT Certain funds may buy debt securities of issuers that are not
currently paying interest, as well as issuers who are in default, and may
keep an issue that has defaulted. A fund will buy defaulted debt securities
if, in the opinion of the manager, they may present an opportunity for later
price recovery, the issuer may resume interest payments, or other
advantageous developments appear likely in the near future. In general,
securities that default lose much of their value before the actual default so
that the security, and thus the fund's net asset value, would be impacted
before the default. Defaulted debt securities may be illiquid and, as such,
will be part of the percentage limits discussed under "Investment
Restrictions."
GINNIE MAE yields (interest income as a percentage of price) have
historically exceeded the current yields on other types of U.S. government
securities with comparable maturities. The effects of interest rate
fluctuations and unpredictable prepayments of principal, however, can greatly
change realized yields. As with most bonds, in a period of rising interest
rates, the value of a Ginnie Mae will generally decline. In a period of
declining interest rates, it is more likely that mortgages contained in
Ginnie Mae pools will be prepaid, thus reducing the effective yield. This
potential for prepayment during periods of declining interest rates may
reduce the general upward price increases of Ginnie Maes as compared to the
increases experienced by noncallable debt securities over the same periods.
In addition, any premium paid on the purchase of a Ginnie Mae will be lost if
the obligation is prepaid. Of course, price changes of Ginnie Maes and other
securities held by the funds will have a direct impact on the net asset value
per share of the funds.
SMALL COMPANIES Historically, small company stocks have been more volatile in
price than larger company stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks,
and the greater sensitivity of small companies to changing economic
conditions. Besides exhibiting greater volatility, small company stocks may,
to a degree, fluctuate independently of larger company stocks. Small company
stocks may decline in price as large company stocks rise, or rise in price as
large company stocks decline. Investors should therefore expect that the net
asset value of a fund that invests a substantial portion of its net assets in
small company stocks may be more volatile than the shares of a fund that
invests solely in larger company stocks.
REPURCHASE AGREEMENTS The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of
the security has declined, a fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
a fund not within the control of a fund, and therefore the realization by the
fund on the collateral may be automatically stayed. Finally, it is possible
that the fund may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the manager acknowledges these risks, it is expected that if
repurchase agreements are otherwise deemed useful to a fund, these risks can
be controlled through careful monitoring procedures.
REVERSE REPURCHASE AGREEMENTS are considered borrowings by the funds and as
such are subject to the investment limitations discussed under "Fundamental
Investment Restrictions." These transactions may increase the volatility of a
fund's income or net asset value. The fund carries the risk that any
securities purchased with the proceeds of the transaction will depreciate or
not generate enough income to cover the fund's obligations under the reverse
repurchase transaction. These transactions also increase the interest and
operating expenses of a fund.
MORTGAGE BACKED SECURITIES differ from conventional bonds in that the
principal is paid back over the life of the certificate rather than at
maturity. As a result, funds invested in these securities will receive
monthly scheduled payments of principal and interest on its investment in
these securities, and may receive unscheduled principal payments representing
prepayments on the underlying mortgages. When a fund reinvests the payments
and any unscheduled prepayments of principal it receives, it may receive a
rate of interest that is lower than the rate on the existing security. For
this reason, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" long-term
interest rates.
The market value of mortgage-backed securities, like other U.S. government
securities in the funds, will generally vary inversely with changes in market
interest rates, declining when interest rates rise and rising when interest
rates decline. However, mortgage-backed securities, while having comparable
risk of decline in value during periods of rising rates, may have less
potential for capital appreciation than other investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline. To the extent these securities are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may
result in some loss of a fund's principal investment to the extent of the
premium paid.
OPTIONS ON SECURITIES The fund's options investments involve certain risks.
The effectiveness of an options strategy depends on the degree to which price
movements in the underlying securities correlate with price movements in the
relevant portion of the fund's portfolio. In addition, the fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option it has purchased, or that there may be a negative
correlation that would result in a loss on both the securities and the
option. If the manager is not successful in using options in managing a
fund's investments, the fund's performance will be worse than if the manager
did not employ such strategies.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. The purchaser of an option can lose the amount of the
premium plus related transaction costs. Moreover, a fund as an option writer
could lose amounts substantially in excess of its initial investment, due to
the margin and collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As
a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all
option positions entered into on a national securities exchange are cleared
and guaranteed by the Options Clearing Corporation, thereby reducing the risk
of counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
Although a fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option,
or at any particular time. For some options, no secondary market on an
exchange may exist and a fund may have difficulty effecting closing
transactions in particular options. Therefore, the fund would have to
exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities where a buyer
exercises put or call options. If a fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. There is no assurance
that higher than anticipated trading activity or other unforeseen events
might not, at times, render certain of the facilities of the Options Clearing
Corporation inadequate, and thereby result in the institution by an exchange
of special procedures which may interfere with the timely execution of
customers' orders.
OPTIONS ON STOCK INDICES A fund's ability to hedge effectively all or a
portion of its securities through transactions in options on stock indexes
depends on the degree to which price movements in the underlying index or
underlying securities correlate with price movements in the relevant portion
of the fund's portfolio. Inasmuch as these securities will not duplicate the
components of any index, the correlation will not be perfect. Consequently, a
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 and the hedged
securities that would result in a loss on both the securities and the hedging
instrument. Accordingly, successful use by a fund of options on stock
indexes, will be subject to the manager's ability to predict correctly
movements in the direction of the securities markets generally or of a
particular segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Positions in stock index options 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 stock index option at any
specific time. Thus, it may not be possible to close an option position. The
inability to close options positions could have an adverse impact on the
fund's ability to effectively hedge its securities.
FUTURES CONTRACTS entail certain risks. A purchase or sale of a futures
contract may result in losses in excess of the amount invested. A fund may
not be able to properly hedge its securities where a liquid secondary market
is unavailable for the futures contract the fund wishes to close. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency held by the fund. Although
the manager believes that the use of futures contracts will benefit certain
funds, if the manager's investment judgment about the general direction of
interest or currency exchange rates is incorrect, a fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if a fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of the bonds which it has
hedged because it will have offsetting losses in its futures positions.
Similarly, if a fund sells a foreign currency futures contract and the U.S.
dollar value of the currency unexpectedly increases, the fund will lose the
beneficial effect of the increase on the value of the security denominated in
that currency. In addition, in such situations, if a fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Sales of bonds may be, but are not necessarily, at
increased prices that reflect the rising market. A fund may have to sell
securities at a time when it may be disadvantageous to do so.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions 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
manager may still not result in a successful transaction.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price. Once the daily
limit has been reached in a futures contract subject to the limit, no more
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and, therefore,
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
The funds which are authorized to engage in futures transactions intend to
purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available may be
relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market will
develop or continue to exist. A fund may not be able to achieve a perfect
correlation between its futures positions and portfolio positions in
corporate fixed-income securities because futures contracts based on these
securities are not currently available.
Futures contracts that are purchased on foreign exchanges may not be as
liquid as those purchased on CTFC-designated contract markets. In addition,
foreign futures contracts may be subject to varied regulatory oversight.
OPTIONS ON FUTURES CONTRACTS The amount of risk a fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In writing options on futures, a fund's loss
is potentially unlimited and may exceed the amount of the premium received.
Also, a fund may not be able to properly hedge its securities where a liquid
secondary market is unavailable for the option the fund wishes to close. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased. A
fund will purchase a put option on a futures contract only to hedge the
fund's portfolio against the risk of rising interest rates or the decline in
the value of securities denominated in a foreign currency.
FORWARD CONTRACTS, CURRENCY FUTURES CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES. Successful use of forward contracts, currency futures contracts
and options on foreign currencies depends on the manager's ability to
properly predict movements in the foreign currency markets. There may be an
imperfect correlation between movements in the foreign currency on which a
forward contract, currency futures contract, or option on a foreign currency
is based and movements in the foreign currency.
Forward contracts are not traded on contract markets regulated by the CFTC or
by the SEC. The ability of a fund to use forward contracts could be
restricted to the extent that Congress authorizes the CFTC or the SEC to
regulate such transactions. Forward contracts are traded through financial
institutions acting as market makers. Also, a hedging strategy may not be
successful if the fund is unable to sell its forward contract, currency
futures contract, or option on a foreign currency with the market maker from
which it bought the security.
If a fund retains a portfolio security and enters into a closing transaction,
the fund will have a gain or a loss to the extent that the forward contract
prices have increased or decreased. If a fund enters into a closing
transaction, it may subsequently enter into a new forward contract to sell
the foreign currency. If forward prices decline between the date that a fund
enters into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the fund will realize a gain. If forward prices increase, a fund
will suffer a loss.
The purchase and sale of exchange-traded foreign currency options are subject
to the risks of the availability of a liquid secondary market, as well as the
risks of adverse market movements, possible intervention by governmental
authorities, and the effects of other political and economic events.
Futures contracts on currencies and options on foreign currencies may be
traded on foreign exchanges. These transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign
currencies. The value of such positions could also be adversely affected by
(i) other foreign political and economic factors, (ii) less available data
than in the U.S. on which to base trading decisions, (iii) delays in a fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the U.S., (iv) the imposition of exercise and
settlement terms and procedures, and margin requirements different from those
in the U.S., and (v) lesser trading volume.
CURRENCY SWAPS usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, a fund could lose the entire principal value of a currency swap if
the other party defaults.
The use of currency swaps is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the managers are incorrect in their
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a fund would be less favorable than it would have
been if this investment technique were not used.
REAL ESTATE Because certain funds may invest in the real estate industry, a
fund could own real estate directly as a result of a default on debt
securities it may own. Receipt of rental income or income from the
disposition of real property by a fund may adversely affect its ability to
retain its tax status as a regulated investment company.
CONVERTIBLE SECURITIES have risk characteristics of both equity and debt
securities. Its value may rise and fall with the market value of the
underlying stock or, like a debt security, vary with changes in interest
rates and the credit quality of the issuer. A convertible security tends to
perform more like a stock when the underlying stock price is high (because it
is assumed it will be converted) and more like a debt security when the
underlying stock price is low (because it is assumed it will not be
converted). Because its value can be influenced by many different factors, a
convertible security is not as sensitive to interest rate changes as a
similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
A fund may have difficulty disposing of such securities because there may be
a thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and a fund's ability to
dispose of particular securities, when necessary, to meet a fund's liquidity
needs or in response to a specific economic event, such as the deterioration
in the creditworthiness of an issuer. Reduced liquidity in the secondary
market for certain securities may also make it more difficult for a fund to
obtain market quotations based on actual trades for purposes of valuing a
fund's portfolio. The funds, however, intend to acquire liquid securities,
though there can be no assurances that this will be achieved.
FUNDAMENTAL INVESTMENT RESTRICTIONS Each fund has adopted the following
restrictions as fundamental policies. This means they may only be changed if
the change is approved by (i) more than 50% of the fund's outstanding shares
or (ii) 67% or more of the fund's shares present at a shareholder meeting if
more than 50% of the fund's outstanding shares are represented at the meeting
in person or by proxy, whichever is less.
Each fund may not:
1. Invest in real estate or mortgages on real estate, or purchase or sell
commodity contracts, except that (i) the Bond, Asset Allocation, Developing
Markets, Growth, Mutual Shares and Small Cap Funds may invest in marketable
securities secured by real estate or interests therein, such as CMOs, or
issued by companies or investment trusts which invest in real estate or
interests therein; and (ii) the Bond, Asset Allocation, Developing Markets,
International, Growth, Mutual Shares and Small Cap Funds may purchase and
sell foreign currency futures and financial futures; and (iii) the Stock,
Asset Allocation, Developing Markets, International, Growth, Mutual Shares
and Small Cap Funds may purchase and sell stock index futures contracts; and
(iv) Templeton Bond Fund may purchase and sell bond index futures contracts.
2. With respect to 75% of its total assets, invest more than 5% of the
total value of its assets in the securities of any one issuer, or purchase
more than 10% of any class of securities of any one company, including more
than 10% of its outstanding voting securities (except for investments in
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities). This restriction does not apply to the Bond Fund.
3. Act as an underwriter, or issue senior securities except as set forth
in Investment Restriction 5 below.
4. Lend money, except that all funds may purchase publicly distributed
bonds, debentures, notes and other evidences of indebtedness and may buy from
a bank or broker-dealer U.S. Government obligations with a simultaneous
agreement by the seller to repurchase them at the original purchase price
plus accrued interest, and may lend their portfolio securities.
5. Borrow money for any purpose other than redeeming its shares or
purchasing its shares for cancellation, and then only as a temporary measure
up to an amount not exceeding 5% of the value of its total assets, except
that the Bond, Stock, Asset Allocation, and International Funds may borrow
money in amounts up to 30% of the value of its net assets. The Developing
Markets, Growth, Mutual Shares and Small Cap Funds may borrow money from
banks in an amount up to 33 1/3% of the fund's total assets (including the
amount borrowed), but may not pledge, mortgage or hypothecate its assets for
any purpose, except to secure borrowings and then only to an extent not
greater than 15% of the fund's total assets. Arrangements with respect to
margin for futures contracts, forward contracts and related options are not
deemed to be pledge of assets.
6. Invest more than 25% of its total assets in a single industry, except
that this limitation will not apply to investments in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, or
repurchase agreements on such securities.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS As non-fundamental investment
policies, which may be changed by the Board without shareholder approval, a
fund will not invest more than 15% of its total assets in securities of
foreign issuers which are not listed on a recognized United States or foreign
securities exchange, or more than 15% of its total assets in (a) securities
with a limited trading market, (b) securities subject to legal or contractual
restrictions as to resale, and (c) repurchase agreements not terminable
within seven days.
Whenever any investment policy or investment restriction states a maximum
percentage of a fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of the fund's acquisition of
such security or property. The investment restrictions do not preclude a fund
from purchasing the securities of any issuer pursuant to the exercise of
subscription rights distributed to a fund by the issuer, unless such purchase
would result in a violation of investment restriction number 6.
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.
RISKS
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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 fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
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 affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH
THE TRUST PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS DURING THE PAST FIVE YEARS
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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)
The Bullitt House
102 East Dover 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, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 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,
Inc.; 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, Inc. 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, Inc. and Franklin Mutual Advisers,
Inc.; 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, Inc.; 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, Inc.;
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 $[ ] per month plus $[ ] per
meeting attended. The trust pays noninterested board members and Mr. Brady an
annual retainer of $6,000 and a fee of $500 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 fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members 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 TRUST* TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FUNDS* SERVES**
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
Gordon S. Macklin 4,000 361,157 49
Fred R. Millsaps 4,400 210,075 22
* For the fiscal year ended December 31, 1998. During the period from January
1, 1998, through May 31, 1998, fees at the rate of $[ ] per month plus $[ ]
per board meeting attended were in effect.
** 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.
As of [ ] the officers and trustees owned of record or beneficially less
than 1% of the outstanding shares of the trust.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Templeton Investment Counsel, Inc. is the
manager of the Asset Allocation, Bond, International, and Stock Funds.
Templeton Asset Management Ltd. is the manager for the Developing Markets
Fund. Franklin Advisers, Inc. is the manager for the Growth Fund and the
Small Cap Fund. Franklin Mutual Advisers, Inc. is the manager for the Mutual
Shares Fund. The managers are 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 managers provide investment research and portfolio management services,
and select the securities for the funds to buy, hold or sell. The managers
also select the brokers who execute the funds' portfolio transactions. The
managers provide periodic reports to the board, which reviews and supervises
the managers' investment activities. To protect the funds, the managers and
their officers, directors and employees are covered by fidelity insurance.
Templeton Asset Management Ltd. and Templeton Global Advisors Limited render
their services to the funds from outside the U.S.
The Templeton organization has been investing globally since 1940. It has
offices in Argentina, Australia, Bahamas, Bermuda, Brazil, the British Virgin
Islands, Canada, China, Cyprus, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, United Kingdom
and the U.S.
The managers and their affiliates 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 Each fund pays its manager a fee equal to an annual rate as
follows:
BOND FUND:
0.50% of the value of net assets up to and including $200 million;
0.45% of the value of net assets over $200 million up to $1.3 billion; and
0.40% of the value of net assets in excess of $1.3 billion.
ASSET ALLOCATION FUND:
0.65% of the value of net assets up to and including $200 million;
0.585% of the value of net assets over $200 million up to $1.3 billion; and
0.52% of the value of net assets in excess of $1.3 billion.
STOCK AND INTERNATIONAL FUNDS:
0.75% of the value of net assets up to and including $200 million;
0.675% of the value of net assets over $200 million up to $1.3 billion; and
0.60% of the value of net assets in excess of $1.3 billion.
DEVELOPING MARKETS FUND:
1.25% of the value of net assets.
GROWTH FUND:
0.60% of the value of net assets up to and including $200 million;
0.50% of the value of net assets over $200 million up to $1.3 billion; and
0.40% of the value of net assets in excess of $1.3 billion.
SMALL CAP FUND:
0.75% of the value of net assets up to and including $200 million;
0.65% of the value of net assets over $200 million up to $1.3 billion; and
0.55% of the value of net assets in excess of $1.3 billion.
MUTUAL SHARES FUND:
0.60% of the value of net assets.
The fees are computed according to the terms of the management agreements.
Each class of a fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the funds paid the
following management fees:
Management Fees Paid ($)
Fund Name 1998 1997 1996
Growth Fund [to be filed by
amendment]
Small Cap Fund
Mutual Shares Fund
Asset Allocation Fund 3,834,087 2,245,898
Bond Fund 164,371 162,273
Developing Markets Fund 1,859,449 293,918
International Fund 5,356,048 2,445,202
Stock Fund 4,629,013 2,627,573
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. FT Services is wholly owned by
Resources and is an affiliate of the trust's manager and principal
underwriter. Before November 1, 1998, Templeton Funds Annuity Company
provided administrative services for the funds.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The funds manager pays FT Services a monthly fee based
on the assets of the trust (all funds) equal to an annual rate of:
0.15% of the average daily net assets up to $200 million;
0.135% of average daily net assets over $200 million up to $700 million;
0.10% of average daily net assets over $700 million up to $1.2 billion; and
0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended December 31, 1998, 1997, and 1996
the fund administrator received fees of $[to be provided in a later
amendment], $2,426,200, and $1,801,632, respectively.
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 custodian of the trust's assets. 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. The Bank of
New York, Mutual Funds Division, 90 Washington Street, New York, NY 10286,
acts as custodian of the fund's securities and other assets of the Growth and
Small Cap Funds.
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
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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 manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The 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 manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
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.
During the last three fiscal years ended December 31, the funds paid the
following brokerage commissions:
Brokerage Commissions ($)
------------------------------------------------
1998 1997 1996
Growth Fund [to be
filed by
amendment]
Small Cap Fund
Mutual Shares Fund
Asset Allocation Fund
Bond Fund
Developing Markets Fund
International Fund
Stock 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. As of December
31, 1998, the [to be updated by amendment]. Except as noted, the funds did
not own any securities issued by their regular broker-dealers during the
fiscal year.
The following table identifies each fund which held securities of its regular
brokers or dealers during 1998, the names of each such broker or dealer, and
the value, if any, of such securities held by each fund as of December 31,
1998.
[to be supplied by a later amendment]
The Mutual Shares Fund may receive research services from persons who act as
brokers or dealers for the fund. The discussion below relates in general to
these brokers or dealers who, pursuant to various arrangements, pay for
certain computer hardware and software and other research and brokerage
services to the manager and/or the funds for transactions effected by it for
the fund. Commission soft dollars may be used only for brokerage and research
services provided by brokers to whom commissions are paid and under no
circumstances will cash payments be made by any such broker to the fund's
manager. To the extent that commission soft dollars do not result in the
provision of any "brokerage and research services" by brokers to whom such
commissions are paid, the commissions, nevertheless, are the property of such
broker. Although, potentially, the manager could be influenced to place fund
brokerage transactions with a broker in order to generate soft dollars for
the manager's benefit, the manager believes that the requirement that it
achieve best execution on fund portfolio transactions, and the fund's
negotiated commission structure with brokers, mitigate these concerns as the
cost of transactions effected through brokers, before consideration of any
soft dollar benefits that may be received, generally will be comparable to
that available elsewhere. During the fiscal year ended December 31, 1998[to
be updated by a later amendment].
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 871(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 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 Small Cap Investments Fund - Class 1
Franklin Small Cap 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 Stock Fund - Class 1
Templeton Stock Fund - Class 2
Shares of each class represent proportionate interests in a fund's assets. 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.
As of February XX, 1999, the principal shareholders of the trust, beneficial
or of record, were:
[to be provided in a later amendment]
Name and Address Share Class Percentage (%)
- ---------------------------------------------------------------
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, [names of insurance companies] will exercise voting rights
attributable to these shares in accordance with voting instructions received
by owners of the contracts issued by [names of insurance companies]. To this
extent, [names of insurance companies] do not exercise control over the trust
by virtue of the voting rights from their ownership on trust shares.
To the knowledge of management, as of March 31, 1999, no other person owned
of record or beneficially 5% or more of the shares of any of the funds.
PRICING SHARES
- ------------------------------------------------------------------------------
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.
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.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
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, 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 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.
For the fiscal year ended December 31, 1998, the funds made the following
payments:
[to be supplied by a later amendment]
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 were 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
The total return performance for each fund's Class 2 shares for the periods
prior to becoming effective on May 1, 1997, will represent the historical
results of Class 1 shares. Performance of Class 2 shares for the periods
after May 1, 1997 will reflect Class 2's higher annual fees and expenses
resulting from its Rule 12b-1 plan. Historical performance data for Class 2
shares, based on Class 1 performance, will generally not be restated to
include 12b-1 fees, although each fund may restate these figures consistent
with SEC rules.
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. The cumulative total returns for the
indicated periods ended [], 199[], were:
[to be supplied by a later amendment]
The average annual total returns for each fund as of the end of the most
recent fiscal year are set forth in the trust's most recent annual report.
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 "Performance Data" in the appropriate
insurance company separate account prospectus and "Calculation of Performance
Data" in the appropriate insurance company separate account SAI.
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:
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.
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 the end of May 1997, the regional weights
of the IFC Composite Index were distributed accordingly: Asia, 40%; Latin
America, 38%; and Europe/Mideast/Africa, 22%.
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.
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
9/23/98, there were 10 funds in this category.
MORGAN STANLEY INTERNATIONAL EUROPE, AUSTRALIA, FAR EAST (MSCI EAFE)
Index - This index includes approximately 1000 companies representing the
stock markets of 20 countries in Europe, Australia, New Zealand, and the
Far East. The average company has a market capitalization of over $3
billion.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX - The index
comprises the developed markets of 22 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.
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.
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.
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).
WILSHIRE 5000 EQUITY INDEX - This index represents the return on the
market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
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.
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.
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.
MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
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.
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.
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.
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.
SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES - This
measures yield, price and total return for Treasury, agency, corporate
and mortgage bonds.
LEHMAN BROTHERS AGGREGATE BOND INDEX OR ITS COMPONENT INDICES - This
measures yield, price and total return for Treasury, agency,
corporate, mortgage and Yankee bonds.
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.
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.
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.
Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
Allegorical stories illustrating the importance of persistent long-term
investing.
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.
Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
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.
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:
TEMPLETON VARIABLE PRODUCTS SERIES FUND FRANKLIN TEMPLETON FUNDS
FRANKLIN STRATEGIC FUNDS
Franklin Small Cap Investments Fund - Franklin Small Cap Growth Fund
Templeton International Fund Templeton Foreign Fund
Templeton Stock Fund Templeton Growth Fund, Inc.
Templeton Bond Fund Templeton Global Bond Fund
FRANKLIN CUSTODIAN FUNDS, INC.
Franklin Growth Investments Fund - Growth Series
FRANKLIN MUTUAL SERIES FUND, INC.
Mutual Shares Investments Fund - Mutual Shares Fund
Templeton Developing Markets Fund Templeton Developing Markets Trust
Templeton Asset Allocation Fund n/a
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.
* 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.
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, except Exhibits
23(h)(ii)and 23(o)(i) which are included. Financial statements and
related exhibits (Exhibits 23(j)and 27)will be filed in a later
amendment.
(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 Investment 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.
(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.
Consent of Independent Accountants
(to be filed by post-effective amendment)
(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
27 FINANCIAL DATA SCHEDULE.
To be filed by post-effective amendment.
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 all Funds
in the Trust except the Templeton Developing Markets, Mutual
Shares Investments, and Franklin Growth Investments 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 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 certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b)under the Securities Act of 1933 and 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
24th day of February, 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: February 24, 1999
Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: February 24, 1999
Edith E. Holiday* Trustee
Edith E. Holiday Dated: February 24, 1999
Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: February 24, 1999
Charles B. Johnson* Trustee
Charles B. Johnson Dated: February 24, 1999
Harris J. Ashton* Trustee
Harris J. Ashton Dated: February 24, 1999
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: February 24, 1999
Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: February 24, 1999
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: February 24, 1999
Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: February 24, 1999
James R. Baio* Principal Financial Officer
James R. Baio Dated: February 24, 1999
*By
/s/ Karen L.Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item23(o))
TEMPLETON VARIABLE PRODUCTS SERIES FUND
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Form of Declaration of Trust *
EX-99.(a)(ii) Form of Amendment of Declaration of *
Trust
EX-99.(a)(iii) Amended Establishment and Designation *
of Series of Shares
EX-99.(a)(iv) Fifth Amended Establishment and *
Designation of Series of Shares
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Amended and Restated Investment *
Management Agreement for Templeton Money
Market Fund and Templeton Bond Fund
EX-99.(d)(ii) Investment Management Agreement for *
Templeton Developing Markets Fund
EX-99.(d)(iii) Investment Management Agreement *
between Registrant, on behalf of the
Templeton Asset Allocation Fund, and
Templeton Investment Counsel, Inc.
EX-99.(d)(iv) Investment Management Agreement *
between Registrant, on behalf of the
Templeton Stock Fund, and Templeton
Investment Counsel, Inc.
EX-99.(d)(v) Investment Management Agreement *
between Registrant, on behalf of the
Templeton International Fund, and
Templeton Investment Counsel, Inc.
EX-99.(d)(vi) Investment Management Agreement *
between Registrant, on behalf of Franklin
Growth Investments Fund, and Franklin
Advisers, Inc.
EX-99.(d)(vii) Investment Management Agreement *
between Registrant, on behalf of the
Mutual Shares Investments Fund, and
Franklin Mutual Advisers, Inc.
EX-99.(d)(viii) Form of Management Agreement between *
Registrant, on behalf of Franklin Small
Cap Investments, Fund and Franklin
Advisers, Inc.
EX-99.(e)(i) Amended and Restated Distribution *
Agreement
EX-99.(g)(i) Amended and Restated Custodian *
Agreement
EX-99.(g)(ii) Master Custody Agreement between *
the Registrant and the Bank of New York
EX-99.(h)(i) Amended and Restated Business *
Management Agreement
EX-99.(h)(ii) Form of Fund Administration Attached
Agreement between Registrant, and
Franklin Templeton Services, Inc.
EX-99.(i)(i) Opinion and Consent of Counsel dated *
April 28, 1998
EX-99.(j)(i) Consent of Independent Accountants **
EX-99.(l)(i) Letter concerning initial capital *
EX-99.(m)(i) Distribution Plan between the *
Registrant and Franklin Templeton
Distributors, Inc.
EX-99.(o)(i) Form of Multiple Class Plan for all *
series of Registrant, except Templeton
Money Fund
EX-99.(p)(i) Power of Attorney from Officers Attached
and Directors of the Registrant dated
December 11, 1998
EX-27 Financial Data Schedule **
*Incorporated by Reference
** To be filed by amendment
FUND ADMINISTRATION AGREEMENT BETWEEN
TEMPLETON VARIABLE PRODUCTS SERIES FUND
AND
FRANKLIN TEMPLETON SERVICES, INC.
AGREEMENT dated as of _______________ 1998, between Templeton
Variable Products Series Fund (the "Investment Company"), an investment
company registered under the Investment Company Act of 1940 ("1940 Act"), on
behalf of each of its series listed on SCHEDULE A (each, a "Fund"), and
Franklin Templeton Services, Inc. ("Administrator").
In consideration of the mutual promises herein made, the parties
hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to
shareholders, notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other communications
with individual shareholders when asked to do so by the Fund's shareholder
servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by
the Fund; providing fund accounting services, including preparing and
supervising publication of daily net asset value quotations, periodic
earnings reports and other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law
firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act and
the rules and regulations thereunder, and under other applicable state and
federal laws; and maintaining books and records for the Fund (other than
those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, annuity tax diversification testing and monitoring the
Fund's compliance with subchapter M of the Internal Revenue Code, as amended,
and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and
foreign laws and regulations applicable to the operation of investment
companies; state insurance licensing of certain employees, and occasional
support of state insurance filings; the Fund's investment objectives,
policies and restrictions; and the Code of Ethics and other policies adopted
by the Investment Company's Board of Trustees or Directors ("Board") or by
the Fund's investment adviser and applicable to the Fund;
(j) preparing and filing regulatory reports, including without
limitation Forms N-1A and NSAR, proxy statements, information statements and
U.S. and foreign ownership reports;
(k) review insurance company marketing literature and
prospectuses pertaining to information about Investment Company or any Fund;
and
(l) providing executive, clerical and secretarial personnel
needed to carry out the duties described in this Agreement;
(m) negotiation and documentation of Fund Participation
Agreements among the Investment Company, its principal underwriter, and
insurance companies which invest in one or more Funds;
(n) customization of Investment Company prospectuses and
shareholder reports as requested by insurance company shareholders; and
(o) providing support services incidental to carrying out the
duties described in this Agreement.
Nothing in this Agreement shall obligate the Investment Company or any Fund
to pay any compensation to the officers of the Investment Company. Nothing
in this Agreement shall obligate the Administrator to pay for the services of
third parties, including attorneys, auditors, printers, pricing services or
others, engaged directly by the Fund to perform services on behalf of the
Fund.
(2) The Investment Company agrees, during the life of this Agreement,
to pay to the Administrator as compensation for the foregoing a monthly fee
equal on an annual basis to 0.15% of the first $200 million of the average
daily net assets of the Investment Company during the month preceding each
payment, reduced as follows: on such net assets in excess of $200 million up
to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal
on an annual basis to 0.10%; and on such net assets in excess of $1.2
billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or
any limitation of each affected Fund's expenses, as if such waiver or
limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved
by the vote of a majority of the Board of the Investment Company in office at
the time or by the vote of a majority of the outstanding voting securities of
the Investment Company (as defined by the 1940 Act); and shall automatically
and immediately terminate in the event of its assignment (as defined by the
1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
TEMPLETON VARIABLE PRODUCTS FRANKLIN TEMPLETON SERVICES, INC.
SERIES FUND
By: By:
Title: Title:
SCHEDULE A
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Bond Fund
Templeton Developing Markets Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
POWER OF ATTORNEY
The undersigned Officers and Trustees of TEMPLETON VARIABLE
PRODUCTS SERIES FUND (the "Registrant") hereby appoint Allan S. Mostoff,
Jeffrey L. Steele, Mark H. Plafker, Bruce G. Leto, Deborah R. Gatzek, Barbara
J. Green, Larry L. Greene, Karen L. Skidmore, Elizabeth Cohernour and Joan E.
Boros (with full power to each of them to act alone) his/her attorney-in-fact
and agent, in all capacities, to execute, and to file any of the documents
referred to below relating to Post-Effective Amendments to the Registrant's
registration statement on Form N-1A under the Investment Company Act of 1940,
as amended, and under the Securities Act of 1933, as amended, covering the
sale of shares by the Registrant under prospectuses becoming effective after
this date, including any amendment or amendments increasing or decreasing the
amount of securities for which registration is being sought, with all
exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of
said attorneys, full authority to do every act necessary to be done in order
to effectuate the same as fully, to all intents and purposes as he/she could
do if personally present, thereby ratifying all that said attorneys-in-fact
and agents, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more
counterparts, each of which shall be deemed to be an original, and all of
which shall be deemed to be a single document.
The undersigned Officers and Trustees hereby execute this Power
of Attorney as of the 11th day of December, 1998.
/s/ HARRIS J. ASHTON, /s/ BETTY P. KRAHMER
Harris J. Ashton, Trustee Betty P. Krahmer, Trustee
/s/ NICHOLAS F. BRADY /s/ GORDON S. MACKLIN
Nicholas F. Brady, Trustee Gordon S. Macklin, Trustee
/s/ S. JOSEPH FORTUNATO /s/ FRED R. MILLSAPS
S. Joseph Fortunato, Trustee Fred R. Millsaps, Trustee
/s/ ANDREW H. HINES, JR., /s/ CHARLES E. JOHNSON
Andrew H. Hines, Jr., Trustee Charles E. Johnson, President
/s/ CHARLES B. JOHNSON /s/ JAMES R. BAIO
Charles B. Johnson, Trustee James R. Baio, Treasurer
/s/ EDITH E. HOLIDAY
Edith E. Holiday, Trustee
