AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 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. 20 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
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 July 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
Franklin Real Estate Investments Fund - Class 1
Franklin Real Estate Investments Fund - Class 2
Franklin Strategic Income Investments Fund - Class 1
Franklin Strategic Income Investments Fund - Class 2
PROSPECTUS
May 1, 1999
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
FRANKLIN REAL ESTATE INVESTMENTS FUND
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
CLASS 1 SHARES
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Information about each fund
you i OVERVIEW
should know before
investing
INDIVIDUAL FUND DESCRIPTIONS
FR-1 Franklin Real Estate Investments Fund
FSI-1 Franklin Strategic Income Investments
Fund
ADDITIONAL INFORMATION, ALL FUNDS
Important Recent Developments
Distributions and Taxes
FUND ACCOUNT INFORMATION
Buying Shares
Information about fund Selling Shares
account transactions Exchanging Shares
and services Fund Account Policies
Questions
FOR MORE INFORMATION
Where to learn more about Back Cover
each fund
Templeton Variable Products Series Fund
Overview
Templeton Variable Products Series Fund (the Trust) currently consists of
ten separate funds, offering a wide variety of investment choices. Each
fund has two classes of shares, class 1 and class 2. The funds are only
available as investment options in variable annuity or variable life
insurance contracts. The accompanying contract prospectus, or disclosure
document, indicates which funds and classes are available to you.
INVESTMENT CONSIDERATIONS
o Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider
diversifying your fund choices.
o You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
o All securities markets, interest rates, and currency valuations move up and
down, sometimes dramatically, and mixed with the good years can be some bad
years. Since no one can predict exactly how financial markets will perform,
you may want to exercise patience and focus not on short-term market
movements, but on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment
goal.
o Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
o Fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of
the U.S. government. Fund shares involve investment risks, including the
possible loss of principal.
More detailed information about each fund, its investment policies, and its
particular risks can be found in the Trust's Statement of Additional
Information (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $211 billion
in assets. Franklin Templeton is one of the largest mutual fund organizations
in the United States, and offers money management expertise spanning a
variety of investment objectives. In 1992, Franklin, recognized as a leader
in managing domestic mutual funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later.
FRANKLIN REAL ESTATE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is to earn current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in securities of companies operating in the
real estate industry, primarily equity real estate investment trusts (REITs).
Real estate companies include:
o companies qualifying under federal tax law as REITs,
o real estate operating companies, real estate services companies,
homebuilders and developers that derive at least half of their assets
or revenues from the ownership, construction, management or other
services, or sale of residential, commercial or industrial real estate.
[Begin callout]
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
[End callout]
REITs are real estate investment trust companies, usually publicly traded,
that manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and shareholders receive income from the
rents received, and receive capital gains on the properties sold at a profit.
Other types, for example, mortgage REITs specialize in lending money to
developers and pass interest income on to shareholders. Still others are
hybrid REITs, having a mix of equity and debt investments. The fund generally
invests in medium-cap (less than $5 billion) to small-cap (less than $1.5
billion) in REITs, because that is reflective of the industry itself. Market
capitalization is defined as share price times the number of common stock
shares outstanding.
In addition to its principal investments, the fund may invest in equity or
debt securities of issuers engaged in businesses whose products and services
are closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but who have very
significant real estate holdings believed to be undervalued relative to the
company's securities. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
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.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy for this fund. As a
"bottom-up" investor focusing primarily on individual securities, the fund's
manager will focus on the market price of a company's security relative to
its evaluation of the company's long-term earnings, asset value, and cash
flow potential. Using both qualitative and quantitative analysis and on-site
visits, the manager evaluates security characteristics, the strength and
quality of management, and underlying properties. In addition, the manager
may consider other factors, such as the supply and demand outlook for various
property types and regional markets.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable for investors, is unable to locate suitable
investment opportunities, or seeks to maintain liquidity, it may invest all
or substantially all of the fund's assets in short-term investments,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price,
its distributions or income, and therefore, the fund's performance.
REAL ESTATE SECURITIES By concentrating in a single industry sector, the
fund carries much greater risk of adverse developments in that sector than a
fund that invests in a wide variety of industries. Real estate values rise
and fall in response to a variety of factors, including local, regional and
national economic conditions and tax considerations, the strength of specific
industries renting properties, and other factors affecting the supply and
demand for properties. When economic growth is slowing, demand for property
decreases and prices may decline. Rising interest rates, which drive up
mortgage and financing costs, can restrain construction and buying and
selling activity and make other investments more attractive. Property values
could decrease because of overbuilding, increases in property taxes and
operating expenses, changes in zoning laws, environmental regulations or
hazards, uninsured casualty or condemnation losses, or a general decline in
neighborhood values.
REITS Equity REITs can be affected by any changes in the value of the
properties owned, while mortgage REITs can be affected by the quality of any
credit extended. A REIT's performance depends on the types and locations of
the properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to
pay rent or poor management.
A REIT's performance also depends on the company's ability to finance
property purchases and renovations and manage its cash flows. Because REITs
are typically invested in a limited number of projects or in a particular
market segment, they are more susceptible to adverse developments affecting a
single project or market segment than more broadly diversified investments.
Loss of status as a qualified REIT or changes in the treatment of REITs under
the federal tax law, could adversely affect the value of a particular REIT or
the market for REITs as a whole and the fund's performance.
[Begin callout]
Because the securities the fund holds fluctuate in price with real estate
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]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramaticallyn over the
shorter term. These price movements may result from factors affecting
individual companies, industries, or securities markets. Value stock prices
are considered "cheap" relative to the company's perceived value and are
often out of favor with other investors. If other investors fail to recognize
the company's value and do not become buyers, or if they become sellers, or
in markets favoring faster-growing companies, value stocks may not increase
in value as anticipated by the manager or may decline further.
SMALLER COMPANIES 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 they can be considered
speculative. These companies may suffer significant losses. Small-cap REITs
can be subject to greater risks than mid- or large-cap issuers due to greater
regional concentration and less diversification in terms of the regions,
clients and types of properties available for investment.
DIVERSIFICATION The fund is non-diversified under the federal securities
laws. As such, it may invest a greater portion of its assets in one issuer
and have a smaller number of issuers than a diversified fund. Therefore, the
fund may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund will, however, meet tax
diversification requirements.
See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be
found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
Because the fund started on July 1, 1999, performance for a full calendar
year is not yet available.
FEES AND EXPENSES
Franklin Real Estate Securities Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY
FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH
THE FUND IS AN INVESTMENT OPTION. IF THEY WERE INCLUDED, YOUR COSTS WOULD BE
HIGHER. Investors should consult the contract prospectus or disclosure
document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
- --------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering
price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS 1
Management fees
Other expenses1
Total annual fund operating expenses
[FIGURES TO BE SUPPLIED IN A LATER AMENDMENT]
1. "Other Expenses" are based on estimated amounts for the current fiscal year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
[to be supplied in a later amendment]
[INSERT GRAPHIC OF BRIEFCASE] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
MATTHEW F. AVERY Mr. Avery has been a manager
Senior Vice President, of the fund since its
Advisers inception, and has
been with the Franklin
Templeton Group since 1987.
DOUGLAS BARTON, CFA Mr. Barton has been a manager
Vice President, Advisers of the fund since its inception, and
has been with the Franklin
Templeton Group since 1988.
The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is equal to an annual rate of [to be supplied].
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to earn a high level of
current income. Its secondary goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in U.S. and non-U.S. debt securities. The
fund uses an active allocation strategy to seek its goals, and there are no
set percentage limitations on particular sectors. Rather, the fund
actively and flexibly shifts its investments among various sectors,
including:
o High Yield Corporate Bonds
o Emerging Market Bonds
o International Bonds
o Convertible Securities, including preferred stocks and bonds convertible
into common stocks
o Mortgage Securities and other Asset-Backed Securities
o U.S. Government Bonds
o Preferred Stock (non-convertible)
[Begin callout]
Through active allocation, the fund invests primarily in U.S. and non-U.S.
bonds, including high yield, lower rated bonds.
[End callout]
The fund invests in fixed, floating and variable rate 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. Common debt
securities are bonds, including bonds convertible into common stock or unsecured
bonds, notes, and short-term investments, including cash or cash equivalents.
Such debt securities also include U.S. government securities, which are
securities issued or guaranteed by the U.S. government, its agencies,
authorities or instrumentalities. In addition to U.S. Treasury notes and
bonds, the fund invests in mortgage-backed securities such as Government
National Mortgage Association ("Ginnie Maes"), Federal National Mortgage
Association, or Federal Home Loan Mortgage Corporation obligations and other
asset-backed securities such as Small Business Administration obligations
("Sallie Maes"). Unlike Treasury securities, Ginnie Maes and Sallie Maes,
the timely payment of principal and interest on securities issued or
guaranteed by FNMA, FHLMC and certain other entities are not backed by the
full faith and credit of the U.S. Government. In addition to U.S. Government
mortgage-backed securities, the fund may invest in mortgage-backed securities
issued by private entities, which are supported by the credit of the issuer.
The fund may invest up 100% of its assets in high yield, lower quality and
defaulted debt securities ("junk bonds"). These securities are either rated
below investment grade (below the top four long-term rating categories) by
independent rating agencies such as Standard & Poor's Corporation (S&P) and
Moody's Investors Service, Inc. (Moody's), or are comparable unrated
securities. Nevertheless, the fund generally invests in debt securities
rated at least Caa by Moody's or CCC by S&P or unrated securities the fund's
manager determines are of comparable quality. 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. Generally, lower rated securities pay higher
yields than more highly rated securities to compensate investors for the
higher risk.
In addition to its principal investments, the fund may also invest in equity
securities, largely dividend-paying common stock or preferred stocks. Other
equities would be more typically held as a result of receiving those
securities in a corporate restructuring. 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 may also invest limited amounts in various complex and
derivative securities, which carry high risk. The fund may invest in secured
or unsecured indebtedness or participations in the indebtedness, including
loan participations and trade claims. Indebtedness represents a specific
commercial loan or portion of a loan, which has been given to a company by a
financial institution such as a bank or insurance company. By purchasing the
direct indebtedness of companies, a fund steps into the shoes of a financial
institution. Participation interests in indebtedness represent fractional
interests in a company's indebtedness. The fund may also invest in stripped
mortgage-backed securities, including Interest Only or Principal Only
securities, collaterallized mortgage obligations, and up to 5% of its total
assets in inverse floaters; options on securities, on securities indices, on
foreign currencies, on futures contracts, and financial futures contracts;
forward foreign currency contracts; interest rate and currency swap
agreements; and mortgage dollar rolls. THESE INVESTMENTS ARE MORE FULLY
DESCRIBED IN THE SAI.
PORTFOLIO SELECTION The manager allocates its investments among the various
market sectors based on the its assessment of changing economic, market,
industry, and issuer conditions. The manager uses a "top-down" analysis of
macroeconomic trends, market sectors, and industries to take advantage of
varying sector reactions to economic events. For example, the manager
evaluates business cycles, yield curves, countries' changing market,
economic, and political conditions, the relative interest rates among
currencies, and values between and within markets.
This "top down" approach is combined with a "bottom-up" fundamental analysis
of individual securities, including factors such as a security's relative
value based on anticipated cash flow, interest or dividend coverage, asset
coverage, and earnings prospects; the experience and managerial strength of
the company; responsiveness to changes in interest rates and business
conditions; debt maturity schedules and borrowing requirements; and the
company's changing financial condition and market recognition of the change.
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 intends to manage the fund's exposure to various currencies, and
may from time to time seek to hedge (protect) against currency risk, largely
by using forward currency exchange contracts (Hedging Instruments).
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable for investors, is unable to locate suitable
investment opportunities, or seeks to maintain liquidity, it may invest all
or substantially all of the fund's assets in U.S. or non-U.S. currency
short-term investments, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest
rates rise, debt securities can lose market value. Similarly, when interest
rates fall, debt securities can gain value. In general, securities with
longer maturities are more sensitive to these price changes. Stripped
securities, such as U.S. Treasury STRIPS, are extremely sensitive to changes
in interest rates (and prepayments), and their price will fluctuate more than
the prices of other interest-paying bonds or notes.
A sub-category of interest rate risk is REINVESTMENT RISK, which is the risk
that interest rates will be lower when the funds seeks to reinvest interest
payments or the proceeds from a matured debt security, resulting in less
income received by the fund. With respect to the fund's mortgage-backed
securities, if rates fall, mortgage holders will refinance their mortgage
loans at lower interest rates, which will reduce the fund's interest and
yield.
[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]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength may affect the security's value and, even securities supported by
credit enhancements have the credit risk of the entity providing credit
support.
LOWER-RATED SECURITIES Securities rated below investment grade, sometimes
called "junk bonds," generally have more risk than higher-rated securities.
Companies issuing high yield debt securities are not as strong financially as
those with higher credit ratings. These companies are more likely to
encounter financial difficulties and are more vulnerable to changes in the
economy, such as a recession or a sustained period of rising interest rates
that could prevent them from making interest and principal payments. If an
issuer is not paying or stops paying interest and/or principal, payments may
never resume. The fund may lose its entire investment on bonds that may be,
or are, in default.
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 changes in the ratings assigned by ratings
agencies. Prices are often closely linked with the company's stock prices and
typically rise and fall in response to factors that affect stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, stock market
activity, large sustained sales by major investors, a high-profile default,
or other factors. High yield securities are also generally less liquid than
higher-quality bonds. Many of these securities do not trade frequently, and
when they do trade their prices may be significantly higher or lower than
expected. At times, it may be difficult to sell these securities promptly at
an acceptable price, which may limit the fund's ability to sell securities
in response to specific economic events or to meet redemption requests.
INDEBTEDNESS AND PARTICIPATIONS These investments always involve a risk as
to the creditworthiness of the participation issuer and the underlying
indebtedness issuer, and the fund may lose its entire investment. There
are no established markets for indebtedness, making them less liquid than
other securities. Purchasers of participations, such as the fund, must rely
on the financial institution issuer to assert any rights against the borrower
with respect to the underlying indebtedness.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. involve risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because the investment is
worth fewer dollars. Currency markets are generally not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the possibility of currency devaluations by a country's government or
banking authority, the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. In addition, political or economic conditions can cause
previously established securities markets to become limited trading markets,
potentially causing liquid securities to become illiquid, particularly in
emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
MORTGAGE- AND ASSET-BACKED SECURITIES Ginnie Maes, and other mortgage- and
asset-backed securities, differ from conventional debt securities because
principal is paid back over the life of the security rather than at
maturity. The fund may receive unscheduled prepayments of principal due to
voluntary prepayments, refinancing or foreclosure on the underlying mortgage
or other loans. During period of declining interest rates, principal
prepayments generally increase. The fund may be forced to reinvest returned
principal at lower interest rates, and there may be less potential for
capital appreciation. Credit enhancements, if any, may be inadequate in the
event of default.
DERIVATIVE SECURITIES, INCLUDING HEDGING INSTRUMENTS Derivative investments
are financial instruments whose performance depends, at least in part, on the
performance of an underlying asset such as stock prices or indices of
securities, interest rates, currency exchange rates, or commodity prices.
They are used to help manage interest rate and currency risks, increase
liquidity, or invest in a particular stock or bond in a more efficient way.
Their successful use 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. Risks include potential 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 a position
because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified under the federal securities
laws. As such, it may invest a greater portion of its assets in one issuer
and have a smaller number of issuers than a diversified fund. Therefore, the
fund may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund will, however, meet tax
diversification requirements.
ILLIQUID SECURITIES The fund may invest up to 15% of its total 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.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep
interest rate risk and market and country allcations 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.
Moreover, in shifting assets strategically from one sector to another, there
is no guarantee that the manager will consistently select the "right" sectors.
See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies and risks, and bond
ratings, can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
Because the fund started on July 1, 1999, performance for a full calendar
year is not yet available.
FEES AND EXPENSES
Franklin Strategic Income Investments Fund - Class 1
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY
FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH
THE FUND IS AN INVESTMENT OPTION. IF THEY WERE INCLUDED, YOUR COSTS WOULD BE
HIGHER. Investors should consult the contract prospectus or disclosure
document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 1
- --------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering
price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS 1
Management fees
Other expenses1
Total annual fund operating expenses
[FIGURES TO BE SUPPLIED IN A LATER AMENDMENT]
1. "Other Expenses" are based on estimated amounts for the current fiscal year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
[to be supplied in a later amendment]
[INSERT GRAPHIC OF BRIEFCASE] MANAGEMENT
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI), 500
East Broward Blvd., Ft. Lauderdale, FL, 33394 through its Templeton Global Bond
Managers division (Global Bond Managers), is the fund's sub-advisor. A team from
Global Bond Managers provides Advisers with investment management advice and
assistance.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CHRIS MOLUMPHY, CFA Mr. Molumphy has been a manager of
SENIOR VICE PRESIDENT, ADVISERS the fund since its inception in
1999. He joined the Franklin
Templeton Group in 1988.
[Additional portfolio managers to be added]
The fund pays the manager a fee for managing its assets, and making its
investment decisions. The fee is based on an annual rate [to be supplied].
Important Recent Developments
o YEAR 2000 PROBLEM The funds' business operations depend upon a
worldwide network of computer systems that contain date fields, including
securities trading systems, securities transfer agent operations and stock
market links. Many of the systems currently use a two digit date field to
represent the date, and unless these systems are changed or modified, they
may not be able to distinguish the Year 1900 from the Year 2000 (commonly
called the Year 2000 problem). In addition, the fact that the Year 2000 is a
leap year may create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by their managers, their service providers and
other third parties they do business with are not Year 2000 ready. For
example, the funds' portfolio and operational areas could be impacted,
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions and others. The funds could experience difficulties in effecting
transactions if any of their foreign subcustodians, or if foreign
broker/dealers or foreign markets are not ready for Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one
of the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year
2000 readiness. Issuers in countries outside of the U.S., particularly in
emerging markets, may be more susceptible to Year 2000 problems and may not
be required to make the same level of disclosure regarding Year 2000
readiness as is required in the U.S. The managers, of course, cannot audit
any company or their major suppliers to verify their Year 2000 readiness. If
a company in which any fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of a fund's portfolio
holdings will have a similar impact on the price of the fund's shares.
The managers and their affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their
Year 2000 problems. Of course, the funds' ability to reduce the effects of
the Year 2000 problem is also very much dependent upon the efforts of third
parties over which the funds and their managers may have no control.
o EURO On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which replaced the national currency for the
eleven participating member countries. If a fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the funds may hold in their
portfolios, and their impact on fund performance. To the extent a fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
Distributions and Taxes
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.
Dividends paid by a fund will be automatically reinvested in additional
shares of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on
the provisions of the variable annuity or variable life insurance contract
through which they are invested in the funds. For more information, please
consult the accompanying contract prospectus or disclosure document.
Fund Account Information
Buying Shares
Shares of each fund are sold at NAV to insurance company separate accounts to
serve as investment options for variable annuity or variable life insurance
contracts. The funds' Board monitors this to be sure there are no material
conflicts of interest between the two different types of contract owners. If
there were, the Board would take corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares
are processed at the NAV next calculated after we receive the request in
proper form. The funds do not issue share certificates.
Selling Shares
Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under
the terms of its contracts. Requests to sell shares are processed at the NAV
next calculated after we receive the request in proper form.
Exchanging Shares
Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options
available under a variable insurance contract, subject to the terms, and any
specific limitations on the exchange (or "transfer") privilege, described in
the contract prospectus. Frequent exchanges can interfere with fund
management or operations and drive up fund costs. To protect shareholders,
there are limits on the number and amount of exchanges that may be made
(please see "Market Timers," below).
Fund Account Policies
CALCULATING SHARE PRICE The funds calculate their NAV per share each
business day at the close of trading on the New York Stock Exchange (normally
1:00 p.m. Pacific time). Each class's NAV is calculated by dividing its net
assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of the
shares may change on days that the insurance company separate account cannot
buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open
for business at the NAV next calculated after we receive the request in
proper form.
REPORTS Insurance company shareholders will receive the fund's financial
reports every six months. If you need additional copies, please call
1-800/774-5001.
MARKET TIMERS The funds are not designed for market timers, large or
frequent transfers. The funds may restrict or refuse purchases or exchanges
by market timers. You will be considered a market timer if you have (i)
requested an exchange out of the fund within two weeks of an earlier exchange
request, or (ii) exchanged shares out of the fund more than twice in a
calendar quarter, or (iii) exchanged shares equal to at least $5 million, or
more than 1% of the fund's net assets, or (iv) otherwise seem to follow a
timing pattern. Accounts under common ownership or control are combined for
these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o Each fund may refuse any order to buy shares.
o At any time, each fund may establish or change investment minimums.
o Each fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to
make payments in securities or other assets of a fund, in the case of an
emergency.
o To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule 12b-1
Plan" which is described in prospectuses offering class 2 shares.
Questions
More detailed information about the Trust and the funds' account policies can
be found in the funds' Statement of Additional Information (SAI). If you have
any questions about the funds, you can write to us at 100 Fountain Parkway,
St. Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your
protection and to help ensure we provide you with quality service, all calls
may be monitored or recorded.
<PAGE>
For More Information
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life
insurance contracts. Please consult the accompanying contract prospectus or
disclosure document for information about the terms of an investment in a
contract.
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed
performance information, fund holdings, and the auditor's report (Annual
Report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, policies, and
risks. It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment
representative or by calling us at the number below.
Franklin(R)Templeton(R)
1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
HTTP://WWW.SEC.GOV.
Investment Company Act file 811-5479 Lit. Code #
PROSPECTUS
May 1, 1999
TEMPLETON
VARIABLE PRODUCTS
SERIES FUND
FRANKLIN REAL ESTATE INVESTMENTS FUND
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
CLASS 2 SHARES
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Information about each i OVERVIEW
fund
you should know before
investing
INDIVIDUAL FUND DESCRIPTIONS
FR-1 Franklin Real Estate Investments Fund
FSI-1 Franklin Strategic Income Investments Fund
ADDITIONAL INFORMATION, ALL FUNDS
Important Recent Developments
Distributions and Taxes
FUND ACCOUNT INFORMATION
Information about fund Buying Shares
account transactions Selling Shares
and services Exchanging Shares
Fund Account Policies
Questions
FOR MORE INFORMATION
Where to learn more about Back Cover
each fund
Templeton Variable Products Series Fund
Overview
Templeton Variable Products Series Fund (the Trust) currently consists of ten
separate funds, offering a wide variety of investment choices. Each fund has two
classes of shares, class 1 and class 2. The funds are only available as
investment options in variable annuity or variable life insurance contracts. The
accompanying contract prospectus, or disclosure document, indicates which funds
and classes are available to you.
INVESTMENT CONSIDERATIONS
o Each fund has its own investment strategy and risk profile. Generally, the
higher the expected rate of return, the greater the risk of loss.
o No single fund can be a complete investment program; consider diversifying
your fund choices.
o You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
o All securities markets, interest rates, and currency valuations move up
and down, sometimes dramatically, and mixed with the good years can be
some bad years. Since no one can predict exactly how financial markets will
perform, you may want to exercise patience and focus not on short-term market
movements, but on your long-term investment goals.
RISKS
o There can be no assurance that any fund will achieve its investment goal.
o Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
o Fund shares are not deposits or obligations of, or guaranteed or endorsed
by,any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency
of the U.S. government. Fund shares involve investment risks, including the
possible loss of principal.
More detailed information about each fund, its investment policies, and its
particular risks can be found in the Trust's Statement of Additional Information
(SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $211 billion in
assets. Franklin Templeton is one of the largest mutual fund organizations in
the United States, and offers money management expertise spanning a variety of
investment objectives. In 1992, Franklin, recognized as a leader in managing
domestic mutual funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Advisers team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
- 18 -
FRANKLIN REAL ESTATE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal is
to earn current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in securities of companies operating in the real
estate industry, primarily equity real estate investment trusts (REITs). Real
estate companies include:
o companies qualifying under federal tax law as REITs,
o real estate operating companies, real estate services companies,
homebuilders and developers that derive at least half of their assets
or revenues from the ownership, construction, management or other
services, or sale of residential, commercial or industrial real estate.
[Begin callout]
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
[End callout]
REITs are real estate investment trust companies, usually publicly traded, that
manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and shareholders receive income from the
rents received, and receive capital gains on the properties sold at a profit.
Other types, for example, mortgage REITs specialize in lending money to
developers and pass interest income on to shareholders. Still others are hybrid
REITs, having a mix of equity and debt investments. The fund generally invests
in medium-cap (less than $5 billion) to small-cap (less than $1.5 billion) in
REITs, because that is reflective of the industry itself. Market capitalization
is defined as share price times the number of common stock shares outstanding.
In addition to its principal investments, the fund may invest in equity or debt
securities of issuers engaged in businesses whose products and services are
closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but who have very significant
real estate holdings believed to be undervalued relative to the company's
securities. Equities represent ownership interests in individual companies and
give shareholders a claim in the company's earnings and assets. 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.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy for this fund. As a "bottom-up"
investor focusing primarily on individual securities, the fund's manager will
focus on the market price of a company's security relative to its evaluation of
the company's long-term earnings, asset value, and cash flow potential. Using
both qualitative and quantitative analysis and on-site visits, the manager
evaluates security characteristics, the strength and quality of management, and
underlying properties. In addition, the manager may consider other factors, such
as the supply and demand outlook for various property types and regional
markets.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price,
its distributions or income, and therefore, the fund's performance.
REAL ESTATE SECURITIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Real estate values rise and fall
in response to a variety of factors, including local, regional and national
economic conditions and tax considerations, the strength of specific industries
renting properties, and other factors affecting the supply and demand for
properties. When economic growth is slowing, demand for property decreases and
prices may decline. Rising interest rates, which drive up mortgage and financing
costs, can restrain construction and buying and selling activity and make other
investments more attractive. Property values could decrease because of
overbuilding, increases in property taxes and operating expenses, changes in
zoning laws, environmental regulations or hazards, uninsured casualty or
condemnation losses, or a general decline in neighborhood values.
REITS Equity REITs can be affected by any changes in the value of the properties
owned, while mortgage REITs can be affected by the quality of any credit
extended. A REIT's performance depends on the types and locations of the
properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to pay
rent or poor management.
A REIT's performance also depends on the company's ability to finance property
purchases and renovations and manage its cash flows. Because REITs are typically
invested in a limited number of projects or in a particular market segment, they
are more susceptible to adverse developments affecting a single project or
market segment than more broadly diversified investments. Loss of status as a
qualified REIT or changes in the treatment of REITs under the federal tax law,
could adversely affect the value of a particular REIT or the market for REITs as
a whole and the fund's performance.
[Begin callout]
Because the securities the fund holds fluctuate in price with real estate 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]
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramaticallyn over the shorter term.
These price movements may result from factors affecting individual companies,
industries, or securities markets. Value stock prices are considered "cheap"
relative to the company's perceived value and are often out of favor with other
investors. If other investors fail to recognize the company's value and do not
become buyers, or if they become sellers, or in markets favoring faster-growing
companies, value stocks may not increase in value as anticipated by the manager
or may decline further.
SMALLER COMPANIES 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 they can be considered
speculative. These companies may suffer significant losses. Small-cap REITs can
be subject to greater risks than mid- or large-cap issuers due to greater
regional concentration and less diversification in terms of the regions, clients
and types of properties available for investment.
DIVERSIFICATION The fund is non-diversified under the federal securities laws.
As such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.
See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
Because the fund started on July 1, 1999, performance for a full calendar year
is not yet available.
FEES AND EXPENSES
Franklin Real Estate Securities Fund - Class 2 This table describes the fees and
expenses that you may pay if you buy and hold shares of the fund. THE TABLE AND
THE EXAMPLE DO NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE
INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY WERE
INCLUDED, YOUR COSTS WOULD BE HIGHER. Investors should consult the contract
prospectus or disclosure document for more information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS 2
Management fees
Rule 12b-1 fees
Other expenses1
Total annual fund operating expenses
[FIGURES TO BE SUPPLIED IN A LATER AMENDMENT]
1. "Other Expenses" are based on estimated amounts for the current fiscal year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
[to be supplied in a later amendment]
[INSERT GRAPHIC OF BRIEFCASE] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
MATTHEW F. AVERY Mr. Avery has been a manager of the
Senior Vice President, Advisers fund since its inception,
and has been with the Franklin
Templeton Group since 1987.
DOUGLAS BARTON, CFA Mr. Barton has been a manager of
Vice President, Advisers the fund since its inception, and has been
with the Franklin Templeton Group
since 1988.
The fund pays the manager a fee for managing its assets and making its
investment decisions. The fee is equal to an annual rate of [to be supplied].
FRANKLIN STRATEGIC INCOME INVESTMENTS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in U.S. and non-U.S. debt securities. The fund
uses an active allocation strategy to seek its goals, and there are no set
percentage limitations on particular sectors. Rather, the fund actively and
flexibly shifts its investments among various sectors, including:
o High Yield Corporate Bonds
o Emerging Market Bonds
o International Bonds
o Convertible Securities, including preferred stocks and bonds convertible
into common stocks
o Mortgage Securities and other Asset-Backed Securities
o U.S. Government Bonds
o Preferred Stock (non-convertible)
[Begin callout]
Through active allocation, the fund invests primarily in U.S. and non-U.S.
bonds, including high yield, lower rated bonds.
[End callout]
The fund invests in fixed, floating and variable rate 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. Common debt
securities are bonds, including bonds convertible into common stock or unsecured
bonds, notes, and short-term investments, including cash or cash equivalents.
Such debt securities also include U.S. government securities, which are
securities issued or guaranteed by the U.S. government, its agencies,
authorities or instrumentalities. In addition to U.S. Treasury notes and bonds,
the fund invests in mortgage-backed securities such as Government National
Mortgage Association ("Ginnie Maes"), Federal National Mortgage Association, or
Federal Home Loan Mortgage Corporation obligations and other asset-backed
securities such as Small Business Administration obligations ("Sallie Maes").
Unlike Treasury securities, Ginnie Maes and Sallie Maes, the timely payment of
principal and interest on securities issued or guaranteed by FNMA, FHLMC and
certain other entities are not backed by the full faith and credit of the U.S.
Government. In addition to U.S. Government mortgage-backed securities, the fund
may invest in mortgage-backed securities issued by private entities, which are
supported by the credit of the issuer.
The fund may invest up 100% of its assets in high yield, lower quality and
defaulted debt securities ("junk bonds"). These securities are either rated
below investment grade (below the top four long-term rating categories) by
independent rating agencies such as Standard & Poor's Corporation (S&P) and
Moody's Investors Service, Inc. (Moody's), or are comparable unrated securities.
Nevertheless, the fund generally invests in debt securities rated at least Caa
by Moody's or CCC by S&P or unrated securities the fund's manager determines are
of comparable quality. 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. Generally, lower
rated securities pay higher yields than more highly rated securities to
compensate investors for the higher risk.
In addition to its principal investments, the fund may also invest in equity
securities, largely dividend-paying common stock or preferred stocks. Other
equities would be more typically held as a result of receiving those securities
in a corporate restructuring. 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 may also invest limited amounts in various complex and
derivative securities, which carry high risk. The fund may invest in secured or
unsecured indebtedness or participations in the indebtedness, including loan
participations and trade claims. Indebtedness represents a specific commercial
loan or portion of a loan, which has been given to a company by a financial
institution such as a bank or insurance company. By purchasing the direct
indebtedness of companies, a fund steps into the shoes of a financial
institution. Participation interests in indebtedness represent fractional
interests in a company's indebtedness. The fund may also invest in stripped
mortgage-backed securities, including Interest Only or Principal Only
securities, collaterallized mortgage obligations, and up to 5% of its total
assets in inverse floaters; options on securities, on securities indices, on
foreign currencies, on futures contracts, and financial futures contracts;
forward foreign currency contracts; interest rate and currency swap agreements;
and mortgage dollar rolls. THESE INVESTMENTS ARE MORE FULLY DESCRIBED IN THE
SAI.
PORTFOLIO SELECTION The manager allocates its investments among the various
market sectors based on the its assessment of changing economic, market,
industry, and issuer conditions. The manager uses a "top-down" analysis of
macroeconomic trends, market sectors, and industries to take advantage of
varying sector reactions to economic events. For example, the manager evaluates
business cycles, yield curves, countries' changing market, economic, and
political conditions, the relative interest rates among currencies, and values
between and within markets.
This "top down" approach is combined with a "bottom-up" fundamental analysis of
individual securities, including factors such as a security's relative value
based on anticipated cash flow, interest or dividend coverage, asset coverage,
and earnings prospects; the experience and managerial strength of the company;
responsiveness to changes in interest rates and business conditions; debt
maturity schedules and borrowing requirements; and the company's changing
financial condition and market recognition of the change. 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 intends to manage the fund's exposure to various currencies, and may
from time to time seek to hedge (protect) against currency risk, largely by
using forward currency exchange contracts (Hedging Instruments).
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Stripped securities, such
as U.S. Treasury STRIPS, are extremely sensitive to changes in interest rates
(and prepayments), and their price will fluctuate more than the prices of other
interest-paying bonds or notes.
A sub-category of interest rate risk is REINVESTMENT RISK, which is the risk
that interest rates will be lower when the funds seeks to reinvest interest
payments or the proceeds from a matured debt security, resulting in less income
received by the fund. With respect to the fund's mortgage-backed securities, if
rates fall, mortgage holders will refinance their mortgage loans at lower
interest rates, which will reduce the fund's interest and yield.
[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]
CREDIT This is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength may
affect the security's value and, even securities supported by credit
enhancements have the credit risk of the entity providing credit support.
LOWER-RATED SECURITIES Securities rated below investment grade, sometimes called
"junk bonds," generally have more risk than higher-rated securities. Companies
issuing high yield debt securities are not as strong financially as those with
higher credit ratings. These companies are more likely to encounter financial
difficulties and are more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates that could prevent them
from making interest and principal payments. If an issuer is not paying or stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
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 changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
INDEBTEDNESS AND PARTICIPATIONS These investments always involve a risk as to
the creditworthiness of the participation issuer and the underlying indebtedness
issuer, and the fund may lose its entire investment. There are no established
markets for indebtedness, making them less liquid than other securities.
Purchasers of participations, such as the fund, must rely on the financial
institution issuer to assert any rights against the borrower with respect to the
underlying indebtedness.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because the investment is worth fewer
dollars. Currency markets are generally not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns that
trade in that country. The political, economic, and social structures of some
countries the fund invests in may be less stable and more volatile than those in
the U.S. The risks of investing in these countries include the possibility of
currency devaluations by a country's government or banking authority, the
imposition of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
punitive taxes and certain custody and settlement risks. In addition, political
or economic conditions can cause previously established securities markets to
become limited trading markets, potentially causing liquid securities to become
illiquid, particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, business and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. While short-term volatility in these markets can be disconcerting,
declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. stock exchanges, trading systems, brokers and companies generally have
less government supervision and regulation than in the U.S. The fund may have
greater difficulty voting proxies, exercising shareholder rights, pursuing legal
remedies, and obtaining judgments with respect to non-U.S. investments in
non-U.S. courts than with respect to U.S. companies in U.S. courts.
MORTGAGE- AND ASSET-BACKED SECURITIES Ginnie Maes, and other mortgage- and
asset-backed securities, differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage or other
loans. During period of declining interest rates, principal prepayments
generally increase. The fund may be forced to reinvest returned principal at
lower interest rates, and there may be less potential for capital appreciation.
Credit enhancements, if any, may be inadequate in the event of default.
DERIVATIVE SECURITIES, INCLUDING HEDGING INSTRUMENTS Derivative investments are
financial instruments whose performance depends, at least in part, on the
performance of an underlying asset such as stock prices or indices of
securities, interest rates, currency exchange rates, or commodity prices. They
are used to help manage interest rate and currency risks, increase liquidity, or
invest in a particular stock or bond in a more efficient way. Their successful
use 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. Risks include
potential 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 a position because the trading market becomes
illiquid.
DIVERSIFICATION The fund is non-diversified under the federal securities laws.
As such, it may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax diversification
requirements.
ILLIQUID SECURITIES The fund may invest up to 15% of its total 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.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest
rate risk and market and country allcations 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. Moreover, in shifting
assets strategically from one sector to another, there is no guarantee that the
manager will consistently select the "right" sectors.
See "Important Recent Developments" in this prospectus for Year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
More detailed information about the fund, its policies and risks, and bond
ratings, can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
Because the fund started on July 1, 1999, performance for a full calendar year
is not yet available.
FEES AND EXPENSES
Franklin Strategic Income Investments Fund - Class 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. THE TABLE AND THE EXAMPLE DO NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY WERE INCLUDED, YOUR COSTS WOULD BE HIGHER. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS 2
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Maximum sales charge (load) as a percentage of offering price
Load imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS 2
Management fees
Rule 12b-1 fees
Other expenses1
Total annual fund operating expenses
[FIGURES TO BE SUPPLIED IN LATER AMENDMENT]
1. "Other Expenses" are based on estimated amounts for the current fiscal year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
[to be supplied in a later amendment]
[INSERT GRAPHIC OF BRIEFCASE] MANAGEMENT
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI),
500 East Broward Blvd., Ft. Lauderdale, Florida 33395, through its Templeton
Global Bond Managers division (Global Bond Managers), is the fund's
sub-advisor. A team from Global Bond Fund Managers provides Adviers with
investment management advice and assitance.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CHRIS MOLUMPHY, CFA Mr. Molumphy has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1999. He
joined the Franklin Templeton Group in
1988.
[Additional portfolio managers to be added]
The fund pays the manager a fee for managing its assets, and making its
investment decisions. The fee is equal to an annual rate of [to be supplied].
Important Recent Developments
o YEAR 2000 PROBLEM The funds' business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000
problem). In addition, the fact that the Year 2000 is a leap year may create
difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected if
the computer systems used by their managers, their service providers and other
third parties they do business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including securities
trade processing, interest and dividend payments, securities pricing,
shareholder account services, reporting, custody functions and others. The funds
could experience difficulties in effecting transactions if any of their foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one of
the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year 2000
readiness. Issuers in countries outside of the U.S., particularly in emerging
markets, may be more susceptible to Year 2000 problems and may not be required
to make the same level of disclosure regarding Year 2000 readiness as is
required in the U.S. The managers, of course, cannot audit any company or their
major suppliers to verify their Year 2000 readiness. If a company in which any
fund is invested is adversely affected by Year 2000 problems, it is likely that
the price of its security will also be adversely affected. A decrease in the
value of one or more of a fund's portfolio holdings will have a similar impact
on the price of the fund's shares.
The managers and their affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the funds' ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the funds and their managers may have no control.
o EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the eleven
participating member countries. If a fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the funds may hold in their portfolios, and
their impact on fund performance. To the extent a fund holds non-U.S. dollar
(euro or other) denominated securities, it will still be exposed to currency
risk due to fluctuations in those currencies versus the U.S. dollar.
Distributions and Taxes
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Each fund typically pays
dividends from net investment income and net capital gains, if any, following
the close of the calendar year. Dividends or distributions by the funds will
reduce the per share net asset value (NAV) by the per share amount paid.
Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus or disclosure document.
Fund Account Information
Buying Shares
Shares of each fund are sold at NAV to insurance company separate
accounts to serve as investment options for variable annuity or variable life
insurance contracts. The funds' Board monitors this to be sure there are no
material conflicts of interest between the two different types of contract
owners. If there were, the Board would take corrective action.
Contract owners'
payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
Selling Shares
Each insurance company sells shares of the applicable fund to
make benefit or surrender payments or to execute transfers between investment
options under the terms of its contracts. Requests to sell shares are processed
at the NAV next calculated after we receive the request in proper form.
Exchanging Shares
Contract owners may exchange shares of any one class or fund for shares of other
classes or funds through a transfer between investment options available under a
variable insurance contract, subject to the terms, and any specific limitations
on the exchange (or "transfer") privilege, described in the contract prospectus.
Frequent exchanges can interfere with fund management or operations and drive up
fund costs. To protect shareholders, there are limits on the number and amount
of exchanges that may be made (please see "Market Timers," below).
Fund Account Policies
CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class's NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The funds' assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
a fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of the shares may change
on days that the insurance company separate account cannot buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper form.
REPORTS Insurance company shareholders will receive the fund's financial reports
every six months. If you need additional copies, please call 1-800/774-5001.
MARKET TIMERS The funds are not designed for market timers, large or frequent
transfers. The funds may restrict or refuse purchases or exchanges by market
timers. You will be considered a market timer if you have (i) requested an
exchange out of the fund within two weeks of an earlier exchange request, or
(ii) exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
o Each fund may refuse any order to buy shares.
o At any time, each fund may establish or change investment minimums.
o Each fund may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the funds reserve the right to make
payments in securities or other assets of a fund, in the case of an emergency.
o To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule 12b-1
Plan" which is described in prospectuses offering class 2 shares.
DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 has a distribution plan, sometimes
known as a rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year (up to 0.15% for the Bond Fund) to those who sell and
distribute Class 2 and provide services to shareholders and contract owners.
Because these fees are paid out of Class 2's assets on an on-going basis, over
time these fees will increase the cost of an investment in the fund, and may
cost more than paying other types of sales charges.
Questions
More detailed information about the Trust and the funds' account policies can be
found in the funds' Statement of Additional Information (SAI). If you have any
questions about the funds, you can write to us at 100 Fountain Parkway, St.
Petersburg, Florida, 33716-1205 or call 1-800/774-5001. For your protection and
to help ensure we provide you with quality service, all calls may be monitored
or recorded.
For More Information
The funds of the Templeton Variable Products Series Fund (the Trust) are only
available as investment options in variable annuity or variable life insurance
contracts. Please consult the accompanying contract prospectus or disclosure
document for information about the terms of an investment in a contract.
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and
the auditor's report (Annual Report only).
STATEMENT OF ADDITIONAL INFORMATION
(SAI) Contains more information about the funds, their investments, policies,
and risks. It is incorporated by reference (is legally a part of this
prospectus).
You may obtain these free reports by contacting your investment representative
or by calling us at the number below.
Franklin(R)Templeton(R)
1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at HTTP://WWW.SEC.GOV.
Investment Company Act file 811-5479 Lit. Code #
TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN REAL ESTATE INVESTMENTS FUND
FRANKLIN STRATEGIC INCOME INVESTMENTS 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
prospectuses, dated May 1, 1999, which we may amend from time to time, contain
the basic information you should know before investing in any of the funds. You
should read this SAI together with the prospectuses.
Templeton Variable Products Series Fund ("Trust") has several series or funds
("funds") each of which is in effect a separate mutual fund. Each fund has two
classes of shares: class 1 and class 2. Shares of the funds are sold only to
insurance companies for use as investment options in variable annuity or
variable life insurance contracts ("Contracts"). The Trust may combine
prospectuses for different funds and share classes to the funds and share
classes available under the Contract. This SAI pertains only to the Franklin
Real Estate Investments Fund ("Real Estate Fund") and the Franklin Strategic
Income Investments Fund ("Strategic Income Fund").
For a free copy of the current prospectus, contact your investment
representative or call 1-800/774-5001.
CONTENTS PAGE
Goals and Strategies of the Real Estate Fund
Risks of the Real Estate Fund
Goals and Strategies of the Strategic Income Fund
Risks of the Strategic Income Fund
Investment Restrictions
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Financial Statements
Miscellaneous Information
Description of Bond Ratings
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- -------------------------------------------------------------------------------
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOALS AND STRATEGIES OF THE REAL ESTATE FUND
WHAT IS THE FUND'S GOAL?
The principal investment goal of the fund is capital appreciation. Its secondary
goal is to earn current income.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE
KINDS OF SECURITIES THE FUND BUYS
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include warrants or rights. Warrants or
rights give the holder the right to purchase a common stock at a given time
for a specified price.
REITS. In order to qualify as a REIT, a company must derive at least 75% of
its gross income from real estate sources (rents, mortgage interest, gains
from the sale of real estate assets), and at least 95% from real estate
sources, plus dividends, interest and gains from the sale of securities. Real
property, mortgage loans, cash and certain securities must comprise 75% of a
company's assets. In order to qualify as a REIT, a company must also make
distributions to shareholders aggregating annually at least 95% of its REIT
taxable income.
By investing in REITs indirectly through the fund, you will bear not only
your proportionate share of the expenses of the fund, but also, indirectly,
similar expenses of the REITs.
DEBT SECURITIES. Debt securities represent an obligation of the issuer to
repay a loan of money to it, and generally, provide for the payment of
interest. These include bonds, notes and debentures; commercial paper;
convertible securities; and bankers' acceptances. A company typically meets
its payment obligations associated with its outstanding debt securities
before it declares and pays any dividend to holders of its equity securities.
Bonds, notes, debentures and commercial paper differ in the length of the
issuer's payment schedule, with bonds carrying the longest repayment schedule
and commercial paper the shortest.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk. The fund may buy debt securities which are rated B or better by Moody's
or S&P or unrated debt which it determines to be of comparable quality. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's). Please see the Appendix for a description of these ratings.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's Net Asset Value.
FOREIGN SECURITIES. The fund may invest up to 10% of its total assets in
securities of issuer in any foreign country, developed or developing, and in
Depositary Receipts.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities. A
convertible security is generally a preferred stock or debt security that may
be converted within a specified period of time into a certain amount of
common stock or other equity securities of the same or a different issuer.
Convertible securities include non-convertible debt securities with warrants
or stock or stock index options attached ("synthetic convertible
securities"). A convertible security entitles the holder to receive interest
paid or accrued on debt securities or dividends paid or accrued on preferred
stock until the security matures or is redeemed, converted or exchanged.
Convertible securities generally offer income yields that are higher than the
dividend yield, if any, of the underlying common stock, but lower than the
yield of similar non-convertible debt securities. While the fund uses the
same criteria to rate a convertible debt security that it uses to rate a more
conventional debt security, a convertible preferred stock is treated like a
preferred stock for the fund's financial reporting, credit rating, and
investment limitation purposes.
When a convertible security's conversion price is significantly above the
price of the underlying stock, the convertible security takes on the risk
characteristics of a debt security. At such times, the price of a convertible
security will vary with changes in the credit quality of the issuer and
inversely with changes in interest rates. When a convertible security's
conversion price is at or below the price of the underlying stock, a
convertible security will behave like a common stock. At such times, the
price of the convertible security will be influenced by the fluctuations in
the price of the underlying security and will vary based on the activities of
the issuing company and changes in general market and economic conditions.
Because of the hybrid nature of convertible securities, investors should
recognize that convertible securities are likely to perform quite differently
than broadly-based measures of the stock and bond markets.
The fund's investment in convertible securities, particularly securities
convertible into securities of an issuer other than the issuer of the
convertible security, may be illiquid. The prices of these securities may be
volatile and the fund may not be able to sell particular securities in a
timely fashion or at fair prices, which could result in losses to the fund.
Reduced liquidity in the secondary market for certain securities may also
make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. Although the fund
intends to acquire liquid securities, there can be no assurances that this
will be achieved.
The holder of a convertible security generally may choose at any time to
exchange the convertible security for a specified number of shares of the
underlying stock. The fund may at times, however, invest in securities that
are convertible other than at the fund's option. Such securities may, for
example, have a mandatory conversion feature whereby the securities convert
automatically into common stock or other equity securities at a specified
date and a specified conversion ratio, or they may be convertible at the
option of the issuer. Because the conversion is not at the fund's option, the
fund may be required to convert the security into the underlying common stock
or other equity security at a time when the value of the underlying common
stock or other security has declined substantially. When a convertible
security is "converted," i.e. exchanged for shares of the underlying
security, the issuer often issues new stock to the holder of the convertible
security, but, in certain cases, the holder may receive cash instead of
common stock.
Convertible securities are usually issued either by an operating company or
by an investment bank. If a convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank. Convertible securities rank senior to common stock in the
company's capital structure, but are generally subordinate to other types of
fixed-income securities issued by the company. Consequently, convertible
securities are subordinated to all debt obligations in the event of
insolvency and the credit rating of a company's convertible issue is
generally lower than the rating of the company's conventional debt issues
since the convertible is normally a "junior" security. 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. An issuer's
failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. The market for
convertible securities includes a larger proportion of small-to-medium size
companies than the broad stock market (as measured by such indices as the
Standard & Poor's 500 Composite Stock Index). Companies which issue
convertible securities are often lower in credit quality.
The fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS").
PERCS are preferred stocks that generally feature a mandatory conversion
date, as well as a capital appreciation limit which is usually expressed in
terms of a stated price. Most PERCS expire three years from the date of
issue, at which time they are convertible into common stock of the issuer.
PERCS are generally not convertible into cash at maturity. Under a typical
arrangement, after three years PERCS convert into one share of the issuer's
common stock if the issuer's common stock is trading at a price below that
set by the capital appreciation limit, and into less than one full share if
the issuer's common stock is trading at a price above that set by the capital
appreciation limit. The amount of that fractional share of common stock is
determined by dividing the price set by the capital appreciation limit by the
market price of the issuer's common stock. PERCS can be called at any time
prior to maturity, and hence do not provide call protection. If called early,
however, the issuer must pay a call premium over the market price to the
investor. This call premium declines at a preset rate daily, up to the
maturity date.
The fund may also invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to
provide the investor with high current income with some prospect of future
capital appreciation; they are typically issued with three to four-year
maturities; they typically have some built-in call protection for the first
two to three years; and, upon maturity, they will automatically convert to
either cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture.
SYNTHETIC CONVERTIBLE SECURITIES. The fund may invest a portion of its assets
in "synthetic" convertible securities. A synthetic convertible security is
created by combining separate securities which together possess the two
principal characteristics of a convertible security, i.e., fixed income and
the right to acquire the underlying equity security. This combination is
achieved, for example, by investing in non-convertible debt 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. Although Advisers typically expects to create synthetic
convertible securities whose components represent one issuer, the fund may
combine components representing distinct issuers, or combine a fixed income
security with a call option on a stock index when Advisers determines that
such a combination would better promote the fund's investment objectives. The
component parts of a synthetic convertible security may be purchased
simultaneously or separately.
Synthetic convertible securities differ from other convertible securities in
several respects. The value of a synthetic convertible security is the sum of
the values of its fixed-income component and its convertible component. Thus,
the market price of a synthetic convertible security may react differently
when compared to other convertible securities to changes in the financial
condition of the issuer or market or general economic conditions. For
example, the holder of a synthetic convertible security faces the risk that
the price of the stock, or the level of the market index underlying the
convertible component may decline even though the price of a convertible
security has not changed.
ILLIQUID INVESTMENTS. The fund's policy is not to invest more than 15% of its
net assets in illiquid securities. Illiquid securities are generally
securities that cannot be sold within seven days in the normal course of
business at approximately the amount at which the fund has valued them. The
Board has authorized the fund to invest in restricted securities (which might
otherwise be considered illiquid) where the investment is consistent with the
fund's investment objective and has authorized the securities to be
considered liquid (and thus not subject to the foregoing 15% limitation), to
the extent Advisers determines on a daily basis that there is a liquid
institutional or other market for the securities - for example, restricted
securities that 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. The Board will
review any determination by Advisers to treat a restricted security as a
liquid security on an ongoing basis, including Advisers' assessment of
current trading activity and the availability of reliable price information.
In determining whether a restricted security is properly considered a liquid
security, Advisers and the Board will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the number of other
potential buyers; (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 the fund invests in
restricted securities that are deemed liquid, the general level of
illiquidity in the fund may be increased if qualified institutional buyers
are no longer interested in buying these securities or the market for these
securities contracts.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The fund may buy and sell debt
securities on a "when-issued" or "delayed delivery" basis. These are trading
practices where payment and delivery of the securities take place at a future
date. During the period between purchase and settlement, no payment is made
by the buyer to the issuer and no interest accrues to the buyer. These
transactions are subject to market fluctuations and the risk that the value
of a security at delivery may be more or less than its purchase price.
Although the fund will generally buy debt securities on a when-issued basis
with the intention of acquiring the securities, it may sell the securities
before the settlement date if it is deemed advisable. When the fund is the
buyer, it will maintain cash or high-grade marketable securities with an
aggregate value equal to the amount of its purchase commitments, in a
segregated account with its custodian bank until payment is made. The fund
will not engage in when-issued and delayed delivery transactions for
investment leverage purposes.
SHORT-TERM INVESTMENTS. Based upon the terms of an SEC order that granted
exemptive relief from certain provisions of the 1940 Act, the fund may invest
its short-term cash in shares of one or more money market funds managed by
Advisers or its affiliates.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. Advisers will
monitor the value of such securities daily to determine that the value equals
or exceeds the repurchase price. Repurchase agreements may involve risks in
the event of default or insolvency of the seller, including possible delays
or restrictions upon the fund's ability to dispose of the underlying
securities. The fund will enter into repurchase agreements only with parties
who meet creditworthiness standards approved by the fund's Board, i.e., banks
or broker-dealers which have been determined by Advisers to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 10% of its total
assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
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 collateral should the borrower
fail.
BORROWING. The fund does not currently intend to borrow money or mortgage or
pledge any of its assets, except that the fund may borrow up to 10% of its total
asset value to meet redemption requests and for other temporary or emergency
purposes. The fund does not currently intend to make any additional investments
while any borrowings exceed 5% of its total assets.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES. The fund may write (sell)
covered put and call options and buy put and call options that trade on
securities exchanges and in the OTC market in order to hedge against the risk
of market or industry-wide stock price fluctuations or to increase income to
the fund. The fund may buy and sell futures and options on futures with
respect to securities and securities indices and buy futures and options to
"close-out" futures and options it may have written. Additionally, the fund
may sell futures and options to "close out" futures and options it may have
purchased. The fund will not enter into any futures contract or related
options (except for closing transactions) if, immediately thereafter, the sum
of the amount of its initial deposits and premiums on open contracts and
options would exceed 5% of its total assets (taken at current value). The
fund will not engage in any stock options or stock index options if the
option premiums paid regarding its open option positions exceed 5% of the
value of its total assets. Options, futures and options on futures are
generally considered "derivative securities."
WRITING CALL AND PUT OPTIONS. Call options written by the fund give the
holder the right to buy the underlying securities from the fund at a stated
exercise price; put options written by the fund give the holder the right to
sell the underlying security to the fund at a stated exercise price. A call
option written by the fund is "covered" if the fund owns the underlying
security that is subject to the call or has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other securities held in its portfolio.
A call option is also covered if the fund holds a call on the same security
and in the same principal amount as the call written where the exercise price
of the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the fund in cash and high grade debt securities
in a segregated account with its custodian bank. A put option written by the
fund is "covered" if the fund maintains cash and high grade debt securities
with a value equal to the exercise price in a segregated account with its
custodian bank, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written. The
premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand and
interest rates.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since with regard to certain options the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the then
current market value of the underlying security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase
is that the writer's position will be canceled by the clearing corporation. A
writer, however, may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In the case of
a written put option, a closing transaction will permit the fund to write
another put option to the extent that the exercise price thereof is secured
by deposited cash or short-term securities. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other fund investments. If
the fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing before or at the same
time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option; the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
buy the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned
by the fund.
The writing of covered put options involves certain risks. For example, if
the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the fund may
elect to close the position or take delivery of the security at the exercise
price, and the fund's return will be the premium received from the put
options minus the amount by which the market price of the security is below
the exercise price.
BUYING CALL AND PUT OPTIONS. The fund may buy call options on securities it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The fund may also buy call options on
securities held in its portfolio and on which it has written call options. A
call option gives the option holder the right to buy the underlying
securities from the option writer at a stated exercise price. Before its
expiration, a call option may be sold in a closing sale transaction. Profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the call option plus the related transaction
costs.
The fund intends to buy put options on particular securities in order to
protect against a decline in the market value of the underlying security
below the exercise price less the premium paid for the option. A put option
gives the option holder the right to sell the underlying security at the
option exercise price at any time during the option period. The ability to
buy put options will allow the fund to protect the unrealized gain in an
appreciated security in its portfolio without actually selling the security.
In addition, the fund will continue to receive interest or dividend income on
the security. The fund may sell a put option it has previously purchased
before the sale of the securities underlying the option. These sales will
result in a net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs paid for
the put option that is sold. The gain or loss may be wholly or partially
offset by a change in the value of the underlying security which the fund
owns or has the right to acquire.
OVER-THE-COUNTER ("OTC") OPTIONS. The fund intends to write covered put and
call options and buy put and call options that trade in the OTC market to the
same extent that it will engage in exchange traded options. Just as with
exchange traded options, OTC call options give the option holder the right to
buy an underlying security from an option writer at a stated exercise price;
OTC put options give the holder the right to sell an underlying security to
an option writer at a stated exercise price. OTC options, however, differ
from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options,
however, are available for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange traded options;
and the writer of an OTC option is paid the premium in advance by the dealer.
The fund will purchase OTC options only from dealers and institutions that
Advisers believe present a minimal credit risk.
There can be no assurance that a continuous liquid secondary market will
exist for any particular option at any specific time. Consequently, the fund
may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the fund writes an OTC option, it generally
can close out that option before its expiration only by entering into a
closing purchase transaction with the dealer to which the fund originally
wrote it.
The fund understands the current position of the SEC staff 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 fund disagrees
with this position. Nevertheless, pending a change in the staff's position,
the fund will treat OTC options and "cover assets" as subject to the fund's
limitation on illiquid securities.
OPTIONS ON STOCK INDICES. The fund may also buy and sell call options on
stock indices in order to hedge against the risk of market or industry-wide
stock price fluctuations. 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 than (or less than, in
the case of puts) the exercise price of the option. This amount of cash is
equal to the difference between the closing price of the index and the
exercise price of the option expressed in dollars multiplied by a specified
number. Thus, unlike stock options, all settlements are in cash, and gain or
loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index and will maintain the account while the option is
open or it will otherwise cover the transaction.
FUTURES CONTRACTS. The fund may enter into contracts for the purchase or sale
of futures contracts based upon securities or financial indices ("financial
futures"). Financial futures contracts are commodity contracts that obligate
the long or short holder 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 security or cash value called for by the contract on a specified date. A
"purchase" of a futures contract means the acquisition of a contractual
obligation to take delivery of the security or cash value called for by the
contract at a specified date. Futures contracts have been designed by
exchanges that have been designated "contracts markets" by the Commodity
Futures Trading Commission ("CFTC") and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security.
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.
Although 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 offsetting of
a contractual obligation is accomplished by buying (or selling, as the case
may be) on a commodities exchange an identical futures contract calling for
delivery in the same month. This transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since 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 futures contracts.
The fund will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of its securities or securities which it
intends to buy and, to the extent consistent therewith, to accommodate cash
flows. The fund will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one-third of
the fund's net assets would be represented by futures contracts or related
options. In addition, the fund may not buy or sell futures contracts or buy
or sell related options if, immediately thereafter, the sum of the amount of
margin deposits on its existing futures and related options positions and
premiums paid for related options would exceed 5% of the market value of the
fund's total assets. In instances involving the purchase of futures contracts
or related call options, money market instruments equal to the market value
of the futures contract or related option will be deposited in a segregated
account with the fund's custodian bank to collateralize these long positions.
To the extent the fund enters into a futures contract, it will maintain with
its custodian bank, to the extent required by the rules of the SEC, assets in
a segregated account to cover its obligations with respect to the contract.
These assets will consist of cash, cash equivalents or high quality debt
securities from its portfolio in an amount equal to the difference between
the fluctuating market value of the futures contract and the aggregate value
of the initial and variation margin payments made by the fund with respect to
these futures contracts.
STOCK INDEX FUTURES. As noted above, stock index futures contracts obligate
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.
The fund may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the fund is not fully
invested in stocks and 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. The fund may buy and sell call and put
options on stock index futures to hedge against risks of marketside price
movements. The need to hedge against these risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of
these investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index futures contract give the holder
the right to receive cash. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day 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.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any
other derivative investments which are not presently contemplated for use by
the fund or which are not currently available but which may be developed, to
the extent these opportunities are both consistent with the fund's investment
objective and legally permissible for the fund.
RISKS OF THE REAL ESTATE FUND
FOREIGN SECURITIES RISK. Investors should consider carefully the substantial
risks involved in foreign securities, which are in addition to the usual
risks associated with investing in U.S. issuers. These risks can be
significantly greater for investments in emerging or developing markets.
There is generally less government supervision and regulation of securities
exchanges, brokers, dealers and listed companies than in the U.S. The
settlement practices of some of the countries in which the fund invests may
be cumbersome and result in delays that may affect portfolio liquidity. The
fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to
foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy with respect to growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position.
Securities that are acquired by the fund outside the U.S. and that are
publicly traded in the U.S. or on a foreign securities exchange or in a
foreign securities market are not considered by the fund to be illiquid
assets so long as the fund acquires and holds the securities with the
intention of reselling the securities in the foreign trading market, the fund
reasonably believes it can readily dispose of the securities for cash in the
U.S. or foreign market, and current market quotations are readily available.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries.
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 laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of
foreign investments. Changes in governmental administrations or economic or
monetary policies, in the U.S. or abroad, or changes in circumstances in
dealings between nations or currency convertibility or exchange rates could
result in investment losses for the fund. Investments in foreign securities
may also subject the fund to losses due to nationalization, expropriation,
holding and transferring assets through foreign subcustodians, depositories
and broker-dealers, or differing accounting practices and treatment.
Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards, and auditing practices and requirements
may not be comparable to those applicable to U.S. companies. The fund,
therefore, may encounter difficulty in obtaining market quotations for
purposes of valuing its portfolio and calculating its Net Asset Value.
Moreover, investors should recognize that foreign securities are often traded
with less frequency and volume and, therefore, may have greater price
volatility than is the case with many U.S. securities. Notwithstanding the
fact that the fund generally intends to acquire the securities of foreign
issuers where there are public trading markets, investments by the fund in
the securities of foreign issuers may tend to increase the risks with respect
to the liquidity of the fund's portfolio and the fund's ability to meet a
large number of shareholder redemption requests should there be economic or
political turmoil in a country in which the fund has a substantial portion of
its assets invested or should relations between the U.S. and foreign
countries deteriorate markedly. Furthermore, the reporting and disclosure
requirements applicable to foreign issuers may differ from those applicable
to domestic issuers, and there may be difficulties in obtaining or enforcing
judgments against foreign issuers.
The fund 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 fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which the fund's portfolio
securities are denominated may have a detrimental impact on the fund.
Advisers endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where from time to time the
fund's investments are placed. The exercise of this policy may include
decisions to buy 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. No assurance can be given
that profits, if any, will exceed losses.
Some of the countries in which the fund may invest are considered developing
or emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions and risk of loss arising out of the
system of share registration and custody. All of these factors make
developing market equity securities' prices generally more volatile than
securities issued in developed markets.
REAL ESTATE RISK. Because the fund invests primarily in the real estate
industry, it 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 the fund may adversely affect its ability to
retain its tax status as a regulated investment company.
CONVERTIBLE SECURITIES RISK. A convertible security has risk characteristics
of both equity and debt securities. Its value may rise and fall with the
market value of the underlying stock or, like a debt security, vary with
changes in interest rates and the credit quality of the issuer. A convertible
security tends to perform more like a stock when the underlying stock price
is high (because it is assumed it will be converted) and more like a debt
security when the underlying stock price is low (because it is assumed it
will not be converted). Because its value can be influenced by many different
factors, a convertible security is not as sensitive to interest rate changes
as a similar non-convertible debt security, and generally has less potential
for gain or loss than the underlying stock.
CREDIT AND ISSUER RISK. The fund's investments in debt securities involve
credit risk. This is the risk that the issuer of a debt security will be
unable to make principal and interest payments in a timely manner and the
debt security will go into default.
HIGH YIELD SECURITIES RISK. 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
the 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, the fund's Net
Asset Value may be adversely affected before an issuer defaults. In addition,
the 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 the 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, Advisers may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for the fund to manage the timing of its income. Under the Code and
U.S. Treasury regulations, the fund may have to accrue income on defaulted
securities and distribute the income to shareholders for tax purposes, even
though the fund is not currently receiving interest or principal payments on
the defaulted securities. To generate cash to satisfy these distribution
requirements, the fund may have to sell portfolio securities that it
otherwise may have continued to hold or use cash flows from other sources,
such as the sale of fund shares.
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 the 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 the fund's
portfolio.
The fund 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 the 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. The 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.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other
characteristics. The fund has no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993, depressed the prices of many of these securities. While
market prices may be temporarily depressed due to these factors, the ultimate
price of any security generally reflects the true operating results of the
issuer. Factors adversely impacting the market value of high yield securities
may lower the fund's Net Asset Value.
The fund relies on Advisers' judgment, analysis and experience in evaluating
the creditworthiness of an issuer. In this evaluation, Advisers 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.
RISKS OF OPTIONS, FUTURES AND OPTIONS ON FUTURES. The fund's options and
futures investments involve certain risks. These risks include the risks that
the effectiveness of an options and futures strategy depends on the degree to
which price movements in the underlying index or securities correlate with
price movements in the relevant portion of the fund's portfolio. The fund
bears the risk that the prices of its portfolio securities will not move in
the same amount as the option or future it has purchased, or that there may
be a negative correlation that would result in a loss on both the securities
and the option or future.
Successful use by the fund of options on securities, stock indexes, stock
index futures, financial futures and related options will be subject to
Advisers' 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.
Adverse market movements could cause the fund to lose up to its full
investment in a call option contract and/or to experience substantial losses
on an investment in a futures contract. There is also the risk of loss by the
fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position in a futures contract or option.
Positions in options, futures and related options on futures may be closed
out only on an exchange which provides a secondary market. There can be no
assurance that a liquid secondary market will exist for any particular option
or futures contract at any specific time. Thus, it may not be possible to
close an option or futures position. The inability to close options or
futures positions could also have an adverse impact on the fund's ability to
effectively hedge its securities. The fund will enter into an option or
futures position only if there appears to be a liquid secondary market for
these options or futures.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only
by exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the fund writes an OTC option, it generally
can close out that option before its expiration only by entering into a
closing purchase transaction with the dealer to which the fund originally
wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires
or the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for
other investment purposes while it is obligated as a put writer. Similarly, a
buyer of a put or call option might also find it difficult to terminate its
position on a timely basis in the absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract.
Trading limits are also imposed on the maximum number of contracts that any
person may trade on a particular trading day. An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The fund does not believe that these
trading and positions limits will have an adverse impact on the fund's
strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by Advisers
may still not result in a successful transaction.
Futures contracts entail other risks as well. Although the fund believes that
the use of these contracts will be beneficial, if Advisers' investment
judgment about the general direction of interest rates is incorrect, the
fund's overall performance would be poorer than if it had not entered into
any futures contract. For example, if the fund has hedged against the
possibility of an increase in interest rates which 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 its bonds
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in these situations, if the fund has insufficient
cash, it may have to sell securities from its portfolio to meet daily
variation margin requirements. These sales may be, but will not necessarily
be, at increased prices which reflect the rising market. The fund may have to
sell securities at a time when it may be disadvantageous to do so.
The fund's investment in options and futures contracts may be limited by the
requirements of the Code for qualification as a regulated investment company
and are subject to special tax rules that may affect the amount, timing and
character of distributions to you. These securities also require the
application of complex and special tax rules and elections. See "Additional
Information on Distributions and Taxes" in this SAI for more information.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions and futures contracts are considered
derivative investments. To the extent the fund enters into these
transactions, their success will depend upon Advisers' ability to predict
pertinent market movements.
PORTFOLIO TURNOVER. The fund's portfolio turnover is not expected to exceed
100%.
GOALS AND STRATEGIES OF THE STRATEGIC INCOME FUND
WHAT IS THE FUND'S GOAL?
The primary investment goal of the fund is to obtain a high level of current
income, with capital appreciation over the long term as a secondary goal. These
goals are fundamental, which means that they may not be changed without
shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?" in
the Prospectus.
MORE INFORMATION ABOUT THE
KINDS OF SECURITIES THE FUND BUYS
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends, which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain period of time. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividends to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of these
securities generally declines. These changes in market value will be reflected
in the fund's Net Asset Value.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the buyer
of a security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under a repurchase agreement, the seller is required
to maintain the value of the securities subject to repurchase at not less than
their repurchase price. Advisers will monitor the value of such securities daily
to determine that the value equals or exceeds the repurchase price. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the fund's ability to
dispose of the underlying securities. The fund will enter into repurchase
agreements only with parties who meet the creditworthiness standards approved by
the Board, i.e. banks or broker dealers which have been determined by Advisers
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to one-third of its
total assets. The fund currently does not intend such securities loans to exceed
10% of its total assets. Such loans must be secured by collateral (consisting of
any combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to the
current market value of the securities loaned. The fund retains all or a portion
of the interest received on investment of the cash collateral or receives a fee
from the borrower. The fund may terminate the loans at any time and obtain the
return of the securities loaned within five business days. The fund will
continue to receive any interest or dividends paid on the 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 collateral should the borrower fail.
BORROWING. The fund does not currently intend to borrow money or mortgage or
pledge any of its assets, except that it may borrow for temporary or emergency
purposes in an amount which is not expected to exceed 5% of its total assets.
MORTGAGE SECURITIES - GENERAL CHARACTERISTICS. The fund may invest in mortgage
securities issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), adjustable rate mortgage securities
("ARMs"), collateralized mortgage obligations ("CMOs"), and stripped
mortgage-backed securities, any of which may be privately issued. The fund may
also invest in asset-backed securities. Please see the discussion below for a
description of the types of municipal or asset-backed securities in which the
fund may invest.
A mortgage security is an interest in a pool of mortgage loans. The primary
issuers or guarantors of mortgage securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage securities from pools of government guaranteed or insured
(Federal Housing Authority or Veterans Administration) mortgages originated by
mortgage bankers, commercial banks, and savings and loan associations. FNMA and
FHLMC issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions, and mortgage bankers. The principal and interest on GNMA securities are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government. Mortgage securities from FNMA and FHLMC are not backed by the full
faith and credit of the U.S. government. FNMA guarantees full and timely payment
of all interest and principal, and FHLMC guarantees timely payment of interest
and the ultimate collection of principal. Securities issued by FNMA are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Securities issued by FHLMC are supported only by the
credit of the agency. There is no guarantee that the government would support
government agency securities and, accordingly, they may involve a risk of
non-payment of principal and interest. Nonetheless, because FNMA and FHLMC are
instrumentalities of the U.S. government, these securities are generally
considered to be high quality investments having minimal credit risks.
Most mortgage securities are pass-through securities, which means that they
provide investors with monthly payments consisting of a pro rata share of both
regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool. The fund invests in both
"modified" and "straight" pass-through securities. For "modified pass-through"
type mortgage securities, principal and interest are guaranteed, whereas such
guarantee is not available for "straight pass-through" securities. CMOs and
stripped mortgage securities are not pass-through securities.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage securities nor do they extend to the value of the
fund's shares. In general, the value of fixed-income securities varies with
changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas interest rates
of ARMS move with market interest rates, and thus their value tends to fluctuate
to a lesser degree. In view of these factors, the ability of the fund to obtain
a high level of total return may be limited under varying market conditions.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES ("GNMAS"). GNMAs are
mortgage backed securities representing part ownership of a pool of mortgage
loans. GNMAs differ from bonds in that principal is scheduled to be paid back by
the borrower over the length of the loan rather than returned in a lump sum at
maturity. The fund may buy GNMAs for which principal and interest are
guaranteed. The fund may also buy "variable rate" GNMAs and may buy other types
that may be issued with the guarantee of the Government National Mortgage
Association ("GNMA").
The GNMA guarantee of principal and interest on GNMAs is backed by the full
faith and credit of the U.S. government. However, these securities do involve
certain risks. For example, when mortgages in the pool underlying GNMAs are
prepaid, the principal payments are passed through to the certificate holders
(such as the fund). Scheduled and unscheduled prepayments of principal may
greatly change realized yields. In a period of declining interest rates it is
more likely that mortgages contained in GNMA pools will be prepaid thus reducing
the effective yield. Moreover, any premium paid on the purchase of GNMAs will be
lost if the obligation is prepaid. In periods of falling interest rates, this
potential for pre-payment may reduce the general upward price increase of GNMAs,
which might otherwise occur. As with other debt instruments, the price of GNMAs
is likely to decrease in times of rising interest rates. Price changes of GNMAs
held by the fund have a direct impact on the Net Asset Value per share of the
fund.
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMs, like traditional mortgage securities,
are an interest in a pool of mortgage loans and are issued or guaranteed by a
federal agency or by private issuers. Unlike fixed-rate mortgages, which
generally decline in value during periods of rising interest rates, the interest
rates on the mortgages underlying ARMs are reset periodically and thus allow the
fund to participate in increases in interest rates, resulting in both higher
current yields and lower price fluctuations. During periods of declining
interest rates, of course, the coupon rates may readjust downward, resulting in
lower current yields. Because of this feature, the value of an ARM is unlikely
to rise during periods of declining interest rates to the same extent as a
fixed-rate instrument. The rate of amortization of principal, as well as
interest payments, for certain types of ARMs change in accordance with movements
in a pre-specified, published interest rate index. There are several categories
of indices, including those based on U.S. Treasury securities, those derived
from a calculated measure, such as a cost of funds index, or a moving average of
mortgage rates and actual market rates. The amount of interest due to an ARM
security holder is calculated by adding a specified additional amount, the
"margin," to the index, subject to limitations or "caps" on the maximum and
minimum interest that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. The interest rates paid on the ARMs in which the fund may invest are
generally readjusted at intervals of one year or less, although instruments with
longer resets such as three years and five years are also permissible
investments.
The underlying mortgages that collateralize the ARMs in which the fund may
invest will frequently have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) 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, which can
extend the average life of the securities. Since most ARMs in the fund's
portfolio will generally have annual reset limits or caps of 100 to 200 basis
points, fluctuations in interest rates above these levels could cause the
mortgage securities to "cap out" and to behave more like long-term, fixed-rate
debt securities.
STRIPPED MORTGAGE-BACKED SECURITIES. The fund may invest in stripped
mortgage-backed securities to achieve a higher yield than may be available from
fixed-rate mortgage securities. The stripped mortgage securities in which the
fund may invest will not be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government, although such securities are more
liquid than privately issued stripped mortgage securities. Stripped
mortgage-backed securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. Typically, one class will receive some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity of an IO or PO class is
extremely sensitive not only to changes in prevailing interest rates but also to
the rate of principal payments (including prepayments) on the related underlying
mortgage assets.
Stripped mortgage-backed securities have greater market volatility than other
types of mortgage securities in which the fund invests and are purchased and
sold by institutional investors, such as the fund, through several investment
banking firms acting as brokers or dealers. As these securities were only
recently developed, traditional trading markets have not yet been established
for all stripped mortgage securities. Accordingly, some of these securities may
be illiquid. The staff of the SEC has indicated that only government-issued IO
or PO securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established by a
fund's board. The Board may, in the future, adopt procedures that would permit
the fund to acquire, hold, and treat as liquid government-issued IO and PO
securities. At the present time, however, all such securities will continue to
be treated as illiquid and will, together with any other illiquid investments,
not exceed 15% of the fund's net assets. This position may be changed in the
future, without notice to shareholders, in response to the staff's continued
reassessment of this matter, as well as to changing market conditions.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"), AND MULTI-CLASS PASS-THROUGHS. The fund may invest in
certain debt obligations that are collateralized by mortgage loans or mortgage
pass-through securities. These obligations may be issued or guaranteed by U.S.
government agencies or issued by certain financial institutions and other
mortgage lenders. CMOs and REMICs are debt instruments issued by special purpose
entities and are secured by pools of mortgages backed by residential and various
types of commercial properties. Multi-class pass-through securities are equity
interests in a trust composed of mortgage loans or other mortgage-backed
securities. Payments of principal and interest on the underlying collateral
provides the funds to pay debt service on the CMO or REMIC or make scheduled
distributions on the multi-class pass-through securities.
CMOs are fixed-income securities that are collateralized by pools of mortgage
loans created by commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other issuers in the U.S. The
underlying mortgages are backed by residential and various types of commercial
properties. Timely payment of interest and principal (but not the market value)
of some of these pools is supported by various forms of insurance or guarantees
issued by private issuers, those who pool the mortgage assets and, in some
cases, by U.S. government agencies. The fund may buy CMOs that are rated in any
category by the rating agencies without insurance or guarantee if, in the
opinion of Advisers, the sponsor is creditworthy. Prepayments of the mortgages
underlying a CMO, which usually increase when interest rates decrease, will
generally reduce the life of the mortgage pool, thus impacting the CMO's yield.
Under these circumstances, the reinvestment of prepayments will generally be at
a rate lower than the rate applicable to the original CMO.
With a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate and has a stated maturity or final distribution
date. Principal prepayments on collateral underlying a CMO, however, may cause
it to be retired substantially earlier than the stated maturities or final
distribution dates. Interest is paid or accrues on all classes of a CMO on a
monthly, quarterly or semiannual basis. The principal and interest on the
underlying mortgages may be allocated among several classes of a series in many
ways. In a common structure, payments of principal, including any principal
prepayments, on the underlying mortgages are applied to the classes of a series
of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full.
To the extent any privately issued CMOs in which the fund invests are considered
by the SEC to be an investment company, the fund will limit its investments in
such securities in a manner consistent with the provisions of the 1940 Act.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages that collateralize
the REMICs in which the fund may invest include mortgages backed by GNMAs or
other mortgage pass-throughs issued or guaranteed by the U.S. government, its
agencies or instrumentalities or issued by private entities, which are not
guaranteed by any government agency.
Yields on privately-issued CMOs have been historically higher than the yields on
CMOs issued or guaranteed by U.S. government agencies. However, the risk of loss
due to default on such instruments is higher since they are not guaranteed by
the U.S. government. The Board believes that accepting the risk of loss relating
to privately issued CMOs that the fund acquires is justified by the higher yield
the fund will earn in light of the historic loss experience on such instruments.
As new types of mortgage securities are developed and offered to investors, the
fund may invest in them if they are consistent with the fund's objectives,
policies, and quality standards.
ASSET-BACKED SECURITIES. The fund may invest in various asset-backed securities
rated in any category by the rating agencies. The underlying assets may include,
but are not limited to, receivables on home equity and credit card loans, and
automobile, mobile home, and recreational vehicle loans and leases. There may be
other types of asset-backed securities that are developed in the future in which
the fund may invest. Asset-backed securities are issued in either a pass-through
structure (similar to a mortgage pass-through structure) or in a pay-through
structure (similar to a CMO structure). In general, asset-backed securities
contain shorter maturities than bonds or mortgage loans and historically have
been less likely to experience substantial prepayment.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities, as they do not have the benefit of the same type of security
interests in the underlying collateral. Credit card receivables are generally
unsecured, and a number of state and federal consumer credit laws give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the outstanding balance. In the case of automobile receivables, there is a risk
that the holders may not have either a proper or first security interest in all
of the obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and the technical requirements imposed under
state laws. Therefore, recoveries on repossessed collateral may not always be
available to support payments on securities backed by these receivables.
CONVERTIBLE SECURITIES. The fund 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 the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because 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. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security. 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. If the convertible
security is issued by an investment bank, the security is an obligation of and
is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES. Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. The fund may acquire laon participations
selling at a discount to par value because of the borrower's credit problems. To
the extent the borrower's credit problems are resolved, the loan participation
may appreciate in value. The manager may acquire loan participations for the
fund when it believes, over the long term, appreciation will occur. An
investment in these securities, however, carries substantially the same risks
associated with an investment in defaulted debt securities and may result in the
loss of the fund's entire investment. The fund will buy defaulted debt
securities if, in the opinion of the manager, it appears the issuer may resume
interest payments or other advantageous developments appear likely in the near
future.
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. The fund may invest in sponsored and unsponsored ADRs.
Prices of ADRs are quoted in U.S. dollars. They are traded in the U.S. on
exchanges or over-the-counter and are sponsored and issued by domestic banks.
ADRs do not eliminate all of the risk inherent in investing in the securities of
foreign issuers. To the extent that the fund acquires ADRs through banks that do
not have a contractual relationship with the foreign issuer of the security
underlying the ADR to issue and service the ADRs, there may be an increased
possibility that the fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner. In addition, the lack of information may result in
inefficiencies in the valuation of such instruments. To the extent the fund
invests in ADRs rather than directly in the stock of foreign issuers, it will
avoid currency risks during the settlement period for either purchases or sales.
In general, there is a large, liquid market in the U.S. for ADRs quoted on a
national securities exchange or the NASDAQ National Market System. The
information available for ADRs is subject to the accounting, auditing, and
financial reporting standards of the domestic market or exchange on which they
are traded. These standards are more uniform and more exacting than those to
which many foreign issuers may be subject.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. The fund may buy U.S. government
obligations on a "when issued" or "delayed delivery" basis. These transactions
are arrangements under which the fund buys securities that have been authorized
but not yet issued with payment for and delivery of the security scheduled for a
future time, generally in 30 to 60 days. Purchases of U.S. government securities
on a when issued or delayed delivery basis are subject to the risk that the
value or yields at delivery may be more or less than the purchase price or the
yields available when the transaction was entered into. Although the fund will
generally buy U.S. government securities on a when issued basis with the
intention of holding the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the fund is the buyer in this
type of transaction, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of the fund's purchase commitments until payment is
made. To the extent the fund engages in when issued and delayed delivery
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies, and not for
the purpose of investment leverage. In when issued and delayed delivery
transactions, the fund relies on the seller to complete the transaction. The
seller's failure to do so may cause the fund to miss a price or yield considered
advantageous to the fund. Securities purchased on a when issued or delayed
delivery basis do not generally earn interest until their scheduled delivery
date. Entering into a when issued or delayed delivery transaction is a form of
leverage that may affect changes in Net Asset Value to a greater extent.
MORTGAGE DOLLAR ROLLS. The fund may enter into mortgage dollar rolls in which
the fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (name, type,
coupon, and maturity) securities on a specified future date. During the period
between the sale and repurchase, the fund forgoes principal and interest paid on
the mortgage-backed securities. The fund is compensated by the difference
between the current sale price and the lower price for the future purchase
(often referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position. The fund could suffer a loss if the contracting party fails
to perform the future transaction in that the fund may not be able to buy back
the mortgage-backed securities it initially sold. The fund intends to enter into
mortgage dollar rolls only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
GENERALLY. The fund may buy and sell options on securities, securities indices
and futures contracts. The fund may buy and sell options on foreign currencies
to protect its portfolio against exchange rate movements. The fund may only sell
covered options. The fund may only buy options on securities and securities
indices if the total premiums it paid for such options is 5% or less of its
total assets.
To reduce its exposure to changes in interest rates, securities prices or
foreign currency valuations, the fund may buy and sell financial futures
contracts and foreign currency futures contracts and options on these contracts.
As more fully explained below, the fund may not commit more than 5% of its total
assets to initial margin deposits on futures contracts.
CALL AND PUT OPTIONS ON SECURITIES. The fund may write (sell) covered put and
call options and buy put and call options that trade on securities exchanges and
in the over-the-counter market.
WRITING CALL OPTIONS. Call options written by the fund give the holder the right
to buy the underlying securities from the fund at a stated exercise price; put
options written by the fund give the holder the right to sell the underlying
security to the fund at a stated exercise price. A call option written by the
fund is "covered" if the fund owns the underlying security which is subject to
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the fund in cash and high
grade debt securities in a segregated account with its custodian bank. The
premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
In the case of a call option, the writer of an option may have no control over
when the underlying securities must be sold, in the case of a call option,
since, with regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation. Whether or not an
option expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the fund to write another call option on the underlying security with either a
different exercise price, expiration date or both. In addition, effecting a
closing transaction will permit the cash or proceeds from the sale of any
securities subject to the option to be used for other fund investments. If the
fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or at the
same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option; the fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the fund.
BUYING CALL OPTIONS. The fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of the security. The fund may also buy call options on securities held in its
portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Prior to its expiration, a call option may be sold in a
closing sale transaction. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus the related transaction costs.
WRITING PUT OPTIONS. Although the fund has no current intention of writing
covered put options, the fund reserves the right to do so.
A put option gives the buyer of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security or currency at the
exercise price during the option period. The option may be exercised at any time
prior to its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.
The fund would write put options only on a covered basis, which means that the
fund would maintain in a segregated account cash, U.S. government securities, or
other liquid, high-grade debt securities in an amount not less than the exercise
price at all times while the put option is outstanding. The rules of the
clearing corporation currently require that the assets be deposited in escrow to
secure payment of the exercise price. The fund would generally write covered put
options in circumstances where Advisers wishes to buy the underlying security or
currency for the fund's portfolio at a price lower than the current market price
of the security or currency. In such event, the fund would write a put option at
an exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive interest
on debt securities or currencies maintained to cover the exercise price of the
option, this technique could be used to enhance current return during periods of
market uncertainty. The risk in this type of transaction would be that the
market price of the underlying security or currency would decline below the
exercise price less the premiums received.
BUYING PUT OPTIONS. The fund may buy put options. As the holder of a put option,
the fund has the right to sell the underlying security or currency at the
exercise price at any time during the option period. The fund may enter into
closing sale transactions with respect to put options, exercise them, or permit
them to expire.
The fund may buy a put option on an underlying security or currency owned by the
fund (a "protective put") as a hedging technique in order to protect against an
anticipated decline in the value of the security or currency. This hedge
protection is provided only during the life of the put option when the fund, as
the holder of the put option, is able to sell the underlying security or
currency 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 or
currency when the Advisers deems it desirable to continue to hold the security
or currency because of tax considerations. The premium paid for the put option
and any transaction costs would reduce any capital gain otherwise available for
distribution when the security or currency is eventually sold.
The fund may also buy put options at a time when the fund does not own the
underlying security or currency. By buying put options on a security or currency
it does not own, the fund seeks to benefit from a decline in the market price of
the underlying security or currency. If the put option is not sold when it has
remaining value, and if the market price of the underlying security or currency
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 or currency 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.
The fund will commit no more than 5% of its assets to premiums when buying put
options. The premium paid by the fund when buying a put option will be recorded
as an asset in the fund's statement of assets and liabilities. This asset will
be adjusted daily to the options' current market value, which will be the latest
sale price at the time at which the Net Asset Value per share of the fund is
computed, the close of the NYSE, or, in the absence of a sale, the latest bid
price. The asset will be extinguished upon expiration of the option, the writing
of an identical option in a closing transaction, or the delivery of the
underlying security or currency upon the exercise of the option.
OVER-THE-COUNTER OPTIONS ("OTC" OPTIONS). The fund intends to write covered put
and call options and buy put and call options that trade in the over-the-counter
market to the same extent that it will engage in exchange traded options. Just
as with exchange traded options, OTC call options give the option holder the
right to buy an underlying security from an option writer at a stated exercise
price; OTC put options give the holder the right to sell an underlying security
to an option writer at a stated exercise price. However, OTC options differ from
exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
OPTIONS ON STOCK INDICES. The fund may also buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. 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 than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write (sell) put and call
options on foreign currencies traded on U.S. exchanges or in the
over-the-counter markets. Like other kinds of options, the writing of an option
on foreign currency will be only a partial hedge, up to the amount of the
premium received, and the 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 be an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the fund's position, the fund may forfeit the entire amount of the premium
plus related transaction costs.
FUTURES CONTRACTS. The fund may enter into contracts for the purchase or sale
for future delivery of securities and in such contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
contracts that obligate the long or short holder 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 ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market.
At the same time a futures contract is purchased or sold, the fund must allocate
cash or securities as a deposit payment ("initial deposit" or "initial margin")
as a partial guarantee of its performance under the contract. 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. In addition, when the fund enters
into a futures contract, it will segregate assets or "cover" its position in
accordance with the 1940 Act.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since 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 futures contracts.
The fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities it intends to buy. The
fund will not enter into any stock index or financial futures contract or
related option if, immediately thereafter, more than one-third of the fund's net
assets would be represented by futures contracts or related options. In
addition, the fund may not buy or sell futures contracts or related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions and premiums paid for related options
would exceed 5% of the market value of the fund's total assets. In instances
involving the purchase of futures contracts or related call options, money
market instruments equal to the market value of the futures contract or related
option will be deposited in a segregated account with the custodian to
collateralize such long positions.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in the price of portfolio securities without
actually buying or selling the underlying security. To the extent the fund
enters into a futures contract, it will maintain with its custodian bank, to the
extent required by SEC rules, assets in a segregated account to cover its
obligations with respect to the contract which will consist of cash, cash
equivalents, or high quality debt securities from its portfolio in an amount
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 with respect to such 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.
The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the fund is not fully invested in
stocks and 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. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market-side price movements.
The need to hedge against such 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 delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. The fund's
investment strategy in employing futures contracts based on an index of debt
securities will be similar to that used by it in other financial futures
transactions. The fund may also buy and write put and call options on such index
futures and enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the fund's investment objectives and
legally permissible for the fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward currency
exchange contracts ("Forward Contract(s)") to attempt to minimize the risk to
the fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to buy or sell a specific
currency for an agreed price at a future date which is individually negotiated
and privately traded by currency traders and their customers.
The 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 same currency.
For example, an Italian lira-denominated position could be constructed by buying
a German mark-denominated debt security and simultaneously entering into a
Forward Contract to exchange an equal amount of marks for lira at a future date
and at a specified exchange rate. With such a transaction, the fund may be able
to receive a return that is substantially similar from a yield and currency
perspective to a direct investment in lira debt securities while achieving other
benefits from holding the underlying security. The fund may experience slightly
different results from its use of such combined investment positions as compared
to its purchase of a debt security denominated in the particular currency
subject to the Forward Contract. This difference may be enhanced or offset by
premiums that may be available in connection with the Forward Contract.
The 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 the 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; or when the 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.
The fund usually effects forward currency exchange contracts on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. Some
price spread on currency exchange (to cover service charges) will be incurred
when the fund converts assets from one currency to another.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents, or readily marketable debt securities
equal to the amount of the purchase will be held in segregated accounts with the
fund's custodian bank to be used to pay for the commitment, or the fund will
cover any commitments under these contracts to sell currency by owning the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of the fund to
enter into Forward Contracts is limited only to the extent such Forward
Contracts would, in the opinion of Advisers, impede portfolio management or the
ability of the fund to honor redemption requests.
INTEREST RATE AND CURRENCY SWAPS. An interest rate swap is the transfer between
two counterparties of interest rate obligations, one of which has an interest
rate fixed to maturity while the other has an interest rate that changes in
accordance with changes in a designated benchmark (e.g., LIBOR, prime,
commercial paper, or other benchmarks). The obligations to make repayment of
principal on the underlying securities are not exchanged. These transactions
generally require the participation of an intermediary, frequently a bank. The
entity holding the fixed-rate obligation will transfer the obligation to the
intermediary, and that entity will then be obligated to pay to the intermediary
a floating rate of interest, generally including a fractional percentage as a
commission for the intermediary. The intermediary also makes arrangements with a
second entity that has a floating-rate obligation which substantially mirrors
the obligation desired by the first party. In return for assuming a fixed
obligation, the second entity will pay the intermediary all sums that the
intermediary pays on behalf of the first entity, plus an arrangement fee and
other agreed upon fees. Interest rate swaps are generally entered into to permit
the party seeking a floating rate obligation the opportunity to acquire such
obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed-rate obligation the opportunity to
acquire such a fixed-rate obligation, also frequently at a price lower than is
available in the credit markets. The success of such a transaction depends in
large part on the availability of fixed-rate obligations at a low enough coupon
rate to cover the cost involved.
The fund will only enter into interest rate swaps on a net basis, which means
that the two payment streams are netted out, with the fund receiving or paying,
as the case may be, only the net amount of the two payments. Interest rate swaps
do not involve the delivery of securities, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate swaps is limited to
the net amount of interest payments that the fund is contractually obligated to
make. If the other party to an interest rate swap defaults, the fund's risk of
loss consists of the net amount of interest payments that the fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
INVERSE FLOATERS. The fund may invest up to 5% of its total assets in inverse
floaters. Inverse floaters are instruments with floating or variable interest
rates that move in the opposite idrection, usually at an accelerated speed, to
short-term interest rates or interest rate indices.
ILLIQUID SECURITIES. It is the policy of the fund that illiquid securities
(including illiquid equity securities, defaulted debt securities, loan
participations, securities with legal or contractual restrictions on resale,
repurchase agreements of more than seven days duration, and other securities
which are not readily marketable) may not constitute more than 15% of the value
of the fund's total net assets. Generally, an "illiquid security" is any
security that cannot be disposed of promptly and in the ordinary course of
business at approximately the amount at which the fund has valued the
instrument. Subject to this limitation, the Board has authorized the fund to
invest in restricted securities where such investment is consistent with the
fund's investment objectives and has authorized such securities to be considered
liquid to the extent Advisers determines that there is a liquid institutional or
other market for such securities - such as, 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. The Board will review on a monthly basis any
determination by Advisers to treat a restricted security as liquid, including
Advisers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, Advisers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and the
number of other potential buyers; (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 the fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity may be increased if qualified institutional buyers become
uninterested in buying these securities or the market for these securities
contracts.
A restricted security is a security that has been purchased through a private
offering and cannot be sold without prior registration under the Securities Act
of 1933 unless the sale is pursuant to an exemption therefrom. Notwithstanding
the restriction on the sale of such securities, a secondary market exists for
many of these securities. As with other securities in the fund's portfolio, if
there are readily available market quotations for a restricted security, it will
be valued, for purposes of determining the fund's Net Asset Value, between the
range of the bid and ask prices. To the extent that no quotations are available,
the securities will be valued at fair value in accordance with procedures
adopted by the Board.
The fund's purchases of restricted securities can result in the receipt of
commitment fees. For example, the transaction may involve an individually
negotiated purchase of short-term increasing rate notes. Maturities for this
type of security typically range from one to five years. These notes are usually
issued as temporary or "bridge" financing to be replaced ultimately with
permanent financing for the project or transaction which the issuer seeks to
finance. Typically, at the time of commitment, the fund receives the security
and sometimes a cash commitment fee. Because the transaction could possibly
involve a delay between the time the fund commits to buy the security and the
fund's payment for and receipt of that security, the fund will maintain, in a
segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of the purchase
commitments until payment is made. The fund will not buy restricted securities
in order to generate commitment fees, although the receipt of such fees will
assist the fund in achieving its principal objective of earning a high level of
current income.
Notwithstanding the determinations in regard to the liquidity of restricted
securities, the Board remains responsible for such determinations and will
consider appropriate action to maximize the fund's liquidity and its ability to
meet redemption demands if a security should become illiquid after its purchase.
To the extent the fund invests in restricted securities that are deemed liquid,
the general level of illiquidity in the fund may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.
RISKS OF THE STRATEGIC INCOME FUND
HIGH YIELD SECURITIES. Because the fund may invest in securities below
investment grade, an investment in the fund 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 the
fund invests. Accordingly, an investment in the 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
the 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, the fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the 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 the 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, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of fund shares.
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 the 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 the fund's portfolio.
The fund 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 the 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.
The 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.
The fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the fund's Net Asset Value.
The fund relies on Advisers' judgment, analysis, and experience in evaluating
the creditworthiness of an issuer. In this evaluation, Advisers 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.
MORTGAGE-BACKED SECURITIES. To the extent mortgage securities are purchased at a
premium, unscheduled principal prepayments, including prepayments resulting from
mortgage foreclosures, may result in some loss of the holder's principal
investment to the extent of the premium paid. On the other hand, if mortgage
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal will increase current and total
returns and will accelerate the recognition of income which, when distributed to
you, will be taxable as ordinary income.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs could
result in the fund's inability to dispose of such securities at an advantageous
price under certain circumstances.
FOREIGN SECURITIES. You should consider carefully the substantial risks involved
in securities of companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable 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. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Foreign markets have
substantially less volume than the NYSE, 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. In
many foreign countries there is less government supervision and regulation of
stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
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 certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, 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.
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 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)
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; (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, and on the fund's
ability to exchange local currencies for U.S. dollars; (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 capitalization, 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 fund 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 fund to lose its registration
through fraud, negligence, or even mere oversight. While the fund will endeavor
to ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability, and it is possible that subsequent
illegal amendment or other fraudulent act may deprive the fund of its ownership
rights or improperly dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting from their
errors, it may be difficult for the fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more than
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 fund from
investing in the securities of certain Russian companies deemed suitable by
Advisers. Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the 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.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably 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 fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the fund.
Through the fund's 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 fund's 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 considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the fund's assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also 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 Advisers, any losses resulting from
the holding of the fund's 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's appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign governments
might not occur.
STOCK INDEX OPTIONS, STOCK INDEX FUTURES, FINANCIAL FUTURES, AND RELATED
OPTIONS. The fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indexes, stock index
futures, financial futures, and related options 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 or underlying
securities, the correlation will not be perfect. Consequently, the fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedging instrument. It is also possible that there may be a
negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both the securities and the hedging instrument. Accordingly, successful use by
the fund of options on stock indexes, stock index futures, financial futures,
and related options will be subject to Advisers' 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, stock index futures, and financial futures,
and related 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 or futures contract or related
option at any specific time. Thus, it may not be possible to close an option or
futures position. The inability to close options or futures positions could have
an adverse impact on the fund's ability to effectively hedge its securities. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for such options or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of such put or call option might
also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The fund does not believe that these trading and positions limits
will have an adverse impact on the fund's strategies for hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the fund believes that use
of such contracts will benefit the fund, if Advisers' investment judgment about
the general direction of interest rates is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if the fund has hedged against the possibility of an increase in
interest rates which 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 its bonds which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the fund has insufficient cash, it may have to sell securities
from its portfolio to meet daily variation margin requirements. These sales may
be, but will not necessarily be, at increased prices which reflect the rising
market. The fund may have to sell securities at a time when it may be
disadvantageous to do so.
The fund's sale of futures contracts and purchase of put options on futures
contracts will be solely to protect its investments against declines in value.
The fund expects that in the normal course it will buy securities upon
termination of long futures contracts and long call options on future contracts,
but under unusual market conditions it may terminate any of such positions
without a corresponding purchase of securities.
FORWARD CURRENCY CONTRACTS. As noted above, the fund may enter into forward
currency contracts, in part in order to limit the risk from adverse changes in
the relationship between currencies. However, 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.
INVESTMENT RESTRICTIONS
The Real Estate and Strategic Income funds have adopted the following
restrictions as fundamental policies. This means they may only be changed if the
change is approved by (i) more than 50% of the fund's outstanding shares or (ii)
67% or more of the fund's shares present at a shareholder meeting if more than
50% of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The Real Estate and Strategic Income funds each may not:
1. Borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any exemptions
therefrom which may be granted by the U.S. Securities and Exchange Commission,
or for temporary or emergency purposes and then in an amount not exceeding
33-1/3% of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment objectives and policies, and (c) to the extent the entry
into a repurchase agreement is deemed to be a loan. The fund may also make
loans to affiliated investment companies to the extent permitted by the 1940
Act or any exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages or
pledges, (b) entering into options, futures contracts, forward contracts or
repurchase transactions, or (c) making short sales of securities to the extent
permitted by the 1940 Act and any rule or order thereunder, or SEC staff
interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities or securities of
other investment companies), EXCEPT that the Real Estate Fund shall concentrate
in securities of companies operating in the real estate industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Nicholas F. Brady (69)
16 North Washington Street
Easton, MD 21601
Trustee
Chairman, Templeton Emerging Markets Investment Trust PLC, Templeton Latin
America Investment Trust PLC, Darby Overseas Investments, Ltd. and Darby
Emerging Markets Investments LDC (investment firms) (1994-present); Director,
Templeton Global Strategy Funds, Amerada Hess Corporation (exploration and
refining of natural gas), Christiana Companies, Inc. (operating and investment
companies), and H.J. Heinz Company (processed foods and allied products);
director or trustee, as the case may be, of 21 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Secretary of the United
States Department of the Treasury (1988-1993) and Chairman of the Board, Dillon,
Read & Co., Inc. (investment banking) (until 1988).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Andrew H. Hines, Jr. (76)
150 2nd Avenue N.
St. Petersburg, FL 33701
Trustee
Consultant, Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 22 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Chairman and
Director, Precise Power Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board and Chief Executive
Officer, Florida Progress Corporation (holding company in the energy area)
(1982-1990) and director of various of its subsidiaries.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
Trustee
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison-United States
Treasury Department (1988-1989).
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, LLC, Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
Betty P. Krahmer (69)
2201 Kentmere Parkway
Wilmington, DE 19806
Trustee
Director or trustee of various civic associations; director or trustee, as the
case may be, of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Economic Analyst, U.S. government.
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Fred R. Millsaps (70)
2665 NE 37th Drive
Fort Lauderdale, FL 33308
Trustee
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978),
Financial Vice President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory
Services, Inc. and Franklin/Templeton Investor Services, Inc.; and officer
and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment companies
in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, LLC and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee, as the case
may be, of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Samuel J. Forester, Jr. (50)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Managing Director, Templeton Worldwide, Inc.; Vice President and Director,
Templeton Global Income Portfolio Ltd.; Director, Closed Joint-Stock Company
Templeton and Templeton Trust Services Pvt. Ltd.; officer of 10 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Templeton Global Bond Managers, a division of Templeton Investment
Counsel, Inc., Founder and Partner, Forester, Hairston Investment Management,
Inc. (1989-1990), Managing Director (Mid-East Region), Merrill Lynch, Pierce,
Fenner & Smith Inc. (1987-1988), and Advisor for Saudi Arabian Monetary Agency
(1982-1987).
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Mark G. Holowesko (39)
Lyford Cay
Nassau, Bahamas
Vice President
President, Templeton Global Advisors Limited; Chief Investment Officer, Global
Equity Group; Executive Vice President and Director, Templeton Worldwide, Inc.;
officer of 21 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Investment Administrator, RoyWest Trust Corporation
(Bahamas) Limited (1984-1985).
Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President and
Director, Franklin Advisory Services, LLC; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
John R. Kay (58)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Vice President and Treasurer, Templeton Worldwide, Inc.; Assistant Vice
President, Franklin Templeton Distributors, Inc.; officer of 25 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Vice President and Controller, Keystone Group, Inc.
Elizabeth M. Knoblock (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President - Compliance
General Counsel, Secretary and Senior Vice President, Templeton Investment
Counsel, Inc.; Senior Vice President, Templeton Global Investors, Inc.; officer
of 21 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Associate General Counsel, Kidder Peabody & Co.
Inc. (1989-1990), Assistant General Counsel, Gruntal & Co., Inc. (1988), Vice
President and Associate General Counsel, Shearson Lehman Hutton Inc. (1988),
Vice President and Assistant General Counsel, E.F. Hutton & Co. Inc.
(1986-1988), and Special Counsel, Division of Investment Management, U.S.
Securities and Exchange Commission (1984-1986).
Barbara J. Green (51)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Secretary
Senior Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of 21 of the investment companies in the Franklin Templeton Group
of Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
James R. Baio (45)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Treasurer
Certified Public Accountant; Treasurer, Franklin Mutual Advisers, LLC; Senior
Vice President, Templeton Worldwide, Inc., Templeton Global Investors, Inc. and
Templeton Funds Trust Company; officer of 22 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Senior Tax Manager, Ernst &
Young (certified public accountants) (1977-1989).
*This board member is considered an "interested person" under federal securities
laws. Charles B. Johnson is an interested person due to his ownership of
Franklin Resources, Inc. Mr. Brady's status as an interested person results from
his business affiliations with Franklin Resources, Inc. and Templeton Global
Advisors Limited. Mr. Brady and Franklin Resources, Inc. are both limited
partners of Darby Overseas Partners, L.P. (Darby Overseas). In addition, Darby
Overseas and Templeton Global Advisors Limited are limited partners of Darby
Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members and Mr. Brady an annual retainer of
$2,000 and a fee of $200 per board meeting attended. Board members who serve on
the audit committee of the trust and other funds in the Franklin Templeton Group
of Funds receive a flat fee of $2,000 per committee meeting attended, a portion
of which is allocated to the trust. Members of a committee are not compensated
for any committee meeting held on the day of a board meeting. Noninterested
board members may also serve as directors or trustees of other funds in the
Franklin Templeton Group of Funds and may receive fees from these funds for
their services. The following table provides the total fees paid to
noninterested board members and Mr. Brady by the trust and by the Franklin
Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME TRUST1($) FUNDS2($) SERVES3
Harris J. Ashton 4,000 361,157 49
Nicholas F. Brady 4,000 140,975 21
S. Joseph Fortunato 4,000 367,835 51
Andrew H. Hines, Jr. 5,988 208,075 22
Edith E. Holiday 4,000 211,400 25
Betty P. Krahmer 4,000 141,075 21
Gordon S. Macklin 4,000 361,157 49
Fred R. Millsaps 4,400 210,075 22
1. For the fiscal year ended December 31, 1998. During the period from September
1, 1997, through February 27, 1998, an annual retainer of $6,000 and fees at the
rate of $500 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 164 U.S. based
funds or series.
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, and paid pro rata by each fund in
the Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or board member received any other compensation, including
pension or retirement benefits, directly or indirectly from the fund or other
funds in the Franklin Templeton Group of Funds. Certain officers or board
members who are shareholders of Franklin Resources, Inc. may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED Franklin Advisers, Inc. is the manager for the
Real Estate and Strategic Income Funds and the Small Cap Fund. The manager is
wholly owned by Franklin Resources, Inc. (Resources), a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates (together, the "managers") manage numerous other
investment companies and accounts. The managers may give advice and take action
with respect to any of the other funds they manage, or for their own account,
that may differ from action taken by a manager on behalf of the fund. Similarly,
with respect to the funds, the managers are not obligated to recommend, buy or
sell, or to refrain from recommending, buying or selling any security that the
managers and access persons, as defined by applicable federal securities laws,
may buy or sell for their own account or for the accounts of any other fund. The
managers are not obligated to refrain from investing in securities held by the
funds or other funds they manage. Of course, any transactions for the accounts
of the managers and other access persons will be made in compliance with the
trust's code of ethics.
Under the trust's code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT FEES Each fund pays its manager a fee equal to an annual rate as
follows:
Real Estate Fund
[to be provided in a later 485(b) amendment]
Strategic Income Fund
[to be provided in a later 485(b) amendment]
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the trust to provide certain administrative
services and facilities for the trust. Under this agreement, FT Services is
responsible for preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
subcontracts with Templeton Funds Annuity Company (TFAC) to provide certain of
these services. FT Services and TFAC are direct or indirect wholly owned
subsidiaries of Resources and are affiliates of the trust's managers and
principal underwriter.
ADMINISTRATION FEES The Real Estate and Strategic Income funds pay FT Services a
monthly fee based on the assets of each fund equal to an annual rate of:
[to be supplied in a later 485(b) amendment]
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
CUSTODIANS The Bank of New York, Mutual Funds Division, 90 Washington Street,
New York, NY 10286, acts as custodian of the securities and other assets of the
Real Estate and .
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 managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the managers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The managers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
managers, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services they receive. This may be viewed in terms of either the particular
transaction or the managers' overall responsibilities to client accounts over
which they exercise investment discretion. The services that brokers may provide
to the managers include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the managers in carrying out their overall
responsibilities to their clients.
To the extent a fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The funds seek to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the managers to supplement their own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
the trust's officers are satisfied that the best execution is obtained, the sale
of trust shares, as well as shares of other funds in the Franklin Templeton
Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute a fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 5% of the voting securities of one or
more broker-dealers through whom such fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent that the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the fund to adhere to procedures adopted by
the board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary broker's
commissions for similar transactions.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
Each fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally due
to the difference in the distribution and service (Rule 12b-1) fees of class 2.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in their shares.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by a fund. These gains when
distributed will be treated as ordinary dividends, and any losses will reduce a
fund's ordinary income otherwise available for distribution. This treatment
could increase or reduce a fund's ordinary income distributions, and may cause
some or all of a fund's previously distributed income to be classified as a
return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute. To ensure that individuals holding the Contracts whose assets are
invested in a fund will not be subject to federal income tax on distributions
made by the fund prior to receipt of payments under the Contracts, each fund
intends to comply with the additional requirements of Section 817(h) of the
Internal Revenue Code relating to diversification of its assets. The board
reserves the right not to maintain the qualification of a fund as a regulated
investment company if it determines such course of action to be beneficial to
shareholders. In such case, the fund will be subject to federal, and possibly
state, corporate taxes on its taxable income and gains.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to make certain minimum distributions by December
31 of each year. Federal excise taxes will not apply to a fund in a given
calendar year, however, if all of its shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable products.
INVESTMENT IN COMPLEX SECURITIES A fund may invest in complex securities. These
investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by a fund are treated as
ordinary income or capital gain, accelerate the recognition of income to a fund
and/or defer a fund's ability to recognize losses, and, in limited cases,
subject a fund to U.S. federal income tax on income from certain of its foreign
securities. In turn, these rules may affect the amount, timing or character of
the income distributed by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The trust is an open-end management investment company, commonly called a mutual
fund. The trust was organized as a Massachusetts business trust on February 25,
1988, and is registered with the SEC. The Real Estate and Strategic Income
funds, and the Templeton Bond Fund, are non-diversified series of the trust. The
other funds are diversified series of the trust.
The shareholders of a Massachusetts business trust, could, under certain
circumstances, be held personally liable as partners for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
each series' (fund's) assets for any shareholder held personally liable for
obligations of that fund or the trust. The Declaration of Trust provides that
the trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of a fund or the trust and shall satisfy
any judgment thereon. All such rights are limited to the assets of the fund. The
Declaration of Trust further provides that the trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the fund as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the fund's total
assets. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance exists and the fund itself is unable to meet its
obligations.
The trust currently offers two classes of shares for each series, Class 1 and
Class 2. All shares purchased before the initial offering of each fund's Class 2
shares are considered Class 1 shares. After that date, all shares are designated
either Class 1 or Class 2. Additional classes of shares may be offered in the
future. The full title of each series and class is:
Franklin Growth Investments Fund - Class 1
Franklin Growth Investments Fund - Class 2
Franklin Real Estate Investments Fund - Class 1
Franklin Real Estate Investments Fund - Class 2
Franklin Small Cap Investments Fund - Class 1
Franklin Small Cap Investments Fund - Class 2
Franklin Strategic Income Investments Fund - Class 1
Franklin Strategic Income Investments Fund - Class 2
Mutual Shares Investments Fund - Class 1
Mutual Shares Investments Fund - Class 2
Templeton Asset Allocation Fund - Class 1
Templeton Asset Allocation Fund - Class 2
Templeton Bond Fund - Class 1
Templeton Bond Fund - Class 2
Templeton Developing Markets Fund - Class 1
Templeton Developing Markets Fund - Class 2
Templeton International Fund - Class 1
Templeton International Fund - Class 2
Templeton Stock Fund - Class 1
Templeton Stock Fund - Class 2
Shares of each class represent proportionate interests in a fund's assets and
are identical except that each fund's Class 2 shares will bear the expense of
the Class 2 distribution plan. (See "The Underwriter" below, for a description
of these plans.) On matters that affect a fund as a whole, each class has the
same voting and other rights and preferences as any other class. On matters that
affect only one class, only shareholders of that class may vote. Each class
votes separately on matters affecting only that class, or expressly required to
be voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes and
series of the trust for matters that affect the trust as a whole. Additional
series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust, or a
series of the trust, may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help shareholders communicate with other shareholders about the removal of a
board member. A special meeting may also be called by the board in its
discretion. For information regarding voting privileges of Contract Owners, see
the insurance company separate account SAI.
PRINCIPAL SHAREHOLDERS Shares of the trust are sold to and owned only by
insurance company separate accounts to serve as the investment vehicle for
variable annuity and life insurance contracts.
However, the insurance companies will exercise voting rights attributable to
these shares in accordance with voting instructions received by owners of the
contracts issued by the insurance companies. To this extent, the insurance
companies do not exercise control over the trust by virtue of the voting rights
from their ownership of trust shares.
PRICING SHARES
- ----------------------------------------------- -------------------------------
When they buy and sell shares, the trust's insurance company shareholders pay
and receive the net asset value per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding. Each fund follows the procedures described below.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
REDEMPTIONS IN KIND In the case of redemption requests, the board reserves the
right to make payments in whole or in part in securities or other assets of the
fund, in case of an emergency, or if the payment of such a redemption in cash
would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the fund's net assets and you may incur brokerage fees in converting the
securities to cash. The fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the trust's shares.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, except to the
extent these expenses are borne by the Insurance Companies. These expenses
include advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The trust pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
Distributors may be entitled to receive payment under the Class 2 Rule 12b-1
plans, as discussed below. Except as noted below, Distributors receives no other
compensation from the trust for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each fund's Class 2 has a separate
distribution or "Rule 12b-1" plan. Under each fund's plan, the fund may pay up
to a maximum of 0.25% (0.15% for the Bond Fund) per year of the average daily
net assets attributable to its Class 2 shares. These fees may be used to
compensate Distributors, the Insurance Companies or others for distribution and
related services and as a servicing fee.
The terms and provisions of the plans, including terms and provisions relating
to required reports, term, and approval, are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the trust and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the non-interested
members of the board. The Class 2 plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
non-interested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of a management agreement with a manager, or by vote
of a majority of the outstanding shares of the class. Distributors, the
Insurance Companies or others may also terminate their respective distribution
or service agreement at any time upon written notice.
The Class 2 plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval by
a majority of the outstanding shares of the fund's class, and all material
amendments to the plans or any related agreements shall be approved by a vote of
the non-interested members of the board, cast in person at a meeting called for
the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
PERFORMANCE
- -------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the funds to compute or express performance follows.
Because the trust only offers its shares to Insurance Company separate accounts
(Insurance Companies) for use in variable annuity and variable life insurance
contracts, to the extent required by SEC rules, the advertised performance of
the funds will be displayed no more prominently than standardized performance of
the applicable insurance company separate accounts/contracts. For information
about how an Insurance Company may advertise such performance, please consult
the contract prospectus which accompanies the trust prospectus.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.
AVERAGE ANNUAL TOTAL RETURN is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does NOT, however, include any fees or sales charges imposed by the variable
insurance contract for which the fund is an investment option. If they had been
included, performance would be lower.
These figures are calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above.
From time to time, the current yields of the funds, may be published in
advertisements and communications to Contract Owners. The current yield for each
fund will be calculated by dividing the annualization of the income earned by
the fund during a recent 30-day period by the net asset value per share at the
end of such period. In addition, aggregate, cumulative and average total return
information for each fund over different periods of time may also be advertised.
Except as stated above, each fund will use the same methods for calculating its
performance.
A distribution rate for each fund may also be published in communications
preceded or accompanied by a copy of the trust's current prospectus. The fund's
current distribution rate will be calculated by dividing the annualization of
the total distributions made by that fund during the most recent preceding
fiscal quarter by the net asset value per share at the end of such period. The
current distribution rate may differ from current yield because the distribution
rate will be for a different period of time and may contain items of capital
gain and other items of income, while current yield reflects only earned income.
Uniformly computed yield and total return figures for each fund will also be
published along with publication of its distribution rate.
Hypothetical performance information may also be prepared for sales literature
or advertisements. See the appropriate insurance company separate account
prospectus and SAI.
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
o CONSUMER PRICE INDEX - Measure of the average change in prices for a fixed
basket of goods and services regularly bought by consumers in the United States,
published by the Bureau of Labor Statistics.
o INTERNATIONAL FINANCE CORPORATION'S (IFC) INVESTABLE COMPOSITE INDEX - The
index tracks the emerging stock markets of three world regions based on market
capitalization weighting. Those regions are Latin America, Asia and
Europe/Mideast/Africa. As of 12/31/98, the regional weights of the IFC Composite
Index were distributed accordingly: Asia, 28%; Latin America, 34%; and
Europe/Mideast/Africa, 38%.
o JP MORGAN GLOBAL GOVERNMENT BOND INDEX (UNHEDGED) - The index comprises 13
markets, including Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, Netherlands, Spain, Sweden, the U.K. and the U.S. Each country's weight
is determined by the total market capitalization in $U.S. of all the bonds in
that country's traded index. The J.P. Morgan Global Government Bond Total Return
Index includes only actively traded, fixed-rate bonds with a remaining maturity
of one year or longer. The index is unhedged and expressed in terms of $U.S.
o LIPPER INCOME FUNDS OBJECTIVE AVERAGE - This is an equally weighted average
calculation of performance figures for all funds within the Lipper Income Funds
Objective Category, which is defined as all mutual funds that normally seek a
high level of current income through investing in income-producing stocks, bonds
and money market instruments. As of 12/31/98, there were 99 funds in this
category.
o MORGAN STANLEY INTERNATIONAL EUROPE, AUSTRALIA, FAR EAST (MSCI EAFE) INDEX -
This index includes approximately 1000 companies representing the stock markets
of 21 countries in Europe, Australia, New Zealand, and the Far East. The average
company has a market capitalization of over $3 billion.
o MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX - The index comprises
the developed markets of 23 countries around the world. The MSCI indices define
the local market for each country by constructing a matrix of all listed
securities, sorting the matrix by industry, and seeking to capture 60% of the
market cap for each group by selecting the most investable stocks in each
industry. The index applies full market cap weights to each included stock.
o RUSSELL 2500 INDEX - Published by Frank Russell Company, the index measures
the performance of the 2,500 smallest companies in the Russell 3000 Index,
representing approximately 22% of the total market capitalization of the
companies in the Russell 3000. The Russell 3000 contains the 3,000 largest
companies incorporated in the U.S. and its territories. As of the latest
reconstitution, the average market capitalization of the Russell 2500 was
approximately $931 million; the median market capitalization was approximately
$630 million. The largest company in the index had an approximate market
capitalization of $3.7 billion.
o STANDARD & POOR'S 500 (S&P 500) - The S&P 500 consists of 500 widely held
domestic common stocks, consisting of four broad sectors: industrials,
utilities, financials and transportation. It is a market value-weighted index,
where the stock price is multiplied by the number of shares outstanding, with
each stock affecting the index in proportion to its market value. This index,
calculated by Standard & Poor's, is a total return index with dividends
reinvested.
o DOW JONES(R) COMPOSITE AVERAgE AND ITS COMPONENT AVERAGes - This is a
price-weighted average of 65 stocks that trade on the New York Stock Exchange.
The average is a combination of the Dow Jones Industrial Average (30 blue-chip
stocks that are generally leaders in their industry), the Dow Jones
Transportation Average (20 transportation stocks), and the Dow Jones Utilities
Average (15 utility stocks involved in the production of electrical energy).
o WILSHIRE 5000 EQUITY INDEX - This index represents the return on the market
value of all U.S. headquartered equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
o THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES - This is an
unmanaged index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
o LIPPER - MUTUAL FUND PERFORMANCE ANALYSIS - This measures total return and
average current yield for the mutual fund industry and rank individual mutual
fund performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
o MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
o STOCKS, BONDS, BILLS, AND INFLATION, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
o MORNINGSTAR - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
o SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES - This measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
o LEHMAN BROTHERS AGGREGATE BOND INDEX OR ITS COMPONENT INDICES - This measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o SALOMON BROTHERS COMPOSITE HIGH YIELD INDEX OR ITS COMPONENT INDICES - This
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
o The manager's and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a similar
statistical organization.
o The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
o Allegorical stories illustrating the importance of persistent long-term
investing.
o A description of the Templeton organization's investment management philosophy
and approach, including its worldwide search for undervalued or "bargain"
securities and its diversification by industry, nation and type of stocks or
other securities.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
* Sir John Templeton sold the Templeton organization to Franklin Resources, Inc.
in October 1992 and resigned from the board on April 16, 1995. He is no longer
involved with the investment management process.
FUND SIMILARITY The investment objectives and policies of certain funds are
similar but not identical to those of certain public Franklin Templeton Funds
indicated in the table below. Because of differences in portfolio size, the
investments held, the timing of purchases of similar investments, cash flows,
minor differences in certain investment policies, insurance product related tax
diversification requirements, state insurance regulations, and additional
administrative and insurance costs associated with insurance company separate
accounts, the investment performance of the funds will differ from the
performance of the corresponding Franklin Templeton Funds:
TEMPLETON VARIABLE PRODUCTS SERIES FUND FRANKLIN TEMPLETON FUNDS
FRANKLIN STRATEGIC SERIES
Franklin Strategic Income Investments Fund - Franklin Strategic Income Fund
Franklin Real Estate Investments Fund Franklin Real Estate Securities Fund
DESCRIPTION OF BOND RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
File Nos.33-20313
FORM N-1A
PART C
Other Information
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference.
(a) DECLARATION OF TRUST.
(i) Form of Declaration of Trust dated February 25, 1988
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Date: April 29, 1998
(ii)
Form of Amendment of Declaration
of Trust
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(iii)
Amended Establishment and Designation of Series of Shares
dated February 14, 1997
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(iv)
Fifth Amended Establishment and Designation of Series of
Shares dated February 27, 1998
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(b) BY-LAWS.
(i) By-Laws dated February 25, 1988
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS.
Not applicable
(d) INVESTMENT ADVISORY CONTRACTS.
(i) Amended and Restated Investment Management Agreement for
Templeton Money Market Fund and Templeton Bond Fund
Filing: Registration Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 27, 1995
(ii) Investment Management Agreement for Templeton Developing
Markets Fund
Filing: Post-Effective Amendment No. 12 to Registration
Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 16, 1996
(iii) Investment Management Agreement between Registrant, on
behalf of the Templeton Asset Allocation Fund, and
Templeton Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(iv) Investment Management Agreement between Registrant, on \
behalf of the Templeton Stock Fund, and Templeton Investment
Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(v) Investment Management Agreement between Registrant, on
behalf of the Templeton International Fund, and Templeton
Investment Counsel, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(vi) Investment Management Agreement between Registrant, on
behalf of the Franklin Growth Investments Fund, and
Franklin Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(vii) Investment Management Agreement between Registrant, on
behalf of the Mutual Shares Investments Fund, and Franklin
Mutual Advisers, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(viii) Form of Management Agreement between Registrant on behalf of
Franklin Small Cap Investments Fund and Franklin Advisers,
Inc.
Filing: Post-Effective Amendment No. 18 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 13, 1998
(e) UNDERWRITING CONTRACTS.
(i) Amended and Restated Distribution Agreement
Filing: Post-Effective Amendment No.10 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: December 22, 1995
(f) BONUS OR PROFIT SHARING CONTRACTS.
Not Applicable
(g) CUSTODIAN AGREEMENTS.
(i) Amended and Restated Custodian Agreement
Filing: Post-Effective Amendment No. 13 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: April 12, 1996
(ii) Master Custody Agreement between the Registrant and the Bank
of New York
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 14, 1997
(h) OTHER MATERIAL CONTRACTS.
(i) Amended and Restated Business Management Agreement
Filing: Post-Effective Amendment No. 12 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: February 16, 1996
(ii) Form of Fund Administration Agreement between Registrant,
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 19 to Registration
Statement of Registrant on Form N-1A.
File No. 33-20313
Filing Date: February 24, 1999
(i) LEGAL OPINION.
(i) Opinion and consent of counsel dated April 28, 1998
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Date: April 29, 1998
(j) OTHER OPINIONS.
Not Applicable
(k) OTHER FINANCIAL STATEMENTS.
Not Applicable
(l) INITIAL CAPITAL AGREEMENTS.
(i) Letter concerning initial capital
Filing: Post-Effective Amendment No. 2 to Registration
Statement of Registrant on Form N-1A
File No. 33-20313
Filing Date: August 26, 1988
(m) RULE 12B-1 PLAN.
(i) Distribution Plan between the Registrant and Franklin
Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 14 to Registration
Statement of Registrant on Form N-1A
File No.: 33-20313
Filing Date: February 14, 1997
(o) RULE 18F-3 PLAN.
(i) Form of Multiple Class Plan for all series of Registrant,
except Templeton Money Fund
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: April 29, 1998
(p) POWER OF ATTORNEY.
(i) Power of Attorney from Officers and Directors of the
Registrant executed December 11, 1998
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No.: 33-20313
Filing Dated: February 24, 1999
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
THE REGISTRANT
Not Applicable
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the
Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act, and, therefore, is
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers
or controlling persons of the Registrant in connection with
the successful defense of any act, suit or proceeding)is
asserted by such trustees, officers or controlling persons
in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication
of such issues.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of Registrant's investment advisers also
serve as officers and/or directors or trustees for (1) Franklin
Resources, Inc. ("Resources"), the corporate parent of all
Registrant's Investment Managers, and/or (2) other investment
companies in the Franklin Templeton Group of Funds.
(i) Templeton Asset Management Ltd., formerly known as
Templeton Investment Management(Singapore) Pte Ltd.
Templeton Asset Management ("Templeton Singapore"), an indirect,
wholly owned subsidiary of Resources, serves as investment manager
to Templeton Developing Markets Fund. For information please
see Part B and Schedules A and D of Form ADV of Templeton Singapore
(SEC File 801-46997), incorporated herein by reference, which
set forth the officers and directors of Templeton Singapore
and information as to any business, profession, vocation of
employment of a substantial nature engaged in by those officers
and directors during the past two years.
(ii) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly
owned subsidiary of Resources, serves as adviser to 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, Franklin Real Estate Investments
Fund, Franklin Strategic Income Investments Fund and Franklin Small
Cap Investments Fund. For additional information, please see Part B
and Schedules A and D of Form ADV of Advisers (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and
directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged
in by those officers and directors during the past two years.
ITEM 27 PRINCIPAL UNDERWRITERS
(a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts
as principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Valuemark Funds
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
(b) The information required by this Item 27 with respect to each
director and officer of Distributors is incorporated by reference to
Part B of this N-1A and schedule A of Form BD filed by Distributors with
the Securities and Exchange Commission pursuant to the Securities
Act of 1934 (SEC File No. 8-5889).
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books, or other documents required to be maintained by the
Fund pursuant to Section 31(a) of the Investment Company Act of
1940 are kept by the Fund, and its administrator, Franklin Templeton
Services, Inc., 500 E. Broward Blvd., Fort Lauderdale, Florida 33394-3091,
or its shareholder services agent, Franklin/Templeton Investor Services,
Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part
A or Part B.
ITEM 30 UNDERTAKINGS
(a) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person
to whom a prospectus is delivered a copy of the annual report upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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
16th day of April, 1999.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
By: /s/Charles E. Johnson*
Charles E. Johnson, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Charles E. Johnson* Principal Executive Officer and Trustee
Charles E. Johnson Dated: April 16, 1999
Fred R. Millsaps* Trustee
Fred R. Millsaps Dated: April 16, 1999
Edith E. Holiday* Trustee
Edith E. Holiday Dated: April 16, 1999
Betty P. Krahmer* Trustee
Betty P. Krahmer Dated: April 16, 1999
Charles B. Johnson* Trustee
Charles B. Johnson Dated: April 16, 1999
Harris J. Ashton* Trustee
Harris J. Ashton Dated: April 16, 1999
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: April 16, 1999
Andrew H. Hines, Jr.* Trustee
Andrew H. Hines, Jr. Dated: April 16, 1999
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: April 16, 1999
Nicholas F. Brady* Trustee
Nicholas F. Brady Dated: April 16, 1999
James R. Baio* Principal Financial Officer
James R. Baio Dated: April 16, 1999
*By
/s/ Karen L.Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney listed in item 23(p)(i))
