As filed with the Securities and Exchange Commission on August 18, 1995.
File Nos.
33-23493
811-5583
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. (X)
Post-Effective Amendment No. 16
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17
FRANKLIN VALUEMARK FUNDS
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(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 (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(2)
[XX] 75 days after filing pursuant to paragraph (a)(1)
[XX] on November 1, 1995 pursuant to paragraph (a)(2) of Rule 485
Exhibit Index Page
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Declaration Pursuant to Rule 24f-2. The issuer has registered an
indefinite number or amount of securities under the Securities Act of
1933 pursuant to Rule 24(f)(2) under the Investment Company Act of
1940. The Rule 24f-2 Notice for the issuer's most recent fiscal year
was filed on February 25, 1995.
FRANKLIN VALUEMARK FUNDS
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial "Financial Highlights"
Information
4. General Description "Introduction"; "General
Investment Consideration"; "Fund
Investment Objectives and
Policies"; "Highlighted Risk
Considerations"; "Common
Investment Methods and Risks";
"Investment Restrictions";
"General Information"
5. Management of the Fund "Management"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "Income Dividends and Capital
Securities Gains Distributions
Distributions"; "Tax
Considerations"; "General
Information"
7. Purchase of Securities "Purchase, Redemption, and
Being Offered Exchange of Shares";
"Determination of Net Asset Value"
8. Redemption or Repurchase "Purchase, Redemption, and
Exchange of Shares"; "Performance
Information"; "General Information"
9. Pending Legal Proceedings Not Applicable
FRANKLIN VALUEMARK FUNDS
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in
Statement of Additional Information
N-1A Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information "Information About The Trust, (See also
and History "Introduction"; and "General Information"
in the Prospectus)"; "Additional
Information"
13. Fund Investment "Fund Investment Objectives and Policies"
Objectives and (See also "Fund Investment Objectives and
Policies Policies" in the Prospectus);
"Highlighted Risk Considerations"; Common
Investment Methods and Risks";
"Fundamental Investment Restrictions";
(See also "Highlighted Risk
Considerations"; "Common Investment
Methods and Risks" in the Prospectus)
14. Management of the Fund "Officers and Trustees"
15. Control Persons and "Officers and Trustees"
Principal Holders of
Securities
16. Investment Advisory "Investment Management and Other
and Other Services Services", (See also "Management" in the
Prospectus)"; "Additional Information"
17. Brokerage Allocation "Policies Regarding Brokers Used on
Securities Transactions"
18. Capital Stock and "About The Trust"; (See also
Other Securities "Introduction" and "General Information"
in the Prospectus)
19. Purchase, Redemption "Additional Information Regarding
and Pricing of Valuation and Redemption of Shares of the
Securities Being Funds"; (See also "Purchase Redemption
Offered and Exchange of Shares" and
"Determination of Net Asset Value" in the
Prospectus)
20. Tax Status "Additional Information" (See also "Tax
Considerations" in the Prospectus)
21. Underwriters Not Applicable
22. Calculation of Not Applicable
Performance Data
23. Financial Statements Financial Statements
FRANKLIN VALUEMARK FUNDS
PROSPECTUS
NOVEMBER 1, 1995
777 MARINERS ISLAND BLVD., P. O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/342-3863
Franklin Valuemark Funds (the "Trust") is an investment company, organized as a
Massachusetts business trust, and consisting of twenty-two separate investment
portfolios or funds (the "Fund" or "Funds"), each of which has different
investment objectives. Shares of the Funds are sold only to insurance company
separate accounts to fund the benefits of variable life insurance policies or
variable annuity contracts owned by their respective policyholders or
contractholders. Certain Funds may not be available in connection with a
particular policy or contract or in a particular state. Investors should consult
the separate account prospectus of the specific insurance product that
accompanies this Trust prospectus for information on any applicable restrictions
or limitations with respect to a separate account's investments in the Funds.
This Prospectus briefly describes the information that investors should know
before investing in these Funds, including the risks associated with investing
in each Fund. Investors should read and retain this prospectus for future
reference. A Statement of Additional Information dated November 1, 1995, as may
be amended from time to time, has been filed with the Securities and Exchange
Commission. It contains additional and more detailed information about the
activities and operations of the Funds. A copy is available without charge from
the Trust, 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777 or by calling 1-800/342-3863. The Statement of Additional Information
is incorporated herein by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES OR INSURANCE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS UNAUTHORIZED. NO SALES REPRESENTATIVE, DEALER OR
OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
SUMMARY OF FUND OBJECTIVES
FUNDS SEEKING STABILITY
OF PRINCIPAL AND INCOME
MONEY MARKET FUND ("Money Fund")1 seeks high current income, consistent with
capital preservation and liquidity. The Fund will pursue its objective by
investing exclusively in high quality money market instruments. AN INVESTMENT IN
THE MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE,
ALTHOUGH NO ASSURANCES CAN BE GIVEN THAT THE FUND WILL BE ABLE TO DO SO.
ZERO COUPON FUNDS, 1995, 2000, 2005, 2010, seek a high investment return
consistent with the preservation of capital, by investing primarily in zero
coupon securities. In response to interest rate changes, these securities may
experience greater fluctuations in market value than interest-paying securities
of similar maturities. The Funds may not be appropriate for short-term investors
or those who intend to withdraw money before the maturity date. THE ZERO COUPON
FUND - 1995 WILL MATURE DECEMBER 15, 1995.
FUNDS SEEKING CURRENT INCOME
ADJUSTABLE U.S. GOVERNMENT FUND ("Adjustable Fund") seeks a high level of
current income, consistent with lower volatility of principal, by investing
primarily in adjustable rate securities which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
GLOBAL INCOME FUND1 seeks a high level of current income, consistent with
preservation of capital, with capital appreciation as a secondary consideration,
through investing in foreign and domestic debt obligations, including up to 25%
in high yield, high risk, lower rated debt obligations (commonly referred to as
"junk bonds"), and related currency transactions. Investing in a non-diversified
fund of global securities including those of developing markets issuers,
involves increased susceptibility to the special risks associated with foreign
investing.
HIGH INCOME FUND2 seeks a high level of current income, with capital
appreciation as a secondary objective, by investing in debt obligations and
dividend-paying common and preferred stocks. Debt obligations include high
yield, high risk, lower rated obligations (commonly referred to as "junk bonds")
which involve increased risks related to the creditworthiness of their issuers.
INVESTMENT GRADE INTERMEDIATE BOND FUND ("Intermediate Bond Fund")1 seeks
current income, consistent with preservation of capital, primarily through
investment in intermediate-term, investment grade corporate obligations and U.S.
government securities.
THE U.S. GOVERNMENT SECURITIES FUND ("Government Fund") seeks current income and
safety of capital by investing exclusively in obligations issued or guaranteed
by the U.S. government or its agencies or instrumentalities.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND (formerly the Equity Growth Fund) seeks capital
appreciation, with current income return as a secondary objective, by investing
primarily in U.S. common stocks, securities convertible into common stocks,
preferred stocks, and debt securities.
INCOME SECURITIES FUND1,2 seeks to maximize income while maintaining prospects
for capital appreciation by investing in a diversified portfolio of domestic and
foreign, including developing markets, debt obligations and/or equity
securities. Debt obligations include high yield, high risk, lower rated
obligations (commonly referred to as "junk bonds") which involve increased risks
related to the creditworthiness of their issuers.
RISING DIVIDENDS FUND seeks capital appreciation, primarily through investment
in the equity securities of companies that have paid consistently rising
dividends over the past ten years. Preservation of capital is also an important
consideration. The Fund seeks current income incidental to capital appreciation.
TEMPLETON GLOBAL ASSET ALLOCATION FUND ("Asset Allocation Fund")1 seeks a high
level of total return through a flexible policy of investing in equity
securities, debt obligations, and money market instruments of issuers in any
nation, including developing markets nations. The mix of investments among the
three market segments will be adjusted in an attempt to capitalize on the total
return potential produced by changing economic conditions throughout the world.
Foreign investing involves special risks.
UTILITY EQUITY FUND ("Utility Fund")1 seeks both capital appreciation and
current income by investing in securities of domestic and foreign, including
developing markets, issuers engaged in the public utilities industry.
FUNDS SEEKING CAPITAL GROWTH
PRECIOUS METALS FUND ("Metals Fund")1 seeks capital appreciation, with current
income return as a secondary objective, by concentrating its investments in
securities of U.S. and foreign companies, including those in developing markets,
engaged in mining, processing or dealing in gold and other precious metals.
REAL ESTATE SECURITIES FUND ("Real Estate Fund") seeks capital appreciation,
with current income return as a secondary objective, by concentrating its
investments in publicly traded securities of U.S. companies in the real estate
industry.
SMALL CAP FUND seeks long-term capital growth. The Fund seeks to accomplish its
objective by investing primarily in equity securities of small capitalization
growth companies. The Fund may also invest in foreign securities, including
those of developing markets issuers. Because of the Fund's investments in small
capitalization companies, an investment in the Fund may involve greater risks
and higher volatility and should not be considered a complete investment
program.
TEMPLETON DEVELOPING MARKETS EQUITY FUND ("Developing Markets Fund")1 seeks
long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equities of issuers in countries having developing
markets. The Fund is subject to the heightened foreign securities investment
risks that accompany foreign developing markets and an investment in the Fund
may be considered speculative.
TEMPLETON GLOBAL GROWTH FUND ("Global Growth
Fund")1 seeks long-term capital growth. The Fund hopes to achieve its objective
through a flexible policy of investing in stocks and debt obligations of
companies and governments of any nation, including developing markets. The
realization of income, if any, is only incidental to accomplishment of the
Fund's objective of long-term capital growth. Foreign investing involves special
risks.
TEMPLETON INTERNATIONAL EQUITY FUND ("International Fund")1 seeks long-term
growth of capital. Under normal conditions, the International Equity Fund will
invest at least 65% of its total assets in an internationally mixed portfolio of
foreign equity securities which trade on markets in countries other than the
U.S., including developing markets, and are (i) issued by companies domiciled in
countries other than the U.S., or (ii) issued by companies that derive at least
50% of either their revenues or pre-tax income from activities outside of the
U.S.Foreign investing involves special risks.
TEMPLETON PACIFIC GROWTH FUND ("Pacific Fund")1 seeks long-term growth of
capital, primarily through investing at least 65% of its total assets in equity
securities which trade on markets in the Pacific Rim, including developing
markets, and are (i) issued by companies domiciled in the Pacific Rim including
developing markets or (ii) issued by companies that derive at least 50% of
either their revenues or pre-tax income from activities in the Pacific Rim.
Investing in a portfolio of geographically concentrated foreign securities,
including developing markets, involves increased susceptibility to the special
risks of foreign investing and an investment in the Fund may be considered
speculative.
1THE ASSET ALLOCATION, DEVELOPING MARKETS, GLOBAL GROWTH, GLOBAL INCOME, INCOME
SECURITIES, INTERMEDIATE BOND, INTERNATIONAL, MONEY MARKET, PACIFIC, PRECIOUS
METALS, SMALL CAP, AND UTILITY EQUITY FUNDS MAY INVEST MORE THAN 10% OF THEIR
TOTAL NET ASSETS IN FOREIGN SECURITIES WHICH ARE SUBJECT TO SPECIAL AND
ADDITIONAL RISKS RELATED TO CURRENCY FLUCTUATIONS, MARKET VOLATILITY, AND
ECONOMIC, SOCIAL, AND POLITICAL UNCERTAINTY; INVESTING IN DEVELOPING MARKETS
INVOLVES SIMILAR BUT HEIGHTENED RISKS RELATED TO THE RELATIVELY SMALL SIZE AND
LESSER LIQUIDITY OF THESE MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN
TRANSACTIONS."
2THE HIGH INCOME AND INCOME SECURITIES FUNDS MAY INVEST UP TO 100% OF THEIR
RESPECTIVE NET ASSETS IN DEBT OBLIGATIONS RATED BELOW INVESTMENT GRADE, COMMONLY
KNOWN AS "JUNK BONDS," OR IN OBLIGATIONS WHICH HAVE NOT BEEN RATED BY ANY RATING
AGENCY. INVESTMENTS RATED BELOW INVESTMENT GRADE INVOLVE GREATER RISKS,
INCLUDING PRICE VOLATILITY AND RISK OF DEFAULT THAN INVESTMENTS IN HIGHER RATED
OBLIGATIONS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THESE FUNDS IN LIGHT OF THE SECURITIES IN WHICH THEY INVEST. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS."
TABLE OF CONTENTS
CONTENTS PAGE
FINANCIAL HIGHLIGHTS
INTRODUCTION
GENERAL INVESTMENT
CONSIDERATIONS
FUND INVESTMENT OBJECTIVES AND
POLICIES
Stability of Principal and Income
Money Market Fund
Zero Coupon Funds
Current Income
Adjustable U.S. Government Fund
Global Income Fund
High Income Fund
Investment Grade Intermediate
Bond Fund
U.S. Government Securities Fund
Growth and Income
Growth and Income Fund
Income Securities Fund
Rising Dividends Fund
Templeton Global Asset Allocation Fund
Utility Equity Fund
Capital Growth
Precious Metals Fund
Real Estate Securities Fund
Small Cap Fund
Templeton Developing Markets
Equity Fund
Templeton Global Growth Fund
Templeton International Equity Fund
Templeton Pacific Growth Fund
HIGHLIGHTED RISK CONSIDERATIONS
Foreign Transactions
General Considerations
Investments in Developing Markets
Certain Restrictions
Currency Risks and their Management
Interest Rate and Currency Swaps
Investments in Depository Receipts
Lower Rated Debt Obligations
The Funds' Portfolios
Asset Composition Table
COMMON INVESTMENT
METHODS AND RISKS
Borrowing
Concentration
Convertible Securities
Convertible Securities
Enhanced Convertible Securities
Synthetic Convertible Securities
Debt Obligations
Corporate Debt Obligations
Money Market Instruments
Mortgage-Backed and Asset-Backed Securities
Stripped Mortgage-Backed Securities
Municipal Securities
U.S. Government Securities
Zero Coupon Securities
Derivatives
Diversification
Loan Participations
Loans of Portfolio Securities
Options and Futures Contracts
Options on Securities
Purchasing Put Options
Put and Call Option on the Same Securities Spread and Straddle Transactions
Options on Stock Indices Financial Futures Contracts Interest Rate Futures
Contracts Options on Interest Rate Futures Contracts Stock Index Futures
Contracts... Options on Stock Index Futures Contracts Risks in Investing in
Options and Futures Contracts and Related Options
Portfolio Turnover
Repurchase and Reverse
Repurchase Agreements
Repurchase Agreements
Reverse Repurchase Agreements
Restricted and Illiquid Securities
"Rolls"
Smaller Capitalization Issuers
Structured Notes
Temporary Investments
Trade Claims
Warrants
"When-Issued" and "Delayed Delivery
Transactions
INVESTMENT RESTRICTIONS
MANAGEMENT
Trustees and Officers
Managers
Management Fees
Operating Expenses
Broker Dealer Selection
Subadvisors
Business Manager
Portfolio Operations
Biographical Information
PURCHASE, REDEMPTION, AND
EXCHANGE OF SHARES
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS
DETERMINATION OF
NET ASSET VALUE
TAX CONSIDERATIONS
PERFORMANCE INFORMATION
GENERAL INFORMATION
Custody of Assets
Distribution Plans
Reports
Transfer Agent
Voting Privileges and Other Rights
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
each Fund from the effective date of its registration throughout the fiscal year
ended December 31, 1994. The information throughout the five fiscal years ended
December 31, 1994 has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report appears in the financial statements in the Trust's
Statement of Additional Information, a copy of which may be obtained from the
Trust. The figures for all prior periods are also audited, but are not covered
by the auditors' current report. The figures for all periods in 1995 are not
audited.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE RATIOS/SUPPLEMENTAL DATA
__________________________________________________________ ___________________________
Distri Distri Ratio of Net
Net Asset Net Net Realized butions butions Net Asset Net Assets Ratio of Investment
Year Value at Invest & Unrealized Total From From Net from Total Value at End Expenses Income Portfolio
Ended Beginning ment Gain (Loss) Investment InvestmentCapital Distri at End Total of Year to Average to Average Turnover
Dec.31 of Year Income on Securities OperationsIncome Gains bution of Year Return+ (in 000's) Net Assets Net Assets Rate
Adjustable U.S. Government Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19903 $10.00 $0.01 $ -- $0.01 $-- $ -- $-- $10.01 0.10% $ 754 --%7 4.73%* --%
1991 10.01 0.36 0.49 0.85 -- -- -- 10.86 8.49 130,664 0.337 7.19 43.31
1992 10.86 0.36 0.12 0.48 (0.24) -- (0.24) 11.10 4.45 256,980 0.607 5.38 53.69
1993 11.10 0.43 (0.04) 0.39 (0.45) -- (0.45) 11.04 3.55 303,384 0.58 4.50 133.68
1994 11.04 0.62 (0.64) (0.02) (0.49) -- (0.49) 10.53 (0.19) 239,695 0.57 4.79 62.05
19958
Equity Growth Fund (currently, Growth and Income Fund)
19891 10.00 0.13 0.16 0.29 -- -- -- 10.29 2.90 17,850 --7 3.78 59.34
1990 10.29 0.20 (0.44) (0.24) (0.08) -- (0.08) 9.97 (2.35) 53,902 0.67 3.46 45.08
1991 9.97 0.12 2.22 2.34 (0.20) -- (0.20) 12.11 23.63 117,944 0.67 2.09 40.43
1992 12.11 0.08 0.72 0.80 (0.12) -- (0.12) 12.79 6.73 231,659 0.62 1.44 25.22
1993 12.79 0.09 1.22 1.31 (0.11) -- (0.11) 13.99 10.32 371,484 0.58 1.00 41.56
1994 13.99 0.19 (0.47) (0.28) (0.09) (0.20) (0.29) 13.42 (3.41) 517,877 0.54 1.81 99.21
19958
Global Income Fund
19891 10.00 0.38 0.55 0.93 -- -- -- 10.93 9.30 3,077 --7 9.81 12.29
1990 10.93 0.60 0.45 1.05 (0.20) -- (0.20) 11.78 9.83 15,646 0.69 10.82 61.52
1991 11.78 0.42 0.99 1.41 (0.60) -- (0.60) 12.59 12.34 39,265 0.69 7.91 130.66
1992 12.59 0.26 (0.30) (0.04) (0.40) (0.15) (0.55) 12.00 (0.40) 75,062 0.67 4.72 92.22
1993 12.00 0.50 1.47 1.97 (0.50) (0.16) (0.66) 13.31 16.68 206,594 0.73 7.56 59.98
1994 13.31 0.86 (1.52) (0.66) (0.33) (0.13) (0.46) 12.19 (4.99) 254,311 0.71 7.99 79.38
19958
High Income Fund
19891 10.00 0.38 (0.25) 0.13 -- -- -- 10.13 1.30 7,513 --7 10.34 2.29
1990 10.13 1.00 (1.86) (0.86) (0.33) -- (0.33) 8.94 (8.67) 10,768 0.67 12.94 13.95
1991 8.94 0.78 1.80 2.58 (0.90) -- (0.90) 10.62 30.15 23,675 0.69 11.41 36.67
1992 10.62 0.38 1.31 1.69 (0.54) -- (0.54) 11.77 16.21 67,991 0.68 9.76 33.36
1993 11.77 0.37 1.45 1.82 (0.46) -- (0.46) 13.13 15.71 196,972 0.64 8.18 21.06
1994 13.13 0.88 (1.18) (0.30) (0.55) (0.07) (0.62) 12.21 (2.26) 255,036 0.60 9.45 22.94
19958
Income Securities Fund
19891 10.00 0.28 0.62 0.90 -- -- -- 10.90 9.00 16,369 --7 8.63 2.54
1990 10.90 0.82 (1.62) (0.80) (0.21) -- (0.21) 9.89 (7.42) 30,054 0.67 10.39 5.53
1991 9.89 0.77 3.06 3.83 (0.90) -- (0.90) 12.82 39.93 61,266 0.67 8.91 29.65
1992 12.82 0.40 1.26 1.66 (0.59) (0.24) (0.83) 13.65 13.20 182,993 0.67 7.44 12.59
1993 13.65 0.33 2.18 2.51 (0.31) (0.05) (0.36) 15.80 18.59 737,942 0.56 6.66 10.12
1994 15.80 0.82 (1.80) (0.98) (0.44) (0.07) (0 .51)14.31 (6.27) 1,000,002 0.54 7.27 13.33
19958
Investment Grade Intermediate Bond Fund
19891 $10.00 $0.25 $0.50 $0.75 $ -- $ -- $ -- $10.75 7.50% $ 2,192 --%7 7.25% 9.78%
1990 10.75 0.57 0.23 0.80 (0.19) -- (0.19) 11.36 7.55 6,786 0.69 7.92 22.91
1991 11.36 0.43 1.31 1.74 (0.49) -- (0.49) 12.61 15.75 17,247 0.73 7.49 28.75
1992 12.61 0.25 0.47 0.72 (0.33) (0.02) (0.35) 12.98 5.89 49,549 0.68 6.15 19.96
1993 12.98 0.27 0.82 1.09 (0.33) (0.05) (0.38) 13.69 8.52 123,376 0.66 4.74 18.84
1994 13.69 0.51 (0.45) 0.06 (0.38) (0.06) (0.44) 13.31 0.47 154,899 0.63 4.66 30.99
19958
Money Market Fund
19891 1.00 0.07 -- 0.07 (0.07) -- (0.07) 1.00 7.51 13,731 --7 7.18 --
1990 1.00 0.07 -- 0.07 (0.07) -- (0.07) 1.00 7.62 66,524 0.65 7.39 --
1991 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00 5.48 68,060 0.67 5.43 --
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00 3.06 86,907 0.69 2.99 --
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00 2.54 131,534 0.66 2.53 --
1994 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00 3.82 518,618 0.467 4.05 --
19958
Precious Metals Fund
19891 10.00 0.16 2.22 2.38 -- -- -- 12.38 23.80 2,352 --7 4.46 21.30
1990 12.38 0.13 (1.84) (1.71) (0.08) (0.07) (0.15) 10.52 (13.97) 10,926 0.69 3.25 1.02
1991 10.52 0.38 0.02 0.40 (0.20) (0.01) (0.21) 10.71 3.86 9,049 0.69 3.20 0.25
1992 10.71 0.10 (1.14) (1.04) (0.31) -- (0.31) 9.36 (10.13) 13,827 0.69 2.23 --
1993 9.36 0.03 5.16 5.19 (0.09) -- (0.09) 14.46 55.62 73,575 0.68 1.58 0.01
1994 14.46 0.16 (0.45) (0.29) (0.08) -- (0.08) 14.09 (1.76) 125,078 0.68 1.63 7.66
19958
Real Estate Securities Fund
19891 10.00 0.25 0.23 0.48 -- -- -- 10.48 4.80 808 --7 6.32 13.24
1990 10.48 0.48 (1.72) (1.24) (0.15) -- (0.15) 9.09 (11.98) 1,963 0.72 7.66 --
1991 9.09 0.34 2.67 3.01 (0.45) -- (0.45) 11.65 33.47 4,810 0.74 6.05 7.95
1992 11.65 0.14 1.24 1.38 (0.24) -- (0.24) 12.79 12.12 14,859 0.69 4.50 2.76
1993 12.79 0.09 2.33 2.42 (0.17) -- (0.17) 15.04 19.01 92,678 0.67 4.05 5.84
1994 15.04 0.38 0.06 0.44 (0.17) -- (0.17) 15.31 2.89 195,697 0.62 4.00 11.73
19958
Rising Dividends Fund
19924 10.00 0.06 0.92 0.98 -- -- -- 10.98 9.80 97,687 0.677 2.11* 5.22
1993 10.98 0.14 (0.52) (0.38) (0.03) -- (0.03) 10.57 (3.48) 299,730 0.79 2.31 13.58
1994 10.57 0.26 (0.69) (0.43) (0.17) -- (0.17) 9.97 (4.08) 309,929 0.80 2.71 24.07
19958
Templeton Developing Markets Equity Fund
19945 10.00 0.07 (0.51) (0.44) -- -- -- 9.56 (4.40) 98,189 1.53* 1.85* 1.15
19958
Templeton Global Asset Allocation Fund
19959
Templeton Global Growth Fund
19945 10.15 0.07 0.26 0.33 -- -- -- 10.48 3.15 158,856 1.14* 2.49* 7.14
19958
Templeton International Equity Fund
19924 10.00 0.14 (0.38) (0.24) -- -- -- 9.76 (2.40) 13,662 1.77* 3.91* 21.78
19936 9.76 0.18 2.60 2.78 (0.04) -- (0.04) 12.50 28.56 310,146 1.12 1.58 29.50
1994 12.50 0.19 (0.08) 0.11 (0.03) (0.07) (0.10) 12.51 0.87 785,124 0.99 2.17 12.22
19958
Templeton Pacific Growth Fund
19924 10.00 -- (0.12) (0.12) -- -- -- 9.88 (1.20) 5,788 1.317 -- 8.41
1993 9.88 0.05 4.68 4.73 -- -- -- 14.61 47.87 215,882 1.14 1.29 12.36
1994 14.61 0.22 (1.50) (1.28) (0.03) (0.06) (0.09) 13.24 (8.79) 375,832 1.07 2.04 4.29
19958
U.S. Government Securities Fund
19892 10.00 0.19 0.35 0.54 -- -- -- 10.54 5.40 12,116 --7 7.16* 1.34
1990 10.54 0.48 0.45 0.93 (0.11) -- (0.11) 11.36 8.92 62,253 0.69 8.40 5.15
1991 11.36 0.41 1.35 1.76 (0.40) -- (0.40) 12.72 15.93 187,987 0.65 7.76 11.69
1992 12.72 0.52 0.44 0.96 (0.43) (0.01) (0.44) 13.24 7.69 371,828 0.59 7.07 28.64
1993 13.24 0.50 0.77 1.27 (0.51) (0.08) (0.59) 13.92 9.71 684,303 0.54 6.06 145.11
1994 13.92 0.93 (1.56) (0.63) (0.67) (0.05) (0.72) 12.57 (4.55) 579,039 0.53 6.66 18.25**
19958
Utility Equity Fund
19891 $10.00 $0.17 $1.97 $2.14 $ -- $ -- $ -- $12.14 21.40% $ 15,151 --%7 5.63% 4.43%
1990 12.14 0.40 (0.18) 0.22 (0.10) -- (0.10) 12.26 1.84 77,739 0.68 6.53 --
1991 12.26 0.35 2.60 2.95 (0.35) -- (0.35) 14.86 24.56 243,626 0.63 5.92 2.01
1992 14.86 0.35 0.92 1.27 (0.31) -- (0.31) 15.82 8.69 667,118 0.55 5.18 0.13
1993 15.82 0.38 1.28 1.66 (0.34) -- (0.34) 17.14 10.54 1,589,634 0.51 4.47 4.80
1994 17.14 0.95 (2.94) (1.99) (0.62) (0.11) (0.73) 14.42 (11.56) 1,155,110 0.52 5.58 11.74
19958
Zero Coupon Fund - 1995
19892 10.00 0.17 0.30 0.47 -- -- -- 10.47 4.70 2,826 --7 6.40* 150.50
1990 10.47 0.42 0.54 0.96 (0.05) (0.04) (0.09) 11.34 9.28 23,929 0.407 8.22 111.71
1991 11.34 0.72 1.11 1.83 (0.49) (0.03) (0.52) 12.65 16.75 36,095 0.257 7.70 18.93
1992 12.65 0.81 0.13 0.94 (0.74) (0.05) (0.79) 12.80 7.85 41,824 0.257 6.96 19.93
1993 12.80 0.74 0.19 0.93 (0.80) (0.17) (0.97) 12.76 7.46 48,961 0.367 6.37 10.79
1994 12.76 0.76 (0.68) 0.08 (0.76) (0.03) (0.79) 12.05 0.70 51,144 0.407 6.51 3.64
19958
Zero Coupon Fund - 2000
19892 10.00 0.21 0.87 1.08 -- -- -- 11.08 10.80 2,056 --7 6.75* 158.01
1990 11.08 0.43 0.19 0.62 (0.13) (0.17) (0.30) 11.40 5.91 12,314 0.377 8.55 180.49
1991 11.40 0.57 1.67 2.24 (0.38) -- (0.38) 13.26 20.19 27,699 0.257 7.88 19.15
1992 13.26 0.57 0.58 1.15 (0.53) -- (0.53) 13.88 9.04 48,217 0.257 6.97 9.10
1993 13.88 0.66 1.55 2.21 (0.62) (0.03) (0.65) 15.44 16.15 76,916 0.377 5.88 7.02
1994 15.44 0.68 (1.71) (1.03) (0.69) (0.10) (0.79) 13.62 (6.76) 94,230 0.407 6.37 --
19958
Zero Coupon Fund - 2005
19892 10.00 0.20 1.33 1.53 -- -- -- 11.53 15.30 1,372 --7 7.79* 232.71
1990 11.53 0.55 (0.32) 0.23 (0.14) (0.47) (0.61) 11.15 2.69 5,151 0.387 8.56 164.90
1991 11.15 0.54 1.65 2.19 (0.43) -- (0.43) 12.91 20.37 11,299 0.257 8.00 4.54
1992 12.91 0.65 0.67 1.32 (0.61) -- (0.61) 13.62 10.81 18,295 0.257 7.46 19.48
1993 13.62 0.44 2.55 2.99 (0.52) (0.01) (0.53) 16.08 22.21 42,998 0.377 5.67 16.59
1994 16.08 0.71 (2.24) (1.53) (0.60) (0.19) (0.79) 13.76 (9.60) 51,499 0.407 6.53 2.00
19958
Zero Coupon Fund - 2010
19892 10.00 0.17 1.44 1.61 -- -- -- 11.61 16.10 2,387 --7 6.57* 193.14
1990 11.61 0.59 (0.57) 0.02 (0.13) (0.25) (0.38) 11.25 0.57 6,846 0.407 8.70 178.75
1991 11.25 0.56 1.58 2.14 (0.55) -- (0.55) 12.84 20.09 15,610 0.257 8.05 22.44
1992 12.84 1.21 0.03 1.24 (0.73) -- (0.73) 13.35 10.31 13,431 0.257 7.64 54.50
1993 13.35 0.50 2.81 3.31 (0.94) (0.04) (0.98) 15.68 25.47 29,189 0.257 5.89 36.63
1994 15.68 0.55 (2.27) (1.72) (0.63) (0.31) (0.94) 13.02 (10.97) 45,361 0.407 6.57 4.34
19958
*Annualized.
**The portfolio turnover rate excludes mortgage dollar roll transactions.
+Total return measures the change in value of an investment over the periods
indicated. It assumes reinvestment of dividends and capital gains, if any, at
net asset value and is not annualized.
1For the period January 24, 1989 (effective date) to December 31, 1989.
2For the period March 13, 1989 (effective date) to December 31, 1989.
3For the period December 3, 1990 (effective date) to December 31, 1990.
4For the period January 27, 1992 (effective date) to December 31, 1992.
5For the period March 15, 1994 (effective date) to December 31, 1994.
6Per share amounts have been calculated using the average shares outstanding
during the period.
7During the periods indicated Franklin Advisers, Inc., the investment manager,
agreed in advance to waive a portion of its management fees and make payment of
other expenses incurred by the Funds. Had such action not been taken, ratios of
operating expenses to average net assets would have been as follows:
8For the Period ended June 30, 1995; unaudited.
9For the Period May 1, 1995 (effective date)through 1995; unadited.
Fiscal Ratio of Expenses to
Fund Name Year Average Net Assets
---------------------------------- ------- ----------------
Money Market Fund......................... 19891 0.95%
1994 0.54
1995
Adjustable U.S. Government Fund........... 19903 0.05*
1991 0.66
1992 0.62
Equity Growth Fund
(currently "Growth and Income Fund")..... 19891 1.01
Global Income Fund........................ 19891 1.06
High Income Fund.......................... 19891 1.02
Income Securities Fund.................... 19891 1.01
Investment Grade Intermediate
Bond Fund................................ 19891 1.14
Templeton Pacific Growth Fund............. 19924 2.57*
Precious Metals Fund...................... 19891 1.11
Real Estate Securities Fund............... 19891 1.24
Rising Dividends Fund..................... 19924 0.76*
U.S. Government Securities Fund........... 19892 0.85*
Utility Equity Fund....................... 19891 1.01
Zero Coupon Fund - 1995................... 19892 0.91*
1990 0.69
1991 0.68
1992 0.68
1993 0.68
1994 0.67
1995
Fiscal Ratio of Expenses to
Fund Name Year Average Net Assets
----------------------------------- ------- ----------------
Zero Coupon Fund - 2000................... 19892 0.93*
1990 0.70
1991 0.68
1992 0.68
1993 0.67
1994 0.66
1995
Zero Coupon Fund - 2005................... 19892 1.02*
1990 0.71
1991 0.71
1992 0.69
1993 0.67
1994 0.68
1995
Zero Coupon Fund - 2010................... 19892 0.93*
1990 0.68
1991 0.70
1992 0.69
1993 0.68
1994 0.68
1995
</TABLE>
INTRODUCTION
Franklin Valuemark Funds (the "Trust") is an open-end management investment
company, or mutual fund, organized as a Massachusetts business trust on April
26, 1988 and registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 (the "1940 Act"). The Trust currently
consists of the twenty-two separate investment portfolios or funds listed on the
cover (the "Funds" or a "Fund"), each of which is, in effect, a separate mutual
fund. The Trust issues a separate series of shares of beneficial interest for
each Fund. An investor, by investing in a Fund, becomes entitled to a pro rata
share of all dividends and distributions arising from the net income and capital
gains on the investments of that Fund. Likewise, an investor shares pro rata in
any losses on the investments of that Fund.
Shares of the Trust are currently sold only to separate accounts (the "Variable
Accounts") of the Allianz Life Insurance Company of North America and its
affiliates ("Allianz Life") to fund the benefits under variable life insurance
policies and variable annuity contracts (collectively the "Policies") issued by
Allianz Life. The Variable Accounts are divided into sub-accounts (the
"Sub-Accounts"), each of which will invest in one of the Funds, as directed
within the limitations described in the appropriate Policies by the owners of
the respective Policies issued by Allianz Life (collectively the
"Policyholders"). Some of the current Funds in the Trust may not be available in
connection with a particular Policy or in a particular state. Policyholders
should consult the accompanying prospectus describing the specific Policy or
Allianz Life for information on available Funds and any applicable limitations.
GENERAL INVESTMENT CONSIDERATIONS
Each Fund has one or more investment objectives and related investment policies
and uses various investment techniques to pursue these objectives and policies.
There can be no assurance that any of the Funds will achieve its investment
objective or objectives. THE INVESTMENT OBJECTIVE OR OBJECTIVES OF EACH FUND ARE
"FUNDAMENTAL POLICIES" WHICH MEANS THEY MAY NOT BE CHANGED WITHOUT SHAREHOLDER
APPROVAL. Certain investment restrictions described here or in the Statement of
Additional Information ("SAI") may also be identified as "fundamental." The
investment strategies, policies, and restrictions designed to realize the stated
objectives however, are typically not fundamental and may be changed by the
Trust's Board of Trustees without shareholder approval.
Investors should not consider any one Fund alone to be a complete investment
program and should evaluate each Fund in relation to their personal financial
situation, goals, and tolerance for risk. All of the Funds are subject to the
risk of changing economic conditions, as well as the risk related to the ability
of the Managers to make changes in the portfolio composition of the Fund in
anticipation of changes in economic, business, and financial conditions. As with
any security, a risk of loss of all or a portion of the principal amount
invested accompanies an investment in the shares of any of the Funds.
The different types of securities, investments, and investment techniques used
by each Fund all have attendant risks of varying degrees and are described in
the pages that follow. As an overview, investors should bear in mind with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt obligations,
there exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time required by the
instrument or at all. In addition, the value of debt obligations generally rises
and falls inversely with prevailing current interest rates. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of shares of Funds which
invest in debt obligations. In addition to the factors which affect the value of
individual securities, a Policyholder may anticipate that the value of the
shares of a Fund will fluctuate with movements in the broader equity and bond
markets as well. A decline in the stock market of any country in which a Fund is
invested or changes in currency valuations may also affect the price of shares
of a Fund. History reflects both increases and decreases in interest rates,
worldwide stock markets, and currency valuations, and these may reoccur
unpredictably in the future.
AS STATED IN THE DESCRIPTIONS OF THE INDIVIDUAL FUNDS BELOW, AN INVESTMENT IN
CERTAIN OF THE FUNDS INVOLVES SPECIAL ADDITIONAL RISKS AS A RESULT OF THEIR
ABILITY TO INVEST A SUBSTANTIAL PORTION OF THEIR ASSETS IN HIGH YIELD, HIGH
RISK, LOWER RATED DEBT OBLIGATIONS, FOREIGN INVESTMENTS INCLUDING THOSE OF
"DEVELOPING MARKET" ISSUERS LOCATED IN EMERGING NATIONS AS DEFINED BY THE WORLD
BANK, SPECIALIZED INDUSTRY SECTORS, DERIVATIVE INSTRUMENTS OR COMPLEX
SECURITIES. These and other types of investments and investment techniques
common to more than one Fund are described in greater detail, including the
risks of each and any limitations, in "Highlighted Risk Considerations," "Common
Investment Methods and Risks," and the SAI. ALL POLICIES AND PERCENTAGE
LIMITATIONS ARE CONSIDERED AT THE TIME OF purchase. Each of the Funds will not
necessarily use the strategies described to the full extent permitted unless the
Managers believe that doing so will help a Fund reach its objectives, and not
all instruments or strategies will be used at all times.
FUND INVESTMENT OBJECTIVES AND POLICIES
FUNDS SEEKING
STABILITY OF PRINCIPAL AND INCOME
MONEY MARKET FUND
The investment objective of the Money Market Fund is to obtain as high a level
of current income (in the context of the type of investments available to the
Fund) as is consistent with capital preservation and liquidity. The Fund will
seek to maintain a $1 per share net asset value, but there is no guarantee that
it will be successful in doing so.
The Fund will pursue this objective by investing, in accordance with procedures
adopted under rule 2a-7 under the 1940 Act, only in U.S. dollar denominated
instruments which the Board of Trustees determines present minimal credit risks
and which are, as required by federal securities laws, rated in one of the two
highest rating categories as determined by nationally recognized statistical
rating organizations ("NRSROs"), or which if unrated are of comparable quality,
with remaining maturities of 397 calendar days or less ("Eligible Securities").
Because the Fund will limit its investments to high quality securities, it will
experience generally lower yields than if the Fund purchased securities of lower
quality and correspondingly greater risk.
Eligible Securities include the following:
1. securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities ("U.S. Government
Securities");
2. obligations issued or guaranteed by U.S. banks with assets of at least one
billion dollars, foreign branches of U.S. banks ("Eurodollar Investment"),
U.S. branches of foreign banks ("Yankee Dollar Investments"), and foreign
branches of foreign banks (including certificates of deposit, bank notes,
loan participation interests, commercial paper, unsecured promissory notes,
time deposits, and bankers' acceptances), provided that where the obligation
is issued by a branch, the parent bank has more than five billion dollars in
total assets at the time of purchase ("Bank Obligations");
3. commercial paper (unsecured promissory notes including variable amount master
demand notes) issued by domestic or foreign issuers;
4. other short-term obligations issued or guaranteed by U.S. corporations, or
obligations issued by foreign entities ("Corporate Obligations");
5. taxable municipal securities, the interest on which is not exempt from
Federal income tax, issued by or on behalf of states, territories, and
possessions of the U.S. and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, up to 10% of the Fund's
assets;
6. unrated notes, paper, obligations or other instruments that the Manager
determines to be of comparable high quality; and
7. repurchase agreements with respect to any of the foregoing obligations.
U.S. Government Securities, Bank and Corporate Obligations may have fixed,
floating, or variable interest rates. NRSROs include Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate
IBCA Inc., and Thompson BankWatch. See Appendix for an explanation of ratings by
S&P and Moody's.
PORTFOLIO MATURITY. All Fund portfolio instruments will mature within 397
calendar days or less of the time that they are acquired. The average maturity
of the Fund's portfolio securities based on their dollar value will not exceed
90 days at the time of each investment. If the disposition of a portfolio
security results in a dollar-weighted average portfolio maturity in excess of 90
days, the Fund will invest its available cash in such manner as to reduce its
dollar-weighted average portfolio maturity to 90 days or less as soon as is
reasonably practicable.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its assets in obligations
of foreign branches of U.S. or foreign banks. The Fund's investments in foreign
obligations, although always dollar denominated, involve risks related to market
volatility, economic, social, and political uncertainty, that are different from
investments in similar obligations of domestic entities. INVESTMENT IN FOREIGN
SECURITIES INVOLVES SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS" AND THE SAI.
OTHER INVESTMENT POLICIES. Investments in obligations of U.S. branches of
foreign banks, which are considered domestic banks, may only be made if such
branches have a federal or state charter to do business in the U.S. and are
subject to U.S. regulatory authorities. The Fund may invest up to 10% of its
assets in time deposits with maturities in excess of seven calendar days. (Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate.)
The Fund will not invest more than 5% of its total assets in Eligible Securities
of a single issuer, other than U.S. Government Securities, rated in the highest
category by the requisite number of rating agencies, except that the Fund may
exceed that limit as permitted by SEC rules for a period of up to three business
days; and the Fund will not invest (a) the greater of 1% of the Fund's total
assets or one million dollars in Eligible Securities issued by a single issuer
rated in the second highest category and (b) more than 5% of its total assets in
Eligible Securities of all issuers rated in the second highest category.
The Fund may acquire U. S. Government Securities on a when-issued or delayed
delivery basis. The Fund may also lend portfolio securities, enter into
repurchase agreements, and engage in other activities specifically identified
for this fund in "Common Investment Methods and Risks." These are described more
fully in "Common Investment Methods and Risks" and the SAI.
ZERO COUPON FUNDS:
MATURING IN DECEMBER
OF 1995, 2000, 2005, 2010
The objective of each of the four Zero Coupon Funds is to provide as high an
investment return as is consistent with the preservation of capital.
Each Fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific target date in the future
by investing primarily in zero coupon securities that pay no cash income but are
acquired by the Fund at substantial discounts from their value at maturity.
These securities may experience greater fluctuations in market value in response
to interest rate changes than interest-paying securities of similar maturities.
If shares of a Zero Coupon Fund are redeemed prior to the maturity of the Fund,
an investor may experience a significantly different investment return than was
anticipated at the time of purchase. THEREFORE, THE ZERO COUPON FUNDS MAY NOT BE
APPROPRIATE FOR POLICYHOLDERS WHO DO NOT PLAN TO HAVE THEIR PREMIUMS INVESTED IN
SHARES OF THE FUND FOR THE LONG-TERM OR UNTIL MATURITY.
PORTFOLIO INVESTMENTS. Under normal circumstances, each Zero Coupon Fund will
invest at least 65% of its net assets in "Stripped Securities," a term used
collectively for Stripped Treasury Securities, Stripped Government Securities,
Stripped Corporate Securities and Stripped Eurodollar Obligations, all described
below. The Stripped Securities in which each Fund will invest consist of:
1) zero coupon securities issued by the U.S. Treasury, that is, treasury bills
or debt obligations issued by the U.S. Treasury that have been stripped of
their unmatured interest coupons, interest coupons that have been stripped
from debt obligations issued by the U.S. Treasury, and receipts and
certificates for stripped debt obligations and stripped coupons, including
U.S. government trust certificates (collectively, "Stripped Treasury
Securities") (currently not anticipated to be in excess of 55% of the
Funds' assets);
2) other zero coupon securities issued by the U.S. government and its agencies
and instrumentalities, by a variety of tax-exempt issuers such as state and
local governments and their agencies and instrumentalities and by
"mixed-ownership government corporations" (collectively, "Stripped
Government Securities");
3) zero coupon securities issued by domestic corporations which consist of
corporate debt obligations without interest coupons, and, if available,
interest coupons that have been stripped from corporate debt obligations,
and receipts and certificates for such stripped debt obligations and
stripped coupons (collectively, "Stripped Corporate Securities");
4) stripped Eurodollar obligations, which are debt obligations denominated in
U.S. dollars that are issued by foreign issuers, often subsidiaries of
domestic corporations ("Stripped Eurodollar Obligations").
RISKS OF INVESTING IN STRIPPED SECURITIES. Stripped Securities investments, like
other investments in debt obligations, are subject to certain risks, including
credit and market risks. To the extent the Zero Coupon Funds invest in Stripped
Securities other than Stripped Treasury Securities, such investments will be
rated at least A by nationally recognized statistical rating agencies, or if
unrated, are determined by the Manager to be of comparable quality. Such
securities are regarded as having an adequate capacity to pay principal and
interest but with greater vulnerability to adverse economic conditions and have
some speculative characteristics. The Zero Coupon Funds will also attempt to
minimize the impact of individual credit risks by diversifying their portfolio
investments.
Stripped Securities do not make any periodic payments of interest prior to
maturity and the stripping of the interest coupons causes the Stripped
Securities to be offered at a substantial or "deep" discount from their face
amounts. The market value of Stripped Securities and, therefore, of the shares
of the Zero Coupon Funds, will fluctuate with changes in interest rates and
other factors and are generally subject to greater fluctuations in response to
changing interest rates than would a fund consisting of debt obligations of
comparable quality and maturities that pay interest currently. The amount of
fluctuation increases with a longer period to maturity.
SPECIAL RISKS RELATING TO MATURITY. The Trust currently offers four separate
Zero Coupon Funds, each maturing on the third Friday of December of its specific
maturity year (the "Target Date"): 1995, 2000, 2005 and 2010. THE ZERO COUPON
FUND-1995 WILL MATURE DECEMBER 15, 1995. On each Fund's Target Date, the Fund
will be converted to cash and an investor may invest in another of the Trust's
Funds. At least 30 days prior to maturity, policy owners will be notified and
given an opportunity to select another investment option. IF AN INVESTOR DOES
NOT COMPLETE AN INSTRUCTION FORM DIRECTING WHAT SHOULD BE DONE WITH LIQUIDATION
PROCEEDS, THE PROCEEDS WILL BE AUTOMATICALLY INVESTED IN THE MONEY FUND AND THE
POLICYHOLDER WILL BE NOTIFIED OF SUCH EVENT.
Because each Fund will be primarily invested in zero coupon securities,
investors whose premiums are invested in shares held to maturity, including
those obtained through reinvestment of dividends and distributions, will
experience a return consisting primarily of the amortization of discount on the
underlying securities in the Fund. However, the net asset value of a Fund's
shares increases or decreases with changes in the market value of that Fund's
investments.
Because they do not pay interest, zero coupon securities tend to be subject to
greater fluctuation of market value in response to changes in interest rates
than interest-paying securities of similar maturities. Investors can expect more
appreciation from a Zero Coupon Fund during periods of declining interest rates
than from interest-paying securities of similar maturity. Conversely, when
interest rates rise, a Fund will normally decline more in price than
interest-paying securities of similar maturity. Price fluctuations are expected
to be greatest in the longer-maturity Funds and are expected to diminish as a
Fund approaches its maturity date. Interest rates can change suddenly and
unpredictably. IF SHARES OF A ZERO COUPON FUND ARE REDEEMED PRIOR TO THE
MATURITY OF THE FUND, AN INVESTOR MAY EXPERIENCE A SIGNIFICANTLY DIFFERENT
INVESTMENT RETURN THAN WAS ANTICIPATED AT THE TIME OF PURCHASE.
The Funds' Manager will attempt to maintain the average duration of each Fund to
within twelve months of the Fund's Target Date. Duration is a measure of the
length of an investment which takes into account, through present value
analysis, the timing and amount of any interest payments as well as the amount
of the principal repayment. Duration is commonly used by professional managers
to help identify and control "reinvestment risk" that is, the risk that interest
rates will be lower when the fund seeks to invest the proceeds from a matured
obligation. Since each Fund will not be invested entirely in zero coupon
securities maturing on the Target Date, there will be some unknown reinvestment
risk and liquidation costs with respect to those other investments. By balancing
investments with slightly longer and shorter durations, the Manager believes it
can maintain a Fund's average duration within twelve months of the Fund's Target
Date and thereby reduce its unknown reinvestment risk. AS A FUND APPROACHES ITS
TARGET DATE, ITS PORTFOLIO WILL BE COMPRISED OF INCREASINGLY LARGER AMOUNTS OF
REPURCHASE AGREEMENTS, COMMERCIAL PAPER, BANKERS ACCEPTANCES, GOVERNMENT AGENCY
DISCOUNT NOTES, TREASURY BILLS, AND OTHER MONEY MARKET INSTRUMENTS.
FOREIGN PORTFOLIO INVESTMENTS. Although each Zero Coupon Fund reserves the right
to invest up to 25% of its assets in obligations or securities of foreign
issuers, each Fund typically limits such investments to less than 10% of their
respective assets and to dollar denominated obligations. Investments in stripped
Eurodollar obligations where delivery takes place outside the U.S. will be made
in compliance with any applicable U.S. and foreign currency restrictions and
other tax laws and laws limiting the amount and types of foreign investments.
INVESTMENT IN FOREIGN SECURITIES INVOLVES SPECIAL AND ADDITIONAL RISKS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" AND THE SAI.
STRUCTURED NOTES. Each Fund may invest up to 10% of its assets in certain
structured notes that are comparable to zero coupon bonds in terms of credit
quality, interest rate volatility, and yield when the Manager believes there is
an opportunity for enhanced yield in the future and minimal additional risk.
These notes would have coupon resets that may cause the current coupon to fall
to, but not below, zero. Existing credit quality, duration and liquidity
standards would apply, so that the Fund may not invest in structured notes
unless the Manager believes that the notes pose no greater credit or market risk
than stripped notes; however, these notes may carry risks similar to those of
stripped securities. See "Common Investment Methods and Risks."
OTHER INVESTMENT POLICIES. To provide income for expenses, redemption payments,
and cash dividends, up to 20% of each Fund's assets may be invested in Money
Market Instruments. Under the policies stated in "Common Investment Methods and
Risks" and in the SAI, the Funds may also lend portfolio securities, enter into
repurchase agreements with respect to securities in which they are permitted to
invest, and engage in other activities specifically identified for these Funds.
TAX CONSIDERATIONS. Under the federal income tax law, a portion of the
difference between the purchase price of the zero coupon securities and their
face value ("original issue discount") is considered to be income to the Zero
Coupon Funds each year, even though such Funds will not receive cash payments
representing the discount from these securities. This original issue discount
will comprise a part of the net taxable investment income of such Funds which
must be "distributed" to the insurance company, as shareholder each year,
whether or not such distributions are paid in cash. To the extent such
distributions are paid in cash, the Fund may have to generate the required cash
from interest earned on non-zero coupon securities or possibly from the
disposition of zero coupon securities.
FUNDS SEEKING CURRENT INCOME
ADJUSTABLE U.S. GOVERNMENT FUND
The investment objective of the Adjustable U.S. Government Fund is to seek a
high level of current income, consistent with lower volatility of principal. The
Fund pursues its investment objective by investing primarily (at least 65% of
its total assets) in adjustable rate securities with interest rates that reset
at periodic intervals and which are issued or guaranteed by the U.S. government,
its agencies or instrumentalities. The above stated investment policies are
fundamental and may not be changed without shareholder approval.
The Fund currently consists primarily of adjustable rate mortgage securities or
other securities collateralized by or representing an interest in mortgages
(collectively "mortgage securities"), but this is not a fundamental policy and
may be changed as the nature of the adjustable rate securities market changes.
In addition to these mortgage securities, the Fund may invest up to 35% of its
total assets in (i) U.S. Government Securities and repurchase agreements
collateralized by such obligations and (ii) Money Market Instruments.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities which are collateralized by mortgages with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued primarily by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation
("FHLMC"), and are actively traded in the secondary market. The underlying
mortgages which collateralize ARMS issued by GNMA are fully guaranteed by the
Federal Housing Administration ("FHA") or the Veterans Administration ("VA"),
while those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to standard underwriting size and
maturity constraints.
Most mortgage securities which are issued or guaranteed by the U.S. government,
its agencies or instrumentalities represent an interest in pools of fixed-rate
mortgages. The Fund believes, however, that by investing primarily in mortgage
securities which will have variable rates of interest, it will achieve a more
consistent and less volatile net asset value than is characteristic of mutual
funds that invest primarily in mortgage securities paying a fixed rate of
interest.
Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Fund to
participate in increases in interest rates through periodic adjustments in the
coupon rates of the underlying mortgages, resulting in both higher current
yields and lower price fluctuations. Furthermore, if prepayments of principal
are made on the underlying mortgages during periods of rising interest rates,
the Fund generally will be able to reinvest such amounts in securities with a
higher current rate of return. The Fund will not, however, benefit from
increases in interest rates to the extent that interest rates rise to the point
where they cause the current coupon of adjustable rate mortgages held as
investments to exceed the maximum allowable annual or lifetime reset limits (or
"cap rates") for a particular mortgage. Also, as described below, the Fund's net
asset value could vary to the extent that current yields on mortgage-backed
securities are different than market yields during interim periods between
coupon reset dates.
The adjustable interest rate feature of the underlying mortgages generally will
act as a buffer to reduce sharp changes in the Fund's net asset value in
response to normal interest rate fluctuations. As the coupon rates on the
mortgages underlying the Fund's investments are reset periodically, yields of
portfolio securities will gradually align themselves to reflect changes in
market rates and should cause the net asset value of the Fund to fluctuate less
dramatically than it would if the Fund invested in more traditional long-term,
fixed-rate debt obligations. During periods of rising interest rates, however,
changes in the coupon rate lag behind changes in the market rate, resulting in a
lower net asset value until the coupon resets to market rates. Thus, investors
could suffer principal loss if they sold their shares of the Fund before the
coupon rates on the underlying mortgages are adjusted to reflect current market
rates. During periods of extreme fluctuations in interest rates, the Fund's net
asset value will fluctuate as well. Since most mortgage securities in the Fund's
portfolio will generally have annual reset caps of 100 to 200 basis points,
fluctuation in interest rates above these levels could cause such mortgage
securities to "cap out" and to behave more like long-term, fixed-rate debt
obligations.
The mortgage securities in which the Fund principally invests, ARMS, differ from
conventional bonds in that principal is paid back over the life of the ARMS
rather than at maturity. As a result, the holder of the ARMS (i.e., the
Adjustable Fund) receives monthly scheduled payments of principal and interest,
and may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
lower than the rate on the existing ARMS. For this reason, ARMS may be less
effective than other types of U.S. Government Securities as a means of "locking
in" long-term interest rates.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). THE FUND MAY INVEST IN CMOS, WHICH
ARE BONDS COLLATERALIZED BY POOls of mortgage loans and created by commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other U.S. issuers. Timely payment of interest and
principal (but not the market value) of these pools is supported by various
forms of insurance or guarantees issued by U.S. government agencies, private
issuers, and mortgage poolers; the obligation itself, however, is not
guaranteed. All CMOs purchased by the Fund will be either issued by a U.S.
government agency or rated in the highest category by a NRSRO.
RESETS. The interest rates paid on the ARMS and CMOs in which the Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are three main categories of
indices: those based on U.S. Treasury securities and those derived from a
calculated measure such as a cost of funds index or a moving average of mortgage
rates.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS and CMOs
in which the Fund invests 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 (that is, an increase in the principal due). In periods of rising
interest rates, certain coupons may be temporarily "capped out" resulting in
declines in the prices of those securities and, therefore, a negative effect on
share price. Conversely, in periods of declining interest rates, certain coupons
may be temporarily "floored out" resulting in an increase in the prices of those
securities and therefore, a positive effect on the Fund's share price.
STRIPPED MORTGAGE SECURITIES. The Fund may also invest in stripped mortgage
securities, which are derivative multiclass mortgage securities. Stripped
mortgage securities may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans.
Stripped mortgage securities have greater market volatility than other types of
mortgage securities in which the Fund invests. Stripped mortgage securities are
usually structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. 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). These securities are extremely volatile and the
Fund may fail to fully recoup its initial investment in these securities even if
the securities are rated in the highest rating categories, AAA or Aaa, by S&P or
Moody's, respectively.
Some of these securities may generally be illiquid. At present, all such
securities will be treated as illiquid, and to such extent, together with any
other illiquid investments, will not exceed 10% of the Fund's net assets. The
Trust's Board of Trustees may in future adopt procedures under which
government-issued IOs and POs backed by fixed-rate mortgages would be deemed to
be liquid and the Fund would, therefore, treat such securities as liquid without
notice to shareholders.
OTHER POLICIES. The Fund may also invest up to 5% of its assets in inverse
floaters. Inverse floaters are derivative instruments with floating or variable
interest rates that move in the opposite direction, at an accelerated speed, to
short-term interest rates and may be considered predominantly speculative.
Under the policies stated in "Common Investment Methods and Risks" and in the
SAI, the Fund may also enter into covered mortgage "dollar rolls," invest in
zero coupon securities, including FICO STRIPs, engage in repurchase,
"when-issued," and delayed-delivery transactions, loan its portfolio securities,
and other activities specifically identified for this Fund.
GLOBAL INCOME FUND
The Global Income Fund's investment objective is to provide high current income,
consistent with preservation of capital, with capital appreciation as a
secondary consideration.
PORTFOLIO INVESTMENTS. The Fund will pursue its
objectives by investing at least 65% of its net assets in both domestic and
foreign debt obligations including those in developing markets and related
foreign currency transactions. Investments will be selected to provide a high
current yield and currency stability, or a combination of yield, capital
appreciation, or currency appreciation consistent with the Fund's objectives. As
a global fund, the Fund may invest in securities issued in any currency and may
hold foreign currencies. The Manager intends to manage the Fund's exposure to
various currencies, and may from time to time make extensive use of forward
currency exchange contracts or options on currencies for hedging purposes and to
enhance income. INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS
INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED FOR
INVESTMENTS IN DEVELOPING MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN
TRANSACTIONS."
The Global Income Fund may invest in debt obligations or equity securities of
any type of issuer, including domestic and foreign corporations, domestic and
foreign banks (with assets in excess of one billion dollars), and other business
organizations, domestic and foreign governments and their political
subdivisions, including the U.S. government, its agencies, and authorities or
instrumentalities, and supranational organizations.
Under normal market conditions, the Global Income Fund will have at least 25% of
its total assets invested in debt obligations issued or guaranteed by foreign
governments. Securities issued by central banks which are guaranteed by their
national governments are considered to be government securities. Bonds of
foreign governments or their agencies which may be purchased by the Fund may be
less secure than those of U.S. government issuers.
The Fund is also authorized to invest in debt obligations of supranational
entities. A supranational entity is an entity designated or supported by the
national government of one or more countries to promote economic reconstruction
or development. Examples of supranational entities include, among others, the
World Bank, the European Investment Bank and the Asian Development Bank. The
Fund is further authorized to invest in "Semi-Governmental Securities," which
are debt obligations issued by entities owned by either a national, state or
equivalent government or are obligations of one of such government jurisdictions
which are not backed by its full faith and credit and general taxing powers.
Other debt obligations of both domestic and foreign issuers in which the Fund
may invest include preferred and preference stock and all types of long-term or
short-term debt obligations, such as bonds, debentures, notes, commercial paper,
equipment lease certificates, equipment trust certificates, and conditional
sales contracts. These debt obligations may involve equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participation based on revenues, sales or profits;
or the purchase of common stock in a unit transaction (where an issuer's debt
obligations and common stock are offered as a unit).
CREDIT QUALITY. The Fund may invest in high yield, high risk, lower rated debt
obligations, including convertible bonds, that are rated at least B by Moody's
or S&P or, if unrated, are at least of comparable quality as determined by the
Manager. The Fund currently holds approximately 15% in lower rated investments
and may in the future increase this percentage but such investments will not
exceed 25% of the Fund's net assets. Many debt obligations of foreign issuers,
and especially developing markets issuers, are not rated by U.S. rating agencies
and their selection depends on the Manager's internal analysis. Securities rated
BB or lower (sometimes referred to as "junk bonds") are regarded as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and therefore
involve special risks. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS," "COMMON INVESTMENT METHODS AND RISKS," AND THE SAI FOR ADDITIONAL
INFORMATION, THE APPENDIX FOR A DISCUSSION OF THE RATING CATEGORIES, AND THE
"ASSET COMPOSITION TABLE" FOR THE RATINGS OF THE DEBT OBLIGATIONS IN THE FUND AS
OF DECEMBER 31, 1994.
COUNTRIES OF PRINCIPAL INVESTMENT. Under normal circumstances, at least 65% of
the Fund's assets will be invested in the securities of issuers located in at
least three countries, one of which may be the U.S. Securities of issuers within
a given country may be denominated in the currency of that or another country,
or in multinational currency units such as the European Currency Unit ("ECU").
The Fund will allocate its assets among securities of various issuers,
geographic regions, and currencies in a manner which is consistent with its
objectives, based upon relative interest rates among currencies, the outlook for
changes in interest rates, and anticipated changes in worldwide exchange rates.
In considering these factors, a country's economic and political conditions,
such as inflation rate, growth prospects, global trade patterns and government
policies will be evaluated.
It is currently anticipated that the Fund's assets will be invested principally
within Australia, Canada, Japan, New Zealand, the U.S., Scandinavia, and Western
Europe, and in securities denominated in the currencies of these countries or
denominated in multinational currency units such as the ECU. The Fund may also
acquire securities and currency in less developed countries as well as in
developing countries. Investments in foreign securities, especially developing
markets, involve special and additional risks related to currency fluctuations,
market volatility and economic, social, and political uncertainty that are
different from investments in similar obligations of domestic entities. See
"Highlighted Risk Considerations, Foreign Transactions" and the SAI.
PORTFOLIO MATURITY. The Fund may invest in debt obligations with varying
maturities. Under current market conditions, it is expected that the
dollar-weighted average maturity of the Fund's debt obligations investments will
not exceed 15 years. Generally, the average maturity of the Fund's debt
obligations portfolio will be shorter when interest rates worldwide or in a
particular country are expected to rise, and longer when interest rates are
expected to fall.
OTHER INVESTMENT POLICIES. With respect to currency risk, the Fund may, but is
not required to, use currency forwards, futures contracts, and interest rate
swaps, primarily to hedge income or capital and secondarily to enhance income.
Under the policies stated in "Common Investment Methods and Risks" and in the
SAI, the Fund may also acquire loan participations, loan its portfolio
securities, enter into repurchase, reverse repurchase, and "when-issued"
transactions, purchase and sell call and put options on U.S. or foreign
securities, enter into futures contracts for the purchase or sale of U.S.
Treasury or foreign securities or based upon financial indices, and engage in
other activities specifically identified for this Fund.
RISKS AND OTHER CONSIDERATIONS RELATED TO NON-DIVERSIFICATION. As a
non-diversified fund under the 1940 Act, the Fund is permitted to invest all of
its assets in the obligations of a single issuer or relatively few issuers. Of
course, the more flexible and less restrictive diversification standards for
non-diversified funds under the 1940 Act may at times be important to the Fund's
investment strategy since the number of issuers of foreign debt obligations is
limited and foreign government securities are not considered "government
securities" for 1940 Act diversification purposes. Since the Fund is permitted
to invest a greater proportion of its assets in the obligations of a smaller
number of foreign issuers, however, changes in the value of a single issuer's
securities or interest rate fluctuations, may have a greater effect on the
Fund's investments and its share price. The risks of investing in foreign
securities could also be magnified. The Fund will still be subject to the
diversification requirements under the federal tax code and the 25% limit on
concentration of investments in a single industry which will have a somewhat
mitigating effect. See "Common Investment Methods and Risks."
HIGH INCOME FUND
The principal investment objective of the High Income Fund is to earn a high
level of current return. As a secondary objective, the Fund seeks capital
appreciation to the extent consistent with its principal objective.
SELECTION OF PORTFOLIO SECURITIES. The Fund may invest in both debt obligations
and dividend-paying common or preferred stocks, including high risk securities,
and will seek to invest in whatever type of investment is offering the highest
yield and expected total return without excessive risk at the time of purchase.
Current yield is the primary criterion used by the Fund in selecting securities
for investment, although potential for capital appreciation may also be
considered.
In the event of a corporate restructuring or bankruptcy reorganization of an
issuer whose securities are owned by the Fund, the Fund may receive securities
different from those originally purchased, e.g., common stock that is not
dividend paying, bonds with a lower coupon or more junior status, or convertible
securities. The Fund is not obligated to sell such securities immediately, if
the Manager believes, based on its own analysis, that the longer term outlook is
favorable and there is the potential for a higher total return by holding such
investments.
CREDIT QUALITY. When purchasing debt obligations, the Fund may invest in
obligations in any rating category (including obligations in the lowest rating
categories) or unrated obligations, depending upon prevailing market and
economic conditions. BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER
YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED
BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED,
LOWER YIELDING OBLIGATIONS. ACCORDINGLY, INVESTORS CONSIDERING THE FUND SHOULD
EVALUATE THEIR OVERALL INVESTMENT GOALS AND TOLERANCE FOR RISK.
It is the Fund's current intention not to purchase debt obligations, including
convertible bonds, rated below Caa by Moody's or CCC by S&P; or, if unrated,
comparable obligations in the view of the Manager. The lower rated obligations
in which the Fund may invest (sometimes referred to as "junk bonds") are
considered by S&P and Moody's, 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 obligation and therefore entail special risks.
The Fund will not purchase issues that are in default. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS OBLIGATIONS," "COMMON INVESTMENT
METHODS AND RISKS," AND THE SAI FOR ADDITIONAL INFORMATION, THE APPENDIX FOR A
DISCUSSION OF THE RATING CATEGORIES, AND THE "ASSET COMPOSITION TABLE" FOR THE
RATINGS OF THE DEBT OBLIGATIONS IN THE FUND AS OF DECEMBER 31, 1994.
These ratings, which represent the opinions of the rating services, are not
absolute credit standards and will be considered but will not be a determining
or limiting factor. Rather than relying principally on the ratings assigned by
rating services, the Manager conducts its own investment analysis based on such
factors as: anticipated cash flow; interest or dividend coverage; asset
coverage; earnings prospects; the experience and managerial strength of the
issuer; responsiveness to changes in interest rates and business conditions;
debt obligations maturity schedules and borrowing requirements; and the issuer's
changing financial condition and public recognition thereof.
In the event the rating on an issue held in the Fund's portfolio is changed by
the ratings service or the obligation goes into default, such event will be
considered by the Fund in its evaluation of the overall investment merits of
that security but will not necessarily result in an automatic sale of the
security.
Certain of the high yield obligations in which the Fund may invest may be
purchased at a discount. Such investments, when held to maturity or retired, may
include an element of gain (which may be treated as ordinary income or capital
gain for tax purposes). The Fund does not intend to hold obligations for the
purpose of achieving such gains, but generally will hold them as long as current
yields on these investments remain attractive. Capital losses may be realized
when obligations purchased at a premium are held to maturity or are called or
redeemed at a price lower than their purchase price. Capital gains or losses
also may be realized upon the sale of obligations.
Because a substantial portion of this Fund's investments at any particular time
may consist of debt obligations, changes in the level of interest rates, among
other things, will likely affect the value of the Fund's holdings and thus the
value of the Fund's shares.
OTHER INVESTMENT POLICIES. Under the policies
stated in "Common Investment Methods and Risks," the SAI, and "Highlighted Risk
Considerations, Foreign Transactions," the Fund may acquire loan participations,
purchase debt obligations on a "when-issued" basis, write covered call options,
loan its portfolio securities, enter into repurchase transactions and forward
currency exchange contracts, participate in interest rate swaps, and engage in
other activities specifically identified for this Fund.
INVESTMENT GRADE INTERMEDIATE BOND FUND
The investment objective of the Investment Grade Intermediate Bond Fund is to
provide current income, consistent with preservation of capital, primarily
through investment in intermediate-term, investment grade corporate obligations
and U.S.
government securities.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund seeks to meet its objective by
investing at least 65% of its assets in a diversified portfolio of:
(1)EU.S. dollar-denominated, debt obligations such as bonds, notes and
debentures, which are issued by domestic or foreign corporations and rated at
the time of purchase Baa or better by Moody's or BBB or better by S&P or, if
unrated, deemed to be of comparable quality by the Manager;
(2)Esecurities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities, including
mortgage-backed securities; and
(3)Ecash and Money Market Instruments.
The Fund may invest in all types of U.S. Government Securities, including U.S.
Treasury bills, notes, and bonds with varying interest rates, maturities and
dates of issuance and obligations issued or guaranteed by U.S. government
agencies and instrumentalities. Some of these investments are supported by the
full faith and credit pledge of the U.S. government, while others are supported
principally by the issuing agency.
The Fund may also invest in collateralized obligations (sometimes referred to as
"asset-backed securities"), which generally are bonds issued by single purpose,
stand-alone finance subsidiaries or trusts of financial institutions, government
agencies, investment bankers or other similar institutions, such as
Collateralized Automobile Receivables ("CARs") and CMOs. All such collateralized
obligations will either be issued by a U.S. government agency or rated in the
highest category by an NRSRO.
CREDIT QUALITY. The Fund will only invest in debt obligations that are
investment grade, i.e., within the four highest bond ratings of either Moody's
or S&P, or if unrated, deemed to be of comparable quality by the Manager. These
are issues rated at least Baa by Moody's or BBB by S&P (see Appendix). While
bonds carrying the fourth highest bond rating are viewed to have adequate
capacity for payment of principal and interest, investments in such securities
involve a higher degree of risk than those in the higher rating categories and
such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. It is currently anticipated that a minimum
of 50% of the Fund's investments will be rated in the top three categories,
i.e., at least A by Moody's or by S&P or, if unrated, will be judged to be at
least of comparable quality as determined by the Fund's Manager, but this is not
a fundamental policy of the Fund and may be changed without notice to
shareholders.
Rather than relying principally on the ratings assigned by rating services,
however, the Manager performs its own internal investment analysis of debt
obligations being considered for the Fund's portfolio. Investments will also be
evaluated in the context of economic and political conditions in the issuer's
domicile. In the event the rating on an issue held in the Fund's portfolio is
changed by the ratings service, such change will be considered by the Fund in
its evaluation of the overall investment merits of that security but will not
necessarily result in an automatic sale of the security.
DOMESTIC AND FOREIGN ISSUERS. The Fund's investments may be in both domestic and
foreign issuers. While 65% of the Fund's total assets will be invested in U.S.
dollar denominated debt obligations, the remaining 35% may be invested in bonds,
to the extent available and permissible, issued by foreign governments
(including Canadian provinces and their instrumentalities), or by supranational
entities, domestic or foreign equities, debt obligations which are denominated
in foreign currencies, and currency deposits or equivalents. A supranational
entity is an entity designated or supported by the national government of one or
more countries to promote economic reconstruction or development, e.g., the
World Bank. The Fund is further authorized to invest in Semi-Governmental
Securities. Although the Fund may, typically it does not, invest in developing
markets.
The Fund may invest in securities issued in any currency and may hold foreign
currency to the extent consistent with its objectives and policies described
above. Securities of issuers within a given country may be denominated in the
currency of that or another country, or in multinational currency units. The
Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
INVESTMENT IN FOREIGN SECURITIES AND IN DEVELOPING MARKETS INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" AND
THE SAI.
MATURITY OF PORTFOLIO INVESTMENTS. Under normal economic conditions, the Fund
will invest at least 65% of its assets in intermediate term obligations.
Intermediate term obligations typically will have effective remaining maturities
of between two and ten years at the time of purchase. The remaining 35% may be
invested in obligations, to the extent available and permissible, which have
remaining maturities of less than two years or more than ten years at the time
of purchase.
When purchasing "putable" bonds (obligations which entitle each holder to
require the obligor to redeem the securities at the holder's option on a date or
dates prior to the final stated maturity), the Fund may consider the optional
redemption date or dates as the effective maturity of the obligations. When
purchasing obligations which require the obligor to prepay periodically portions
of the obligation prior to the stated final maturity (whether by operation of a
fixed, known, pro rata sinking fund or, as in collateralized securities, by the
periodic passing through of variable payments made to the issuer on the
underlying collateral), the expected average life or average term of the
investment may also be deemed to be its effective maturity.
At times, particularly during periods when interest rates on short term
obligations are significantly lower than those on intermediate or longer term
obligations, the Fund's strategy is designed to seek a higher yield than that
available from a money market fund, while attempting to avoid the potential
risks to principal often associated with both non-investment-grade securities
and longer-term instruments.
OTHER INVESTMENT POLICIES. Under the policies stated in "Common Investment
Methods and Risks," and in the SAI, the Fund may enter into "U.S. Treasury
Rolls" and repurchase transactions, and may also write covered call options,
purchase put options, enter into contracts for the purchase or sale for future
delivery of U.S. Treasury or foreign securities, or contracts based upon
financial indices, loan its portfolio securities, and engage in other activities
specifically identified for this Fund.
U.S. GOVERNMENT SECURITIES FUND
The investment objective of the U.S. Government Fund is to earn income through
investments in a portfolio limited to securities which are obligations of the
U.S.
government, its agencies or instrumentalities.
The Fund pursues its objective by investing in all types of U.S. Government
Securities, including U.S. Treasury bills, notes, and bonds with varying
interest rates, maturities and dates of issuance and obligations issued or
guaranteed by U.S. government agencies and instrumentalities. Some of these
investments are supported by the full faith and credit pledge of the U.S.
government, while others are supported principally by the issuing agency.
The Fund anticipates that a significant portion of its portfolio will consist of
Government National Mortgage Association ("GNMA ") mortgage-backed certificates.
The GNMA guarantee of principal and interest is backed by the full faith and
credit of the U.S. government. The yields provided by these securities have
historically exceeded the yield on other types of U.S. Government Securities
with comparable maturities. Unpredictable prepayments of principal, however, can
greatly change realized yields. In a period of declining interest rates it is
more likely that mortgages continued contained in GNMA pools will be prepaid
thus reducing the effective yield. Moreover, as is true of all securities
guaranteed by the U.S. government, the U.S. government guarantee relates only to
the payment of principal and interest, AND DOES NOT GUARANTEE THE MARKET VALUE
OR YIELD OF THE SECURITIES OR THE FUND'S SHARES.
GNMA certificates and other mortgage-backed securities represent part ownership
of a pool of mortgage loans. They differ from conventional bonds in that the
principal is paid back at a variable rate over the life of the certificate
rather than at maturity. The Fund receives monthly scheduled payments of
principal and interest on its investment in these securities, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. When the Fund reinvests the payments and any unscheduled prepayments
of principal it receives, it may receive a rate of interest which is lower than
the rate on the existing security. For this reason, mortgage-backed securities
are generally not effective as a means of "locking in" long-term interest rates.
The market value of mortgage-backed securities, like other U.S. Government
Securities in the Fund's portfolio, will generally vary inversely with changes
in market interest rates, declining when interest rates rise and rising when
interest rates decline. Mortgage-backed securities, while having comparable risk
of decline in value during periods of rising rates, may have less potential for
capital appreciation than other non callable debt investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline.
In addition, to the extent such securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments may result in some loss of
the Fund's principal investment to the extent of the premium paid. On the other
hand, if such 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.
OTHER INVESTMENT POLICIES. Under the policies stated in "Common Investment
Methods and Risks" and in the SAI, the Fund may enter into only covered mortgage
"dollar rolls," loan portfolio securities, engage in repurchase agreements and
in other activities specifically identified for this Fund.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND
(FORMERLY THE "EQUITY GROWTH FUND")
The principal investment objective of the Growth and Income Fund is capital
appreciation. The Fund's secondary objective is to provide current income
return.
PORTFOLIO INVESTMENTS. The Fund pursues capital appreciation by investing in
securities the Manager believes have the potential to increase in value. The
Fund will normally invest in the U.S. stock market by investing in a broadly
diversified portfolio of common or preferred stocks and securities convertible
into common stocks which may be traded on a securities exchange or
over-the-counter. Such investments will be made, however, only if the Fund's
Manager believes that the perceived risk is justified by the potential for
capital appreciation.
The Fund seeks current income through the receipt of dividends or interest from
its investments, and the payment of dividends may therefore be a consideration
in purchasing debt obligations or securities for the Fund. In pursuing its
secondary objective of current income, the Fund may also purchase convertible
securities, including bonds or preferred stocks, debt obligations, and Money
Market Instruments.
CONVERTIBLE SECURITIES. The Fund may invest in securities which provide an
opportunity for equity participation. These securities (generally debt
obligations or preferred stock) are convertible into a certain quantity of the
common stock of the same or a different issuer, at a stated price within a
specified period of time and are generally senior to common stocks in a
corporation's capital structure, although they are usually subordinated to
similar nonconvertible debt obligations. The convertible debt obligations in
which the Fund invests are subject to the same rating criteria as the Fund's
investments in debt obligations. Convertible preferred stocks are equity
securities and generally carry a higher degree of market risk than debt
obligations. They often may be regarded as speculative in nature.
The Fund may also invest in enhanced convertible securities which provide an
investor, such as the Fund, with the opportunity to earn higher dividend income
than is available on a company's common stock. These may be considered
derivatives or complex securities. See "Highlighted Risk Considerations" and
"Common Investment Methods and Risks."
SELECTION OF PORTFOLIO INVESTMENTS. The investment strategy of the Fund is to
generally invest in undervalued issues believed to have attractive long-term
growth prospects. The Fund has been managed using primarily a quantitative
analysis approach to stock selection, supported by fundamental research. The
Fund has also been managed to provide exposure to a broad base of U.S. growth
equities, including smaller capitalization issues. Smaller companies as a group
can offer attractive valuations and above-average earnings growth potential,
although they may be accompanied by increased risks and volatility. See "Common
Investment Strategies and Risks." That management strategy is being shifted to
stock selection focusing on relative yield analysis, supported by fundamental
and quantitative analysis.
In May of 1995, the Fund's Manager began to use relative yield analysis to
target companies that have current relative yields near the upper end of their
historical ranges. In doing so the Fund's Manager hopes to identify undervalued
stocks, in pursuit of the Fund's primary objective of capital appreciation,.
Relative yield, as used here, is a company's stock yield divided by the market
yield (as defined by the S&P 500). In implementing the Fund's relative yield
strategy, the Fund generally restricts its investment to stocks yielding at
least 100% of the yield of the S&P 500, thereby enabling the Manager to pursue
its secondary objective, namely current income. In addition to relative yield
analysis, the fund employs other valuation methods including, but not limited
to, quantitative and fundamental analysis. This strategy has decreased the
Fund's exposure to smaller capitalization issuers in favor of mid- and larger
capitalization issuers.
FOREIGN INVESTMENTS. Although the Fund reserves the right to invest up to 30% of
its assets in foreign securities not publicly traded in the U.S., the Fund's
current investment strategy is to limit such investments to less than 5% of the
Fund's total net assets excluding American Depository Receipts (in which the
Fund may also invest).
OTHER INVESTMENT POLICIES. The Fund may also invest
up to 5% of its assets in equity real estate investment trusts ("REITs") which
are described in the Real Estate Fund. The Fund will not invest more than 5% of
its assets in debt obligations, including convertible debt obligations, rated Ba
or lower by Moody's or BB or lower by S&P, or unrated securities determined by
the Manager to be of comparable quality. Under the policies stated in "Common
Investment Methods and Risks" and in the SAI, the Fund may also write covered
call and put options; purchase call and put options on securities and indices of
securities; engage in "forward conversion" transactions; loan its portfolio
securities; enter into repurchase transactions; and engage in other activities
specifically identified for this Fund.
NAME CHANGE. The Board of Trustees approved a change in the Fund's name to the
"Growth and Income Fund" from the "Equity Growth Fund" to better reflect its
investment objectives and current strategy, effective May 1, 1995. The Fund's
investment objectives, which are fundamental policies, are unchanged.
INCOME SECURITIES FUND
The investment objective of the Income Securities Fund is to maximize income
while maintaining prospects for capital appreciation.
PORTFOLIO INVESTMENTS. The Fund will pursue its objective typically by investing
in a diversified portfolio of domestic and foreign debt obligations which may
include high yield, high risk, lower rated obligations (commonly referred to as
"junk bonds") as well as equity securities, selected with particular
consideration of current income production along with capital appreciation.
BECAUSE OF THE FUND'S POLICY OF INVESTING IN HIGHER YIELDING, HIGHER RISK
OBLIGATIONS, AN INVESTMENT IN THE FUND IS ACCOMPANIED BY A HIGHER DEGREE OF RISK
THAN IS PRESENT WITH AN INVESTMENT IN HIGHER RATED, LOWER YIELDING OBLIGATIONS.
ACCORDINGLY, INVESTORS CONSIDERING THIS FUND SHOULD EVALUATE THEIR OVERALL
INVESTMENT GOALS AND TOLERANCE FOR RISK.
In selecting portfolio investments, the Manager may invest in the securities and
obligations of issuers which are corporations, associations or similar legal
entities having gross assets valued by it at not less than one million dollars
as shown by its latest published annual report, or in securities traded on any
national securities exchange or on NASDAQ Stock Markets ("NASDAQ"), or in Money
Market Instruments. Such investments may include zero coupon bonds, pay-in-kind
bonds, or preferred stocks. See "Common Investment Methods and Risks."
THERE ARE NO RESTRICTIONS AS TO THE PROPORTION OF INVESTMENTS WHICH MAY BE MADE
IN ANY PARTICULAR TYPES OF SECURITY AND SUCH DETERMINATION IS ENTIRELY WITHIN
THE MANAGER'S DISCRETION. As market conditions change, it is conceivable that
all of the assets of the Fund might be invested in debt obligations or,
conversely, in common stocks. As a fundamental policy, however, the Fund will
not concentrate its investments in a single industry in excess of 25% of its
total assets.
CREDIT QUALITY. The Fund may invest in securities regardless of their ratings.
Accordingly, the assets of the Fund may be invested in debt obligations rated Ba
or lower by Moody's or BB or lower by S&P, or unrated debt obligations
determined by the Manager to be of comparable quality. Higher yields are
ordinarily available from lower rated debt obligations. These bonds are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation
and therefore entail special risks. As an operating policy, however, the Fund
will generally invest in securities that are rated at least Caa by Moody's or
CCC by S&P, except for defaulted securities discussed below, or, if unrated, at
least of comparable quality as determined by the Manager. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS," "COMMON INVESTMENT METHODS AND
RISKS," AND THE SAI FOR ADDITIONAL INFORMATION, THE APPENDIX FOR A DISCUSSION OF
THE RATING CATEGORIES, AND THE "ASSET COMPOSITION TABLE" FOR THE RATINGS OF THE
DEBT OBLIGATIONS IN THE FUND AS OF DECEMBER 31, 1994. Since a substantial
portion of the Fund's portfolio at any particular time may consist of debt
obligations, changes in the level of interest rates, among other things, will
likely affect the value of the Fund's holdings and therefore the value of a
Policyholder's investment.
DEFAULTED DEBT OBLIGATIONS. The Fund may purchase debt obligations of issuers
not currently paying interest as well as issuers who are in default if, in the
opinion of the Manager, the issuer is expected to resume interest payments or
other advantageous developments appear likely, in the near term. As an operating
policy, such speculative investments will not exceed 5% of the Fund's net
assets. See "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND
"RESTRICTED AND ILLIQUID INVESTMENTS."
FOREIGN INVESTMENTS. The Fund may
invest up to 25% of its total net assets in foreign securities not publicly
traded in the U.S., including those of developing markets issuers. The Fund may
also invest in sponsored or unsponsored American Depository Receipts. The Fund's
investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investments in similar obligations of domestic entities.
INVESTMENT IN FOREIGN SECURITIES AND IN DEVELOPING MARKETS INVOLVE SPECIAL AND
ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" AND
THE SAI.
OTHER INVESTMENT POLICIES. Under the policies stated in "Common Investment
Methods and Risks" and in the SAI, the Fund may also invest up to 5% of its
assets in loan participations and other related direct or indirect bank
obligations and up to 5% of its assets in trade claims, both of which carry a
high degree of risk; invest up to 5% of its assets in enhanced convertible
securities which may include PERCS, ACES, DECS, MPS, and PEPS; loan its
portfolio securities; enter into repurchase transactions; purchase debt
obligations on a "when-issued" or "delayed-delivery" basis; write covered call
options on securities; and engage in other activities specifically identified
for this Fund.
RISING DIVIDENDS FUND
The investment objectives of the Rising Dividends Fund are capital appreciation
and current income incidental to capital appreciation. In seeking capital
appreciation, the Fund invests with a long-term investment horizon. Preservation
of capital, while not an objective, is also an important consideration.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund seeks to achieve its investment
objectives by investing, as a fundamental policy, at least 65% of its net assets
in financially sound companies that have paid consistently rising dividends
based on the investment philosophy that the securities of such companies,
because of their dividend record, have a strong potential to increase in value.
Under normal market conditions, the Fund's portfolio is at least 65% invested in
the securities of companies that meet the following specialized criteria at the
time of purchase:
1. consistent dividend increases - a company should have increased its
dividend in at least eight out of the last ten years with no year showing a
decrease;
2. substantial dividend increases - a company must have increased its dividend
at least 100% over the past ten years;
3. reinvested earnings - dividend payout should be less than 65% of current
earnings (except for utility companies);
4. strong balance sheet - long-term debt obligations should be no more than
30% of total capitalization (except for utility companies); and
5. attractive price - the current price should either be in the lower half of
the stock's price/earnings ratio range for the past ten years or less than
the average current market price/earnings ratio of the stocks comprising
the S&P 500 Stock Index.
The remaining 35% of the Fund's assets typically are invested in dividend-paying
equity securities with similar characteristics that may not meet all of the
specialized criteria listed above. The Fund's investments may include common
stocks, convertible securities, or rights or warrants to subscribe for or
purchase common stocks.
The Manager also considers other factors, such as return on shareholder's
equity, rate of earnings growth and anticipated price/earnings ratios, in
selecting investments for the Fund. In addition, because capital preservation is
an important consideration, the Manager generally also reviews a company's
stability and the strength of its balance sheet in selecting among eligible
growth companies.
OTHER INVESTMENT POLICIES. Under the policies stated in "Common Investment
Methods and Risks," and in the SAI, the Fund may also loan its portfolio
securities, enter into repurchase transactions, write covered call options, and
engage in other activities specifically identified for this Fund.
TEMPLETON GLOBAL ASSET ALLOCATION FUND
The investment objective of the Templeton Global Asset Allocation Fund is to
seek a high level of total return through a flexible policy of investing in the
following market segments: equity securities of issuers in any nation, debt
obligations of companies and governments of any nation, and Money Market
Instruments.
PORTFOLIO INVESTMENTS. The mix of investments among these three market segments
will be adjusted in an attempt to capitalize on total return potential produced
by changing economic conditions throughout the world. There are no minimum or
maximum percentages as to the amount of the Fund's assets which may be invested
in each of the market segments. Except as noted below and under "Investment
Restrictions" in the SAI, THE MANAGER HAS COMPLETE DISCRETION IN DETERMINING THE
AMOUNT AND NATURE OF EQUITY SECURITIES, DEBT OBLIGATIONS, OR MONEY MARKET
INSTRUMENTS IN WHICH THE FUND MAY INVEST.
The Fund seeks to achieve its objective by seeking investment opportunities in
all types of securities issued by companies or governments of any nation,
including developing markets nations. The Fund will normally be invested in at
least three countries, except during defensive periods. INVESTORS SHOULD
CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
EQUITY SECURITIES. Equity securities in which the Fund may invest consistent
with its investment objective and policies may include common and preferred
stock, securities (bonds or preferred stock) convertible into common stock
("convertible securities"), warrants, and securities representing underlying
international securities such as depository receipts. The Fund may purchase
sponsored or unsponsored depository receipts, such as ADRs, EDRs, and GDRs,
which will be deemed to be investments in the underlying securities for purposes
of the Fund's investment policies. Depository receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted and they involve the risks of other investments in foreign
securities, as discussed in "Highlighted Risk Considerations, Foreign
Transactions."
DEBT OBLIGATIONS. Debt obligations in which the Fund may invest consistent with
its investment objective and policies may include many types of debt obligations
of both domestic and foreign issuers such as bonds, debentures, notes,
commercial paper, and obligations issued or guaranteed by governments or
government agencies or instrumentalities. The Fund has the flexibility to invest
in preferred stocks and certain debt obligations, rated or unrated, such as
convertible bonds and bonds selling at a discount. Debt obligations can provide
the potential for capital appreciation based on various factors such as changes
in interest rates, economic and market conditions, improvement in an issuer's
ability to repay principal and pay interest, and ratings upgrades.
CREDIT QUALITY. The Fund may invest in medium grade and lower quality debt
obligations that are rated between BBB and as low as CC by S&P, and between Baa
and as low as Ca by Moody's or, if unrated, are of equivalent investment quality
as determined by the Manager. Bonds rated BB or lower are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and may be in default.
Issues of bonds rated Ca may often be in default. Higher yields are generally
available from securities in the higher risk, lower rating categories of S&P or
Moody's (commonly referred to as "junk bonds"), however, the values of lower
rated securities generally fluctuate more than those of higher rated securities
and involve greater risk of loss of income and principal. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND "APPENDIX."
As an operating policy established by the Board, however, the Fund will not
invest more than 10% of its total assets in debt obligations rated BBB or lower
by S&P or Baa or lower by Moody's or if unrated, determined by the Manager to be
of comparable quality. Such limit would not include defaulted debt obligations.
Many debt obligations of foreign issuers, and especially developing markets
issuers, are not rated by U.S. rating agencies and their selection depends on
the Manager's internal analysis. The Board may consider a change in this
operating policy if, in its judgment, economic conditions change such that a
higher level of investment in high risk, lower quality debt obligations would be
consistent with the interests of the Fund and its Shareholders.
DEFAULTED DEBT OBLIGATIONS. The Fund may, from time to time, purchase defaulted
debt obligations if, in the opinion of the Managers, the issuer may resume
interest payments in the near future. As an operating policy, which may be
changed by the Board, the Fund will not invest more than 10% of its total assets
in such speculative defaulted debt obligations. Such securities may be illiquid
and as such, would be part of the Fund's overall 10% of assets limit on illiquid
investments. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS"
AND "APPENDIX" and "Restricted and Illiquid Investments."
MONEY MARKET INSTRUMENTS. The Fund may invest in Money Market Instruments and,
specifically, Government National Mortgage Association ("GNMA") mortgage-backed
certificates. The yields provided by these securities have historically exceeded
the yields on other types of U.S. Government Securities with comparable
maturities. Unpredictable prepayments of principal, however, can greatly change
realized yields. See "Common Investment Methods and Risks." In addition, the
Fund may hold cash and time deposits with banks in the currency of any major
nation and invest in certificates of deposit of federally insured savings and
loan associations having total assets in excess of $1 billion. The Fund may also
invest in commercial paper limited to obligations rated Prime-1 or Prime-2 by
Moody's or A-1 or A-2 by S&P or, if not rated by Moody's or S&P, issued by
companies having an outstanding debt issue currently rated Aaa or Aa by Moody's
or AAA or AA by S&P. See the SAI.
FOREIGN SECURITIES. The Fund has an unlimited right to purchase securities in
any foreign country, developed or underdeveloped, if they are listed on an
exchange, as well as a limited right to purchase such securities if they are
unlisted. The Fund's investments in foreign securities involve risks related to
currency fluctuations, market volatility, and economic, social, and political
uncertainty that are different from investing in similar obligations of domestic
entities. See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
CURRENCY TECHNIQUES. The Fund may, but currently does not intend with respect to
equity securities, to employ certain active currency hedging techniques to
attempt to minimize the risk to the Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. Such techniques may
include investments in foreign currency futures contracts, forward foreign
currency exchange contracts ("forward contracts"), and options on foreign
currencies, all of which involve specialized risks.
The Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market. The Fund will generally not enter into a forward contract with
a term of greater than one year. The Fund has no specific limitation on the
percentage of assets it may commit to forward contracts, except that it will not
enter into a forward contract if the amount of assets set aside to cover the
contract would impede portfolio management or the Fund's ability to meet
redemption requests. The Fund may also purchase and write put and call options
on foreign currencies for the purpose of protecting against declines in the
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities to be acquired. See "Highlighted Risk
Considerations, Foreign Transactions" and the SAI.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs, considered derivative or
complex securities, are securities collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the U.S. Timely
payment of interest and principal (but not the market value) of these pools is
supported by various forms of insurance or guarantees issued by U.S. Government
agencies, private issuers, and mortgage poolers; however, the obligation itself
is not guaranteed. If the collateral securing the obligations is insufficient to
make payment on the obligation, a holder could sustain a loss. In addition, the
Fund may buy CMOs without insurance or guarantees if, in the opinion of the
Managers, the sponsor is creditworthy. The ratings of the CMOs will be
consistent with the ratings criteria of the Fund. Prepayments of the mortgages
included in the mortgage pool may influence the yield of the CMO. Prepayments
usually increase when interest rates are decreasing, thereby decreasing the life
of the pool. Reinvestment of prepayments may be at a lower rate than that on the
original CMO. As a result, the value of CMOs decrease like other debt
obligations when interest rates rise, but when interest rates decline, they may
not increase as much as other debt obligations, due to the prepayment feature.
FUTURES CONTRACTS. The Fund may purchase and sell financial futures contracts,
stock index futures contracts, bond index futures contracts, and foreign
currency futures contracts for hedging purposes only and not for speculation. As
an operating policy, which the Board may change, the Fund may engage in such
transactions only if the total contract value of the futures contracts does not
exceed 20% of the Fund's total assets and the Fund may not commit more than 5%
of its total assets to initial margin deposits on futures contracts. See "Common
Investment Methods and Risks, Options and Futures Contracts."
PORTFOLIO TURNOVER. The Fund invests for long-term total return and does not
intend to place emphasis on short-term trading profits. Accordingly, the Fund
expects to have an annual portfolio turnover rate of less than 50%. Portfolio
turnover could be greater in periods of unusual market movement and volatility.
The Managers will weigh the potential benefits of any short-term trading against
the higher transaction costs associated with a higher turnover rate.
OTHER INVESTMENT POLICIES. Under the policies stated in "Common Investment
Methods and Risks," and in the SAI, the Fund may also invest up to 10% of its
net assets in illiquid and restricted securities, purchase securities on a
"when-issued" basis, enter into repurchase transactions, loan its portfolio
securities with an aggregate value of up to one third of its total assets,
borrow up to 33 1U3% of the value of its net assets for temporary or emergency
purposes or to increase its holdings of portfolio securities, and engage in
other activities specifically identified for this Fund.
UTILITY EQUITY FUND
The investment objectives of the Utility Equity Fund are to seek both capital
appreciation and current income by concentrating investments in the securities
of public utilities companies.
PORTFOLIO INVESTMENTS. The Fund pursues its objectives by investing, under
normal conditions, at least 65% of the Fund's total assets in securities of
issuers engaged in the public utilities industry, which includes the
manufacture, production, generation, transmission and sale of gas and electric
energy and water. Assets may also be invested in issuers engaged in the
communications field, including entities such as telephone, telegraph,
satellite, microwave and other companies providing communication facilities for
the public benefit, but not those in public broadcasting. The Fund will normally
invest in common stocks which are expected to yield dividends.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its total net assets in
foreign securities, including Depository Receipts and those of developing
markets issuers. The Fund's investments in foreign securities involve risks
related to currency fluctuations, market volatility, and economic, social, and
political uncertainty that are different from investing in similar obligations
of domestic entities. INVESTMENTS IN FOREIGN SECURITIES, AND DEVELOPING MARKETS,
INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN SECURITIES" AND THE SAI.
RISKS ASSOCIATED WITH UTILITIES INVESTMENTS. The Fund has substantial
investments in gas and electric public utility companies which have certain
characteristics and risks of which investors should be aware. Such
characteristics include: the difficulty in obtaining adequate returns on
invested capital despite frequent rate increases; the difficulty in financing
large construction programs during inflationary periods; restrictions on
operations and increased costs and delays attributable to environmental
considerations; difficulty of the capital markets in absorbing utility debt
obligations and equity securities; difficulties in obtaining fuel for electric
generation at reasonable prices; difficulty in obtaining natural gas for resale;
declines in the prices of alternative fuels; increased competition and
concentration; risks associated with the construction and operation of nuclear
power plants; and general effects of energy conservation. The Fund's policy of
concentrating its investments in utilities may make it more susceptible to
adverse developments than a fund with greater industry diversification.
In addition, utility stocks may be particularly sensitive to interest rate
movements because investors may value such stocks based upon their yields rather
than their potential growth. Accordingly, utility stocks may behave like bonds,
rising in value during periods of falling interest rates and falling in value
during periods of rising interest rates. Utility stocks may also, however, be
affected by factors which affect equity securities generally.
Notwithstanding these risk factors, gas and electric utility companies have been
favorably affected by lower financing costs, and, in the case of electrical
utilities, the ability to build, operate and maintain power plants outside their
historical territories. Each of the favorable factors is, of course, subject to
change.
OTHER INVESTMENT POLICIES. The Fund may invest up to 5% of its
assets in debt obligations, including convertible bonds issued by public utility
issuers regardless of their rating which means the assets of the Fund may be
invested in securities rated Ba or lower by Moody's or BB or lower by S&P, or
unrated securities determined by the Manager to be of comparable quality. Higher
yields are ordinarily available from lower rated obligations (commonly referred
to as "junk bonds") and reflect their predominantly speculative characteristics.
Under the policies stated in "Common Investment Methods and Risks" and in the
SAI, the Fund may also invest up to 5% of its assets in preferred stocks or
convertible preferred stocks issued by public utility issuers, write covered
call options, loan its portfolio securities, enter into repurchase transactions,
and engage in other activities specifically identified for this Fund.
FUNDS SEEKING CAPITAL GROWTH
PRECIOUS METALS FUND
The principal investment objective of the Precious Metals Fund is capital
appreciation through concentration of its investments in securities of issuers
engaged in mining, processing or dealing in gold and other precious metals. The
Fund's secondary objective is to provide current income return through the
receipt of dividends or interest from its investments.
PORTFOLIO INVESTMENTS. The Fund pursues its principal objective by investing,
under normal circumstances, at least 65% of the value of the Fund's total assets
in securities of issuers engaged in mining, processing or dealing in gold and
other precious metals, such as silver, platinum and palladium, securities of
gold mining finance companies, as well as securities of operating companies with
long-life, medium-life, or short-life mines.
The Fund will normally invest in common stocks, and securities convertible into
common stocks, such as convertible preferred shares, convertible debentures,
convertible rights and warrants which may be traded on a securities exchange or
over-the-counter. The payment of dividends may be a consideration in purchasing
securities for the Fund because of its secondary objective of current income.
FOREIGN INVESTMENTS. Because of the Fund's policy of investing primarily in
securities of companies engaged in mining, processing or dealing in gold, a
substantial part of its assets is generally invested in securities of companies
domiciled or operating in one or more foreign countries, which may include
developing market countries. The Fund generally anticipates that it may invest
more than 50% of its total assets in the securities of corporations located
outside the U.S., including South Africa. Due to current internal conditions in
South Africa, any investments in securities from that country may be subject to
somewhat greater risk than an investment in a country with a more stable
political profile and without such restrictions. INVESTMENTS IN FOREIGN
SECURITIES, ESPECIALLY DEVELOPING MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS
RELATED TO CURRENCY, MARKET, POLITICAL, AND OTHER FACTORS THAT ARE DIFFERENT
FROM INVESTMENTS IN SIMILAR OBLIGATIONS OF DOMESTIC ENTITIES. SEE "HIGHLIGHTED
RISK CONSIDERATIONS, FOREIGN TRANSACTIONS" AND THE SAI.
RISKS OF INVESTING IN PRECIOUS METALS. The value of this Fund's shares
fluctuates and may, in fact, be more volatile than the shares of other Funds
because of the volatility of the underlying portfolio investments. Due to the
Fund's policy of concentrating its investments in gold and precious
metal-related issuers, an investment in the Fund's shares may be subject to
greater risk of adverse developments in those industries than an investment in a
fund with greater industry diversification. Special Fund risks may include:
fluctuations in the price of gold; the potential effect of the concentration of
the sources of supply of gold and over control of the sale of gold; changes in
U.S. or foreign tax or currency laws; and unpredictable monetary policies and
economic and political conditions. For additional discussion of the special
risks of this Fund, see "Highlighted Risk Considerations" in the SAI.
OTHER INVESTMENT POLICIES. The Fund may invest in gold bullion. In seeking
income or appreciation or in times when the Fund's Manager believes a
conservative or defensive investment policy is in order, the Fund may also
purchase preferred stocks and debt obligations, any of which may or may not be
rated securities. In those circumstances, the Fund may also place some of its
cash reserves in Money Market Instruments. Under the policies stated in "Common
Investment Methods and Risks," and in the SAI, the Fund may also write covered
call options, loan its portfolio securities, enter into repurchase transactions,
and engage in other activities specifically identified for this Fund.
REAL ESTATE SECURITIES FUND
The principal objective of the Real Estate Securities Fund is capital
appreciation, with a secondary objective of earning current income on its
investments.
PORTFOLIO INVESTMENTS. The Fund pursues its principal objective by investing
primarily in securities of companies operating in the real estate industry.
Under normal circumstances, therefore, at least 65% of the Fund's total assets
will be invested in "real estate securities," (defined below), primarily equity
real estate investment trusts ("REITs"). The Fund may also invest in equity
securities issued by home builders and developers and in debt obligations and
convertible securities issued by REITs, home builders, and developers. The Fund
will generally invest in real estate securities of companies listed on a
securities exchange or traded over-the-counter. As used by the Fund, investments
deemed to be "real estate securities" will include equity, debt obligations, and
convertible securities of companies having the following characteristics and
will be subject to the following limitations:
1. Companies qualifying as a REIT for federal income tax purposes. 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.
2. Companies, such as home builders and developers, having at least 50% of their
assets related to, or deriving at least 50% of their revenues from, the
ownership, construction, management, or sale of residential, commercial or
industrial real estate.
RISKS RELATED TO CONCENTRATION. The Fund may invest more than 25% of its total
assets in any sector of the real estate industry described above. The Fund's
policy of concentrating in the securities of companies in the real estate
industry and the other investment policies referenced above are fundamental
policies that cannot be changed without shareholder approval. Due to the Fund's
concentration in the real estate industry, adverse developments in that industry
will have a greater impact on the Fund, and consequently shareholders, than a
fund with broader diversification. Special considerations to an investment in
the Fund include those risks associated with the direct ownership of real
estate: declines in the value of real estate, risks related to general and local
economic conditions, over-building and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to tenants, and increases in interest rates. The value of
securities of companies which service the real estate industry may also be
affected by such risks.
In addition to the risks discussed above, equity REITs may be affected by any
changes in the value of the underlying property owned by such REITs, while
mortgage REITs may be affected by the quality of any credit extended. Equity and
mortgage REITs are dependent on the REITs' management skill, may not be
diversified, and are subject to the risks of financing projects. The Fund could
conceivably own real estate directly as a result of a default on debt
obligations it owns. Changes in prevailing interest rates also may inversely
affect the value of the debt obligations in which the Fund will invest.
The Fund's Manager believes, however, that diversification of the Fund's assets
into different types of real estate investments will help mitigate, although it
cannot eliminate, the inherent risks of such industry concentration.
REAL ESTATE RELATED INVESTMENTS. In addition to the Fund's investments in real
estate securities, as defined above, the Fund may also invest a portion of its
assets in debt obligations or equity securities of issuers engaged in businesses
whose products and services are closely related to the real estate industry, and
publicly traded on an exchange or in the over-the-counter market. Such issuers
may include manufacturers and distributors of building supplies; financial
institutions that issue or service mortgages, such as savings and loan
associations or mortgage bankers; and companies whose principal business is
unrelated to the real estate industry but who have significant real estate
holdings (at least 50% of their respective assets) believed to be undervalued
relative to the price of those companies' securities.
CREDIT QUALITY. As an operating policy, the Fund will not invest more than 10%
of its net assets in convertible debt obligations or debt obligations rated Ba
or lower by Moody's or, if unrated, deemed by the Manager to be of comparable
quality. Generally, however, the Fund will not acquire any investments rated
lower than B by Moody's or, if unrated, deemed to be of comparable quality by
the Manager. Lower rated obligations (commonly referred to as "junk bonds") are
considered by the rating agencies to have increased risks related to the
creditworthiness of their issuers. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER
RATED DEBT OBLIGATIONS" AND THE SAI.
OTHER INVESTMENT POLICIES. Under the
policies stated in "Highlighted Risk Considerations," "Common Investment Methods
and Risks," and in the SAI, the Fund may also write covered call options, loan
its portfolio securities, engage in repurchase transactions, and engage in other
activities specifically identified for this Fund.
SMALL CAP FUND
The FundOs investment objective is long-term capital growth. The Fund seeks to
accomplish its objective by investing primarily in equity securities of small
capitalization growth companies. Investments in small capitalization companies
may involve greater risks and greater volatility than investments in larger and
more established companies.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund will invest at
least 65% of its total assets in equity securities of small capitalization
growth companies ("small cap companies"). A small cap company generally has a
market capitalization of less than $1 billion at the time of the FundOs
investment and, in the opinion of the FundOs Manager, is positioned for rapid
growth in revenues, earnings or assets. Market capitalization is defined as the
total market value of a companyOs outstanding common stock. The securities of
small cap companies are traded on U.S. or foreign stock exchanges and
over-the-counter. As an operating policy the Fund will not invest more than 10%
of its assets in securities issued by companies with less than three years of
continuous operation.
The Fund seeks to invest at least one-third of its assets in equity securities
of companies with market capitalizations of $550 million or less; there is no
assurance, however, that the Fund will always be able to find suitable companies
to include in this one-third portion. The Manager will monitor the availability
of securities suitable for investment by the Fund and recommend appropriate
action to the Board of Trustees of the Trust if it appears that this goal will
not be attainable under the FundOs current objective and other policies.
Equity securities of small cap companies may consist of common stock, preferred
stock, warrants for the purchase of common stock, and convertible securities.
The Fund will not invest more than 10% of its assets in convertible securities,
which are discussed below in "Common Investment Methods and Risks, Convertible
Securities."
SELECTION OF PORTFOLIO INVESTMENTS. The Fund has been designed to provide
investors with potentially greater long-term rewards by investing in securities
of small cap companies which may offer the potential for significant capital
appreciation since they may be overlooked by investors or undervalued in
relation to their earnings power. Small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, and therefore may provide greater opportunities for long-term capital
growth as a result of relative inefficiencies in the marketplace. Such companies
may be undervalued because they are part of an industry that is out of favor
with investors, although the individual companies may have high rates of earning
growth and be financially sound. Selection of small cap company equity
securities for the Fund will be based on characteristics such as the financial
strength of the company, the expertise of management, the growth potential of
the company within its industry and the growth potential of the industry itself.
Small cap companies often pay no dividends and current income is not a factor in
the selection of stocks. The Manager uses a disciplined approach to stock
selection, blending fundamental and quantitative analysis.
RISKS ASSOCIATED WITH SMALL CAP INVESTMENTS. The Fund will primarily invest in
relatively new or unseasoned companies which are in their early stages of
development, or small cap companies positioned in new and emerging industries
where the opportunity for rapid growth is expected to be above average.
Securities of smaller or unseasoned companies present greater risks than
securities of larger, more established companies. The companies may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Small cap companies may lack depth of
management, they may be unable to internally generate funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or they may be developing or marketing new products or services
for which markets are not yet established and may never become established. Due
to these and other factors, small cap companies may suffer significant losses as
well as realize substantial growth, and investments in such companies tend to be
more volatile and are therefore speculative. Besides exhibiting greater
volatility, small cap company stocks may, to a degree, fluctuate independently
of larger company stocks. See "Common Investment Methods and Risks--Small
Capitalization Issuers".
THE FUND MAY NOT BE APPROPRIATE FOR SHORT-TERM INVESTORS, AND AN INVESTMENT IN
THE FUND SHOULD NOT BE CONSIDERED A COMPLETE INVESTMENT PROGRAM.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its total assets in
foreign securities, including those of developing markets and sponsored or
unsponsored Depository Receipts. The Fund will not invest more than 5% of its
assets in developing markets securities. The Fund's investments in foreign
securities involve risks related to currency fluctuations, market volatility,
and economic, social, and political uncertainty that are different from
investing in similar domestic securities. INVESTMENTS IN FOREIGN SECURITIES,
PARTICULARLY IN DEVELOPING MARKETS, INVOLVE SPECIAL AND ADDITIONAL RISKS. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN SECURITIES" BELOW AND IN THE SAI.
OTHER INVESTMENTS. Although the FundOs assets will be invested primarily in
equity securities of small cap companies, the Fund may invest up to 35% of its
total assets in other instruments, which may cause its performance to vary from
that of the small capitalization equity markets. The Fund may invest in equity
securities of larger capitalization companies which the Fund's Manager believes
have strong growth potential, or in equity securities of relatively well-known,
larger companies in mature industries which the Manager believes have the
potential for capital appreciation.
The Fund may also invest in debt securities which the Manager believes have the
potential for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income is incidental to the
FundOs objective of capital growth. The Fund may invest in debt securities rated
B or above by MoodyOs or S&P, or in unrated securities the Manager has
determined are of comparable quality. As an operating policy, however, the Fund
will not invest more than 5% of its assets in debt obligations (including
convertible debt securities) rated lower than BBB by S&P or Baa by Moody's or,
if unrated, determined by the Manager to be of comparable quality. Lower rated
obligations (commonly referred to as "junk bonds") are considered by the rating
agencies to have increased risks related to the creditworthiness of their
issuers.
The Fund may invest up to 10% of its assets in real estate investment trusts,
("REITs") which are described in "Real Estate Fund", above, including small
capitalization REITs.
OTHER INVESTMENT POLICIES. The Fund may write covered put and call options on
securities or financial indices. The Fund may purchase put and call options on
securities or financial indices, provided that premiums on open option positions
may not exceed 5% of the Fund's total assets. The Fund may purchase and sell
futures contracts or related options with respect to securities, indices and
currencies, provided that the sum of deposits and premiums paid on such
contracts may not exceed 5% of the Fund's total assets at current values. Under
the policies stated in "Common Investment Methods and Risks" and in the SAI, the
Fund may also invest in restricted or illiquid securities, lend portfolio
securities, borrow money, enter into repurchase or reverse repurchase
agreements, and engage in other activities specifically identified for this
Fund.
TEMPLETON DEVELOPING MARKETS EQUITY FUND
The investment objective of the Templeton Developing Markets Equity Fund is
long-term capital appreciation.
The Fund seeks to achieve this objective by investing primarily in equity
securities of issuers in countries having developing markets. It is currently
expected that under normal conditions at least 65% of the Fund's total assets
will be invested in developing market equity securities. The Fund may, from time
to time, hold significant cash positions until suitable investment opportunities
are available, consistent with its policy on temporary investments. The Fund
will at all times, except during defensive periods, maintain investments in at
least three countries having developing markets. Investments in foreign
developing markets involve heightened risks related to the small size and lesser
liquidity of these markets that are in addition to the special risks associated
with foreign investing, including currency fluctuations, market volatility, and
economic, social, and political uncertainty. INVESTORS SHOULD CONSIDER CAREFULLY
THE SUBSTANTIAL AND HEIGHTENED RISKS INVOLVED IN INVESTING IN FOREIGN DEVELOPING
MARKETS SECURITIES. AN INVESTMENT IN THE FUND MAY BE CONSIDERED SPECULATIVE. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
INVESTMENTS IN DEVELOPING MARKETS. The Fund considers countries having
developing markets to be all countries that are generally considered to be
developing or emerging countries by the International Bank for Reconstruction
and Development (more commonly referred to as the World Bank) and the
International Finance Corporation, as well as countries that are classified by
the United Nations or otherwise regarded by their authorities as developing.
Currently, the countries not included in this category are Ireland, Spain, New
Zealand, Australia, the United Kingdom, Italy, the Netherlands, Belgium,
Austria, France, Canada, Germany, Denmark, the U.S., Sweden, Finland, Norway,
Japan and Switzerland.
In addition, "developing market equity securities" for purposes of the Fund
means (i) equity securities of companies the principal securities trading market
for which is a developing market country, as defined above, (ii) equity
securities, traded in any market, of companies that derive 50% or more of their
total revenue from either goods or services produced in such developing market
countries or sales made in such developing market countries or (iii) equity
securities of companies organized under the laws of, and with a principal office
in, a developing market country. "Equity securities" refers to common stock,
preferred stock, warrants or rights to subscribe to or purchase such securities
and sponsored or unsponsored Depository Receipts such as American Depository
Receipts, European Depository Receipts, and Global Depository Receipts.
Depository Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted and they involve the
risks of other investments in foreign securities, as discussed in "HIGHLIGHTED
RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
The Fund seeks to benefit from economic and other developments in developing
markets. The investment objective of the Fund reflects the belief that
investment opportunities may result from an evolving long-term international
trend favoring more market-oriented economies, a trend that may especially
benefit certain countries having developing markets. This trend may be
facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
OTHER INVESTMENTS. For capital appreciation, the Fund may invest up to 35% of
its total assets in fixed-income debt obligations(defined as bonds, notes,
debentures, commercial paper, certificates of deposit, time deposits and
bankers' acceptances) which are rated at least C by Moody's or S&P or unrated
debt obligations deemed to be of comparable quality by the Manager. These debt
obligations entail increased risks related to the creditworthiness of their
issuers. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS." As
a current policy established by the Board, however, the Fund will not invest
more than 5% of its total assets in debt obligations rated BBB or lower by S&P
or Baa or lower by Moody's (the lowest category of "investment grade" rating).
The Board may consider a change if economic conditions change such that a higher
level of investment in high risk, lower quality debt obligations would be
consistent with the objective of the Fund.
Certain debt obligations can provide the potential for capital appreciation
based on various factors such as changes in interest rates, economic and market
conditions, improvement in an issuer's ability to repay principal and pay
interest, and ratings upgrades. Additionally, convertible bonds offer the
potential for capital appreciation through the conversion feature, which enables
the holder of the bond to benefit from increases in the market price of the
securities into which they are convertible.
DEFAULTED DEBT OBLIGATIONS. The Fund may, from time to time, purchase defaulted
debt obligations if, in the opinion of the Manager, the issuer is expected to
resume interest payments or other advantageous developments appear likely, in
the near term. Such securities may be illiquid. As a fundamental policy
changeable only by shareholder vote, the Fund will not invest more than 10% of
its total assets (at the time of purchase) in defaulted debt obligations. See
"Restricted and Illiquid Investments."
CLOSED-END INVESTMENT COMPANIES. Some countries, such as South Korea, Chile and
India, have authorized the formation of closed-end investment companies to
facilitate indirect foreign investment in their capital markets. In accordance
with the 1940 Act, the Fund may invest up to 10% of its total assets in
securities of closed-end investment companies. This restriction on investments
in securities of closed-end investment companies may limit opportunities for the
Fund to invest indirectly in certain developing markets. Shares of certain
closed-end investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares of
closed-end investment companies, shareholders would bear both their
proportionate share of expenses of the Fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
CURRENCY TECHNIQUES. The Fund will normally conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into
forward contracts to purchase or sell foreign currencies. The Fund will
generally not enter into a forward contract with a term of greater than one
year. Further, the Fund will not enter into forward contracts if, as a result,
the Fund will have more than 20% of its total assets committed to the
consummation of such contracts. See "Highlighted Risk Considerations, Foreign
Securities."
OTHER INVESTMENT POLICIES. Under the policies stated in
"Highlighted Risk Considerations", "Common Investment Methods and Risks," and
the SAI, the Fund may also loan its portfolio securities, engage in repurchase
transactions, borrow money for investment purposes, and, for hedging purposes
only, enter into transactions in options on securities, securities indices, and
foreign currencies, forward foreign currency contracts, and futures contracts
and related options, and engage in other activities specifically identified for
this Fund. The Fund may not commit more than 5% of its total assets to initial
margin deposits on futures contracts and related options, and the value of the
underlying securities on which futures contracts will be written at any one time
will not exceed 25% of the total assets of the Fund. When the Fund's Manager
believes that market conditions warrant, the Fund may adopt a temporary
defensive position and may invest without limit in Money Market Instruments
denominated in U.S. dollars or in the currency of any foreign country.
Presently, some of the above strategies cannot be used to a significant extent
by the Fund in the markets in which the Fund will principally invest.
TEMPLETON GLOBAL GROWTH FUND
The Templeton Global Growth Fund's investment objective is long-term capital
growth; any income realized will be incidental.
PRINCIPAL PORTFOLIO INVESTMENTS. The Fund seeks to achieve its objective through
a flexible policy of investing in stocks and debt obligations of companies and
governments of any nation. The Fund has the right to purchase securities in any
foreign country, developed or underdeveloped. Although the Fund generally
invests in common stock, it may also invest in preferred stocks and certain debt
obligations, rated or unrated, such as convertible bonds and bonds selling at a
discount. The Fund may, from time to time, hold significant cash positions until
suitable investment opportunities are available, consistent with its policy on
temporary investments.
The Fund's investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING
IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING
MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENTS. For capital appreciation, the Fund may invest in debt
obligations(defined as bonds, notes, debentures, commercial paper, certificates
of deposit, time deposits and bankers' acceptances) which are rated at least C
by Moody's or S&P or unrated debt obligations deemed to be of comparable quality
by the Manager. These debt obligations entail predominantly speculative risks.
SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS OBLIGATIONS"
AND "APPENDIX."
As a policy established by the Board, however, the Fund will not invest more
than 5% of its total assets in debt obligations rated BBB or lower by S&P or Baa
or lower by Moody's. The Board may consider a change if economic conditions
change such that a higher level of investment in high risk, lower quality debt
obligations would be consistent with the objective of the Fund.
These debt obligations can provide the potential for capital appreciation based
on various factors such as changes in interest rates, economic and market
conditions, improvement in an issuer's ability to repay principal and pay
interest, and ratings upgrades. Additionally, convertible bonds offer the
potential for capital appreciation through the conversion feature, which enables
the holder of the bond to benefit from increases in the market price of the
securities into which they are convertible.
DEFAULTED DEBT OBLIGATIONS. The Fund may, from time to time, purchase defaulted
debt obligations if, in the opinion of the Manager, the issuer is expected to
resume interest payments or other advantageous developments appear likely in the
near term. Such securities may be illiquid. As a fundamental policy changeable
only by shareholder vote, the Fund will not invest more than 10% of its total
assets (at the time of purchase) in defaulted debt obligations. See "Restricted
and Illiquid Investments."
CURRENCY TECHNIQUES. The Fund may, but is not required, to employ certain
currency management techniques involving risks different from those associated
with investing solely in dollar-denominated securities of U.S. issuers. The Fund
will normally conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. The Fund will generally not enter into a forward contract
with a term of greater than one year. See "Highlighted Risk Considerations,
Foreign Transactions" and the SAI.
OTHER INVESTMENT POLICIES. The Fund may purchase and sell stock index futures
contracts up to an aggregate amount not exceeding 20% of its total assets and
may not at any time commit more than 5% of its total assets to initial margin
deposits on futures contracts. In addition, in order to increase its return or
to hedge all or a portion of its portfolio investments, the Fund may purchase
and sell put and call options on securities indices. These specialized
investment techniques involve additional risks as described in "Common
Investment Methods and Risks" and the SAI.
The Fund may invest no more than 5% of its total assets in securities issued by
any one company or government, exclusive of U.S. Government Securities. The Fund
may not invest more than 5% of its assets in warrants (exclusive of warrants
acquired in units or attached to securities) nor more than 10% of its assets in
securities with a limited trading market, i.e., "illiquid securities." Under the
policies stated in "Common Investment Methods and Risks," and in the SAI, the
Fund may also enter into repurchase agreements, lend its portfolio securities,
and engage in other activities specifically identified for this Fund. The
investment objective and policies described above (except as noted), as well as
most of the investment restrictions described in the SAI cannot be changed
without shareholder approval.
TEMPLETON INTERNATIONAL EQUITY FUND
The investment objective of the Templeton International Equity Fund is to seek
long-term growth of capital.
PRINCIPAL PORTFOLIO INVESTMENTS. Under normal conditions, the Fund will invest
at least 65% of its total assets in an internationally diversified portfolio of
equity securities consisting of common and preferred stock, securities (bonds or
preferred stock) convertible into common stock, warrants and securities
representing underlying international securities such as ADRs and EDRs ("Equity
Securities"). Such Equity Securities purchased by the Fund will trade on markets
in countries other than the U.S. and which are issued by companies (i) domiciled
in countries other than the U.S., or (ii) that derive at least 50% of either
their revenues or pre-tax income from activities outside of the U.S. Thus it is
possible, although not anticipated, that up to 35% of the Fund's assets could be
invested in U.S.
companies.
In selecting portfolio securities, the Fund attempts to take advantage of the
difference between economic trends and the anticipated performance of securities
and securities markets in various countries. The Fund may, from time to time,
hold significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments. The Fund's
investments in foreign securities involve risks related to currency
fluctuations, market volatility, and economic, social, and political uncertainty
that are different from investing in similar obligations of domestic entities.
INVESTORS SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING
IN FOREIGN SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING
MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENTS. Up to 35% of the Fund's total assets may be invested in debt
obligations of which up to 5% may be debt obligations rated Ba or lower by
Moody's or BB or lower by S&P or that are not rated but determined by the
Manager to be of comparable quality. These debt obligations entail predominantly
speculative risks. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS OBLIGATIONS" AND "APPENDIX." The balance may be invested in debt
obligations rated Baa or better by Moody's, or BBB or better by S&P or that are
not rated but determined by the Manager to be of comparable quality.
The Fund may seek capital appreciation by investing in such debt obligations
which would occur through changes in relative foreign currency exchange rates,
changes in relative interest rates or improvement in the creditworthiness of an
issuer. These debt obligations may consist of U.S. and foreign government
securities and corporate debt obligations, including Yankee bonds, Eurobonds,
and Depository Receipts. See "Common Investment Methods and Risks."
COUNTRIES OF PRINCIPAL INVESTMENT. Normally, the Fund will invest at least 65%
of its total assets in securities traded in at least three foreign countries,
including the countries listed below. The Fund may invest in securities of
issuers in, but not limited to, the following countries: Argentina, Australia,
Austria, Belgium, Bermuda, Brazil, Canada, Chile, Colombia, Denmark, Finland,
France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Israel, Italy,
Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand,
Norway, Philippines, Portugal, Singapore, Spain, Sri Lanka, Sweden, Switzerland,
Taiwan, Thailand, Turkey, the United Kingdom, and Uruguay.
OTHER INVESTMENT POLICIES. While the Fund reserves the right to invest up to 10%
of its net assets in illiquid securities, it is the current policy of the Fund
to limit any such investments to 5% of the Fund's net assets. The Fund may
invest up to 10% of its net assets in warrants, including such warrants that are
not listed on an exchange. Under the policies stated in "Common Investment
Methods and Risks" and in the SAI, the Fund may also write covered call and put
purchase options on securities, buy puts and write calls in "forward conversion"
transactions, engage in "spread" and "straddle" transactions, purchase and write
call and put options on stock indices, enter into contracts for the purchase or
sale for future delivery of U.S. Treasury or foreign securities or futures
contracts based upon financial indices, and purchase and sell interest rate
futures contracts and related options, and purchase and sell stock index futures
contracts and related options, lend its portfolio securities, engage in
repurchase agreements, and in other activities specifically identified for this
Fund.
TEMPLETON PACIFIC GROWTH FUND
The Templeton Pacific Growth Fund seeks to provide long-term growth of capital.
Under normal conditions, the Fund will invest at least 65% of its total assets
in Equity Securities as defined in the International Fund discussion above which
trade on markets in the Pacific Rim, including developing markets and which are
(i) issued by companies domiciled in the Pacific Rim or (ii) issued by companies
that derive at least 50% of either their revenues or pre-tax income from
activities in the Pacific Rim. For purposes of the Fund's 65% investment policy,
the countries in the Pacific Rim are Australia, Hong Kong, Indonesia, Japan,
Korea, Malaysia, New Zealand, Singapore and Thailand. Normally, the Fund will
invest at least 65% of its total assets in securities traded in at least three
foreign countries, including the countries listed herein. The Fund may, from
time to time, hold significant cash positions until suitable investment
opportunities are available, consistent with its policy on temporary
investments.
The correlation among the Singapore, Malaysia, Thailand, and Hong Kong markets
is very high. Because these markets comprise such a substantial portion of the
Fund's portfolio, the Fund has less geographical diversification than a
broad-based international fund and thus its volatility is higher. INVESTORS
SHOULD CONSIDER CAREFULLY THE SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN
SECURITIES, RISKS THAT ARE HEIGHTENED FOR INVESTMENTS IN DEVELOPING MARKETS. AN
INVESTMENT IN THE FUND MAY BE CONSIDERED SPECULATIVE. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENTS. The Fund may invest up to 35% of its assets in the securities
of issuers domiciled outside of the Pacific Rim. The investments may consist of,
for example (i) securities of issuers in countries that are not located in the
Pacific Rim but are linked by tradition, economic markets, cultural similarities
or geography to the countries in the Pacific Rim; and (ii) securities of issuers
located elsewhere in the world which have operations in the Pacific Rim or which
stand to benefit from political and economic events in the Pacific Rim. For
example, the Fund may invest in a company outside of the Pacific Rim when the
Managers believe at the time of investment that the value of the company's
securities may be enhanced by conditions or developments in the Pacific Rim even
though the company's production facilities are located outside of the Pacific
Rim.
Up to 35% of the Fund's total assets may be invested in investment grade debt
obligations rated Baa or better by Moody's, or BBB or better by S&P or, if
unrated, determined by the Manager to be of comparable quality.
The Fund may seek capital appreciation by investing in such debt obligations
which would occur through changes in relative foreign currency exchange rates,
changes in relative interest rates or improvement in the creditworthiness of an
issuer. These debt obligations may consist of U.S. and foreign government
securities and corporate debt obligations, including Yankee bonds, Eurobonds,
and Depository Receipts. The issuers of such debt obligations may or may not be
domiciled in the Pacific Rim. See "Common Investment Methods and Risks."
OTHER INVESTMENT POLICIES. While the Fund reserves the right to invest up to 10%
of its net assets in illiquid securities, it is the current policy of the Fund
to limit any such investments to 5% of the Fund's net assets. The Fund may
invest up to 10% of its net assets in warrants, including such warrants that are
not listed on an exchange. Under the policies stated in "Common Investment
Methods and Risks" and in the SAI, the Fund may also write covered call and put
purchase options on securities, buy puts and write calls in "forward conversion"
transactions, engage in "spread" and "straddle" transactions, purchase and write
call and put options on stock indices, enter into contracts for the purchase or
sale for future delivery of U.S. Treasury or foreign securities or futures
contracts based upon financial indices, purchase and sell interest rate futures
contracts and related options, purchase and sell stock index futures contracts
and related options, lend its portfolio securities, engage in repurchase
agreements, and engage in other activities specifically identified for this
Fund.
HIGHLIGHTED RISK CONSIDERATIONS
FOREIGN TRANSACTIONS
Investments in the securities of companies organized outside the U.S. or of
companies whose securities are principally traded outside the U.S. ("foreign
issuers") or investments in securities denominated or quoted in foreign currency
("non-dollar securities") may offer potential benefits not available from
investments solely in securities of domestic issuers or dollar denominated
securities. Such benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the Managers, to offer better opportunity
for long-term capital appreciation or current earnings than investments in
domestic issuers, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the U.S. and the opportunity
to reduce fluctuations in portfolio value by taking advantage of foreign
securities markets that do not necessarily move in a manner parallel to U.S.
markets.
GENERAL CONSIDERATIONS. Investing in non-dollar securities or in the securities
of foreign issuers involves significant risks that are not typically associated
with investing in U.S. dollar denominated securities or in securities of
domestic issuers. These risks, which may involve possible losses, include
political, social or economic instability in the country of the issuer, the
difficulty of predicting international trade patterns, the possibility of the
imposition of exchange controls, expropriation, limits on removal of currency or
other assets, foreign investment controls on daily stock market movements,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Changes of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations or currency convertibility or exchange rates could result in
investment losses for a Fund. In addition, there may be less publicly available
information about a foreign company than about a U.S. domiciled company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. domestic
companies. Further, the Fund may encounter difficulties or be unable to pursue
legal remedies and obtain judgments in foreign courts. The Fund may also
encounter difficulties or be unable to vote proxies, exercise shareholder
rights, pursue legal remedies and obtain judgments in foreign courts. There is
generally less government supervision and regulation of business and industry
practices, securities exchanges, brokers and listed companies abroad than in the
U.S. This is especially true in developing markets. There is an increased risk,
therefore, of uninsured loss due to lost, stolen, or counterfeit stock
certificates. Confiscatory taxation or diplomatic developments could also affect
investment in those countries.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and types of foreign
investments. Investments may be in securities of foreign issuers located in both
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Foreign securities may be subject to greater fluctuations in price than U.S.
Corporate Obligations or U.S. Government Securities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. Under certain market conditions, these
investments may be less liquid than U.S. Corporate Obligations and are certainly
less liquid than U.S. Government Securities. Finally, in the event of a default
of any such foreign debt obligations, it may be more difficult for a Fund to
obtain or to enforce a judgment against the issuers of such securities.
Securities which are acquired by a Fund outside the U.S. and which are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered to be an illiquid asset so long as the Fund
acquires and holds the security with the intention of reselling the security in
the foreign trading market, the Fund reasonably believes it can readily dispose
of the security for cash in the U.S. or foreign market, and current market
quotations are readily available.
While the Funds which may acquire Foreign Securities intend to acquire
securities of foreign issuers only where there are public trading markets for
such securities (with the exception of the illiquid securities which may be
purchased consistent with a Fund's investment objectives and policies), such
investments, nevertheless, may tend to reduce the liquidity of the Funds'
investment securities due to internal problems in such foreign countries or to
deteriorating relations between the U.S. and such countries.
Transaction costs on foreign securities exchanges may be higher than in the
U.S., and foreign securities settlements may, in some instances, be subject to
delays and related administrative uncertainties. The operating expense ratio of
a Fund with a significant non-U.S. portfolio can be expected to be higher than
those of Funds investing exclusively in domestic securities because of its
additional expenses, such as custodial costs, valuation costs and communication
costs, although they are expected to be similar to expenses of other investment
companies investing in a mix of U.S. securities and securities of one or more
foreign countries.
Brokerage commissions, custodial services, and other costs relating to
investment in developing markets are generally higher than in the U.S. Such
markets have different clearance and settlement procedures and in certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. The inability of a Fund to make intended security purchases due to
settlement problems could cause a Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
INVESTMENTS IN DEVELOPING MARKETS. These countries are located in the
Asia-Pacific region, Eastern Europe, Central and South America and Africa.
Countries considered to have developing markets are all countries that are
generally considered to be developing or emerging countries by the International
Bank for Reconstruction and Development (more commonly referred to as the World
Bank) and the International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their authorities as
developing. Currently, the countries not included in this category are Ireland,
Spain, New Zealand, Australia, the United Kingdom, Italy, the Netherlands,
Belgium, Austria, France, Canada, Germany, Denmark, the U.S., Sweden, Finland,
Norway, Japan and Switzerland.
The Funds investing in developing markets seek to benefit from economic and
other developments in developing markets. Such investments reflect the Managers'
belief that investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain countries having developing markets. This trend may
be facilitated by local or international political, economic or financial
developments that could benefit the capital markets of such countries. Certain
such countries, particularly the emerging market countries which may be in the
process of developing more market-oriented economies, may experience relatively
high rates of economic growth. Other countries, although having relatively
mature developing markets, may also be in a position to benefit from local or
international developments encouraging greater market orientation and
diminishing governmental intervention in economic affairs.
Investments in developing or emerging markets are subject to all of the risks of
foreign investing generally but have additional and heightened risks related to
the small size and lesser liquidity of these markets, making investments in such
markets particularly volatile. While short-term volatility can be disconcerting,
investors should understand that declines of as much as 40% to 50% are not
unusual in emerging markets. For investors comfortable with this level of risk,
developing markets can offer the potential for high return. For example, the
Hong Kong market has increased nine-fold, or 900%, in the last 14 years but has
suffered eight declines of 20% or more during that time, including two declines
of 40% or more.
Among the special risks associated with investment in developing or emerging
markets are political or economic uncertainty. Political and economic structures
in many of these countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Certain of these countries
may have in the past failed to recognize private property rights and have at
times nationalized or expropriated the assets of private companies. As a result,
the risks of foreign investment generally, including the risks of
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the values of the
Fund's investments in those countries and the availability to a Fund of
additional investments in those countries.
The small size and inexperience of the securities markets in certain of these
countries and the limited volume of trading in securities in those countries may
also make the Fund's investments in such countries less illiquid and more
volatile than investments in Japan or most Western European countries, and these
Funds may be required to establish special custody or other arrangements before
making certain investments in those countries. There may be little financial or
accounting information available with respect to issuers located in certain of
such countries, and it may be difficult as a result to assess the value or
prospects of an investment in such issuers. The laws of some foreign countries
may limit the ability of these Funds to invest in securities of certain issuers
located in those countries.
Prior governmental approval of foreign investments may be required under certain
circumstances in some developing countries, and the extent of foreign investment
in domestic companies may be subject to limitation in other developing
countries. Foreign ownership limitations also may be imposed by the charters of
individual companies in developing countries to prevent, among other concerns,
violation of foreign investment limitations. Repatriation of investment income,
capital and proceeds of sales by foreign investors may require governmental
registration and/or approval in some developing countries. The Fund could be
adversely affected by delays in or a refusal to grant any required governmental
registration or approval for such repatriation. Further, the economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be adversely
affected by economic conditions in the countries with which they trade.
CERTAIN RESTRICTIONS. THE ADJUSTABLE FUND, GOVERNMENT FUND, GROWTH AND INCOME
FUND, HIGH INCOME FUND, REAL ESTATE FUND, RISING DIVIDENDS FUND AND ZERO COUPON
FUNDS PRESENTLY INTEND TO INVEST NO MORE THAN 10% OF THEIR NET ASSETS IN FOREIGN
SECURITIES NOT PUBLICLY TRADED IN THE U.S.
Some of the countries in which the Funds invest may not permit direct
investment. Investments in such countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve frequent or layered fees or expenses and may, as well, be subject to
limitations under the 1940 Act. Under the 1940 Act, each Fund may invest up to
10% of its assets in shares of other investment companies and up to 5% of its
assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
While the Pacific and International Funds, to the extent consistent with their
investment objectives and policies, reserve the right to invest more than 25% of
their respective assets in the securities of issuers in one or more countries,
they currently will not do so while one state's foreign diversification
requirements would preclude them from doing so. Investors should consider the
greater risk of such policy versus the safety that comes with an investment that
does not involve potential geographic concentration and should compare these
Funds with other investment vehicles before making an investment decision.
There may be other applicable policies or restrictions on a Fund's investments
in foreign securities. See "Currency Risks and Their Management," "Investment
Objectives and Policies," "Common Investment Methods and Risks" and the SAI.
CURRENCY RISKS AND THEIR MANAGEMENT. The relative performance of foreign
currencies in which securities held by a Fund are denominated is an important
factor in each Fund's overall performance. The Managers intend to manage a
Fund's exposure to various currencies to take advantage of different yield,
risk, and return characteristics that different currencies, currency
denominations, and countries can provide for U.S. investors. UNLESS
OTHERWISE INDICATED IN THE SPECIFIC FUND DESCRIPTION, THE MANAGERS GENERALLY DO
NOT ACTIVELY HEDGE CURRENCY POSITIONS WITH RESPECT TO EQUITY SECURITIES,
BELIEVING THAT THE COSTS OUTWEIGH THE POTENTIAL BENEFITS. THE MANAGERS MAY,
HOWEVER, HEDGE WHERE THEY BELIEVE IT WOULD BE APPROPRIATE. To hedge exposure to
currency fluctuations or to increase income to a Fund, each of the Funds which
may invest in Foreign Securities may, but is not required to, enter into forward
foreign currency exchange contracts, currency futures contracts, and options on
such futures contracts, as well as purchase put or call options and write
covered put and call options on currencies traded in U.S. or foreign markets.
Other currency management strategies allow the Managers to hedge portfolio
securities, to shift investment exposure from one currency to another, or to
attempt to profit from anticipated declines in the value of a foreign currency
relative to the U.S. dollar. Some of these strategies will require a Fund to set
aside liquid assets in a segregated custodial account to cover its obligations.
THERE IS NO ASSURANCE THAT THE MANAGERS' HEDGING STRATEGIES WILL BE SUCCESSFUL.
If a security is denominated in foreign currency, the value of the security to a
Fund will be affected by changes in currency exchange rates and in exchange
control regulations, and costs will be incurred in connection with conversions
between currencies. A change in the value of any foreign currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of a
Fund's securities denominated in that currency. Such changes will also affect a
Fund's income and distributions to shareholders. In addition, although the Fund
will receive income on foreign securities in such currencies, the Fund will be
required to compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for any such currency declines materially after a Fund's income
has been accrued and translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a Fund incurs expenses in U.S. dollars
and the time such expenses are paid, the amount of such currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater.
A Fund will use forward currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities denominated in foreign currencies. A forward currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks). A currency futures contract is a
standardized contract for the future delivery of a specified amount of currency
at a future date at a price set at the time of the contract. A Fund may enter
into currency futures contracts traded on regulated commodity exchanges,
including non-U.S. exchanges.
A Fund will normally conduct its foreign currency exchange transactions either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. A Fund will generally not enter into a forward contract with
a term of greater than one year. Some price spread on currency exchange
transactions (to cover service charges) will be incurred when the Fund converts
assets from one currency to another. A Fund may either accept or make delivery
of the currency specified at the maturity of a forward or futures contract or,
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts and options thereon are effected on the exchange on which the contract
was entered into (or on a linked exchange).
A Fund will not enter into such forward currency exchange contracts or currency
futures contracts or purchase or write such options or maintain a net exposure
to such contracts where the completion of the contracts would obligate the Fund
to deliver an amount of currency other than U.S. dollars in excess of the value
of the Fund's portfolio securities or other assets denominated in that currency
or, in the case of cross-hedging, in a currency closely correlated to that
currency.
A Fund will generally enter into forward contracts only under two circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security in relation to another currency by entering into a
forward contract to buy the amount of foreign currency needed to settle the
transaction. Second, when the Managers believe that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, the Fund may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. This second investment practice is
generally referred to as "cross-hedging." Although forward contracts will be
used primarily to protect the Fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted.
As in the case of other kinds of options, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and a Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium plus
related transaction costs.
A liquid secondary market for any futures or options contract may not be
available when a futures or options position is sought to be closed. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is based
and movements in the securities or currency in the Fund's portfolio. Successful
use of futures or options contracts is further dependent on the Managers'
ability to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct.
Successful use of options on securities or stock indices is subject to similar
risk considerations. In addition, by writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price. See
"Common Investment Methods and Risks" for additional information.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate payments.
Currency swaps involve the exchange of their respective rights to make or
receive payments in specified currencies. Since interest rate and currency swaps
are individually negotiated, these Funds expect to achieve an acceptable degree
of correlation between their portfolio investments and their interest rate or
currency swap positions.
A 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.
The use of interest rate and currency swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Managers are incorrect
in their forecasts of market values, interest rates and currency exchange rates,
the investment performance of the Fund would be less favorable than it would
have been if this investment technique were not used.
INVESTMENTS IN DEPOSITORY RECEIPTS. Many securities of foreign issuers are
represented by American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs"), and Global Depository Receipts ("GDRs") (collectively
"Depository 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 United States corporation. Generally, Depository Receipts
in registered form are designed for use in the U.S. securities market and
Depository Receipts in bearer form are designed for use in securities markets
outside the United States.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the United
States 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, a Fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there is
a large, liquid market in the United States 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 domestic
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.
Depository 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 Depository Receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs and there may not be a correlation
between such information and the market value of the Depository Receipts.
Depository Receipts do not eliminate all the risk inherent in investing in the
securities of foreign issuers. To the extent that a Fund acquires Depository
Receipts through banks which do not have a contractual relationship with the
foreign issuer of the security underlying the Depository Receipt to issue and
service such Depository Receipts, there may be an increased possibility that the
Fund would not become aware of and be able to respond to corporate actions such
as stock splits or rights offerings involving the foreign issuer in a timely
manner. For purposes of each Fund's investment policies, a Fund's investments in
Depository Receipts will be deemed to be investments in the underlying
securities.
LOWER RATED DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower rated or unrated obligations are more likely to
react to developments affecting market and credit risk than are more highly
rated obligations, which react primarily to movements in the general level of
interest rates. The Managers consider both credit risk and market risk in making
investment decisions as to corporate debt obligations for a Fund.
Debt obligations rated BB or below by S&P or Ba or below by Moody's (or
comparable unrated obligations), commonly called "junk bonds," are considered by
S&P and Moody's, on balance, speculative and payments of principal and interest
thereon may be questionable. They will generally involve more credit risk than
obligations in the higher rating categories. The market values of such
securities tend to reflect individual corporate developments to a greater extent
than do higher rated obligations, which react primarily to fluctuations in the
general level of interest rates. Such lower rated obligations also tend to be
more sensitive to economic conditions than higher rated securities. Even
obligations rated BBB or Baa by S&P and Moody's, ratings which are considered
investment grade, possess some speculative characteristics.
Companies that issue high yielding, debt obligations are often highly leveraged
and may not have more traditional methods of financing available to them.
Therefore, the risk associated with acquiring the obligations of such issuers is
generally greater than is the case with higher rated obligations. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of high yielding obligations may experience financial
stress. During such periods, such issuers may not have sufficient earnings to
meet their interest payment obligations. The issuer's ability to service its
debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding obligations because such obligations are generally unsecured and are
often subordinated to other creditors of the issuer. The current economic
downturn has disrupted the market for many high yield bonds and adversely
affected the value of such outstanding bonds and the ability of certain issuers
of such bonds to repay principal and interest.
High yielding, debt obligations frequently have call or buy-back features which
would permit an issuer to call or repurchase the obligations from a Fund.
Although such obligations are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called obligation with lower yielding obligation, thus decreasing the net
investment income to the Fund and dividends shareholders.
A Fund may have difficulty disposing of certain high yielding obligations
because there may be a thin trading market for a particular obligation at any
given time. The market for lower rated debt obligations generally tends to be
concentrated among a smaller number of dealers than is the case for obligations
which trade in a broader secondary retail market. Generally, purchasers of these
obligations are predominantly dealers and other institutional buyers, rather
than individuals. To the extent a secondary trading market for high yielding,
debt obligations does exist, it is generally not as liquid as the secondary
market for higher rated obligations. Reduced liquidity in the secondary market
may have an adverse impact on market price and the Fund's ability to dispose of
particular issues, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of the issuer. Reduced liquidity in the secondary market for
certain obligations 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. Current value for these high yield issues are obtained from pricing
services and/or a limited number of dealers and may be based upon factors other
than actual sales. See "Determination of Net Asset Value."
Funds that acquire high yielding, debt obligations may acquire such obligations
sold without registration under the federal securities laws and that therefore
carry restrictions on resale. While many recent high yielding obligations have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if a Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities, as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
Funds that may acquire high yielding, debt obligations may do so during an
initial underwriting. Such obligations involve special risks because they are
new issues. Those Funds have no arrangement with their underwriters or any other
person concerning the acquisition of such obligations, and the Manager will
carefully review the credit and other characteristics pertinent to such new
issues.
Factors adversely impacting the market value of high yielding obligations will
adversely impact the Funds' net asset values. For example, adverse publicity
regarding lower-rated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the prices for many such
obligations. In addition, a Fund may incur additional expenses to the extent it
is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holding. A Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
Investments may also be evaluated in the context of economic and political
conditions in the issuer's domicile, such as the inflation rate, growth
prospects, global trade patterns and government policies. In the event the
rating on an issue held in a Fund's portfolio is changed by the ratings service,
such change will be considered by the Fund in its evaluation of the overall
investment merits of that security but will not necessarily result in an
automatic sale of the security.
Certain Funds, consistent with their investment objectives and policies may
purchase debt obligations of issuers not currently paying interest as well as
issuers who are in default. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and a Fund may have unrealized
losses on such defaulted obligations which are reflected in the price of the
Fund's shares. In general, debt obligations which default lose much of their
value in the time period prior to the actual default so that the Fund's net
assets are impacted prior to the default. A Fund may retain an issue which has
defaulted because such issue may present an opportunity for subsequent price
recovery.
A Fund may be required under the Internal Revenue Code of 1986, as amended (the
"Code"), to accrue income for tax purposes on defaulted obligations, even though
it is not currently receiving interest or principal payments on such
obligations. This income must be "distributed" to the insurance company
shareholders each year, whether or not such distributions are paid in cash. To
the extent such distributions are paid in cash, a Fund may be required to
dispose of portfolio securities that it otherwise would have continued to hold
or to use cash flows from other sources such as sales of Fund shares.
THE FUNDS' PORTFOLIOS. BECAUSE OF CERTAIN OF THE FUNDS' POLICIES OF INVESTING IN
HIGHER YIELDING, HIGHER RISK DEBT OBLIGATIONS, AN INVESTMENT IN SUCH A FUND IS
ACCOMPANIED BY A HIGHER DEGREE OF RISK THAN IS PRESENT WITH AN INVESTMENT IN A
FUND THAT INVESTS IN HIGHER RATED, LOWER YIELDING DEBT OBLIGATIONS. ACCORDINGLY,
AN INVESTMENT IN ANY SUCH FUND SHOULD BE CAREFULLY EVALUATED FOR ITS
APPROPRIATENESS IN LIGHT OF THE INVESTOR'S OVERALL INVESTMENT NEEDS AND GOALS.
Persons on fixed incomes, such as retired persons, should also consider the
increased risk of loss of principal which is present with an investment in
higher risk obligations.
As of December 31, 1994, with the exception of the High Income Fund, the Income
Securities Fund, and the Global Income Fund which held 86.73%, 27.33%, 12.54%,
respectively, of their net assets in debt obligations rated below investment
grade by one or more rating agencies or determined by the Manager to be of
comparable credit quality, no other Fund held more than 5% of its assets in such
securities. At December 31, 1994, none of the funds held any such obligations
which were in default on their contractual provisions. See the Appendix for a
description of the ratings issued by investment rating services.
ASSET COMPOSITION TABLE. A credit rating by an NRSRO evaluates only the safety
of principal and interest of the debt obligation, including convertible bonds,
and does not consider the market value risk associated with an investment in
such an obligation. The table below shows the percentage invested in each of the
specific rating categories by an NRSRO and those that are not rated by the
NRSROs but deemed by the Manager to be of comparable credit quality. The
information was prepared based on a dollar weighted average of the Fund's
portfolio composition based on month-end assets for each of the 12 months in the
fiscal year ended December 31, 1994.
High Income
Income Securities
MOODY'S FUND FUND
AAA 10.31%
Aa1 2.27%
Aa2 0.00%
Aa3 0.00%
A1 0.00%
A2 0.00%
A3 0.01%
Baa1 0.18%
Baa2 1.68% 0.41%
Baa3 2.85% 6.61%
Ba1 1.99% 0.04%
Ba2 5.06% 1.43%
Ba3 9.03% 1.46%
B1 18.64% 4.62%
B2 29.01% 8.67%
B3 18.88% 7.53%
Caa* 4.12% 4.03%
Ca 0.20%
*Securities which are unrated by an NRSRO have been included in the Caa rating
category.
S&P GLOBAL INCOME FUND
--- ------------------
AAA 21.68%
AA 35.60%
A 9.02%
BBB 2.46%
BB (rated) 6.18%
BB (unrated) 0.39%
B (rated) 5.11%
B (unrated) 0.86%
IT SHOULD BE NOTED THAT THE ABOVE RATINGS ARE NOT NECESSARILY INDICATIVE OF
RATINGS OF BONDS AT THE TIME OF PURCHASE.
COMMON INVESTMENT METHODS AND RISKS
Certain types of investments and investment techniques authorized for more that
one fund, as stated in the descriptions of the individual Funds, are described
below and in the SAI in greater detail. ALL POLICIES AND PERCENTAGE LIMITATIONS
ARE CONSIDERED AT THE TIME OF PURCHASE. Each of the Funds will not necessarily
use the strategies described to the full extent permitted unless the Managers
believe that doing so will help a Fund reach its objectives, and not all
instruments or strategies will be used at all times. See "Table of Contents" in
front for complete listing and page numbers.
BORROWING
As a matter of fundamental policy, all of the Funds except the Asset Allocation,
Developing Markets and Small Cap Funds, may borrow money up to 5% of the value
of their respective total assets and no such borrowing may be for direct
investment in securities. The Funds may also borrow from banks for temporary or
short-term purposes. The Funds currently define temporary or short-term purposes
to include: (i) short-term (i.e., no longer than five business days) credits for
clearance of portfolio transactions; (ii) borrowing in order to meet redemption
requests or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets; and (iii)
borrowing in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets
in the near term. As a fundamental policy, the Asset Allocation, Developing
Markets and Small Cap Funds may borrow up to 33 1U3% of the value of their
respective total net assets from banks to increase their holdings of portfolio
securities or for temporary purposes.
Under the 1940 Act, the Fund is required to maintain continuous asset coverage
of 300% with respect to such borrowings and to sell (within three days)
sufficient portfolio holdings to restore such coverage if it should decline to
less than 300% due to market fluctuations or otherwise, even if such
liquidations of the Fund's holdings may be disadvantageous from an investment
standpoint. Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Fund's net asset
value, and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income received from the securities purchased
with borrowed funds. A Fund will not purchase additional securities while its
borrowings exceed the above percentage of its total assets.
In addition to the above, to the extent a Fund's policy is less restrictive,
those Funds will nevertheless comply with a certain state's staff guidelines
which currently limit a Fund's borrowing to no more than 10% of net asset value
when borrowing for any general purpose and 25% of net asset value when borrowing
as a temporary measure or for short-term purposes.
CONCENTRATION
The Adjustable Fund, Asset Allocation Fund, Developing Markets Fund, Global
Growth Fund, Government Fund, Growth and Income Fund, High Income Fund, Income
Securities Fund, Intermediate Bond Fund, International Fund, Money Fund, Pacific
Fund, Rising Dividends Fund, Small Cap Fund, and Zero Coupon Funds 1995, 2000,
2005, 2010 will not invest more than 25% of the value of their respective total
assets in any one particular industry (excluding the U.S. government). The other
Funds will concentrate in a particular industry or U.S. government securities,
as indicated in the separate discussions above for each respective Fund.
CONVERTIBLE SECURITIES
CONVERTIBLE SECURITIES. With the exception of the Money Fund, Zero Coupon Funds
and Government Fund, all Funds may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock which
may be converted within a specified period of time into a certain quantity of
the common stock of the same or different issuer. A convertible security may
also be subject to redemption by the issuer but only after a particular date and
under certain circumstances established upon issue. Convertible securities
provide a fixed-income stream and the opportunity, through their conversion
feature, to participate in the capital appreciation resulting from a market
price advance in the convertible security's underlying common stock. Holders of
a convertible security will have recourse only to the issuer of the security
which will be either an operating company or an investment bank.
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. The price of a convertible security is also influenced by
the market value of the security's underlying common stock and tends to increase
as the market value of the underlying stock rises, whereas it tends to decrease
as the market value of the underlying stock declines. When issued by a company
other than an investment bank, a convertible security tends to be senior to
common stock, but at the same time is often subordinate to other types of fixed
income securities issued by its respective company. Operating company issued
convertible securities are typically convertible into common stock through the
company issuing new common stock to the holder of the security. However in the
instance that the security is called by the issuer and the parity price of the
convertible security is less than the call price, the operating company will
often pay cash out instead of common stock. If the security is issued by an
investment bank, the security is an obligation of and is also convertible
through such investment bank. Because it has features of both common stock and a
straight fixed income security, a convertible security's value can be
influenced, as mentioned, by both interest rate and market movements.
Consequently, convertible securities often are not influenced by a change in
interest rates as much as a similar straight fixed income security or a change
in share price as drastically as the respective common stock. This is because
rather than a convertible security's value largely being determined by just
interest rates or share price, it is often determined by a combination of the
two.
The convertible debt obligations in which a Fund may invest are subject to the
same rating criteria as that Fund's investments in debt obligations. However
unlike convertible debt obligations, convertible preferred stocks are equity
securities. Like common stocks, preferred stocks are 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. Like common stocks, preferred stocks generally have
no maturity date, so that their market value is dependent on the issuer's
business prospects for an indefinite period of time. Finally, preferred stock
dividends are dividends, rather than interest payments, and are treated as such
for corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for each Fund's financial reporting, credit rating,
and investment limitation purposes.
ENHANCED CONVERTIBLE SECURITIES. The Fund may invest in convertible preferred
stocks that offer enhanced yield features, such as Preferred Equity Redemption
Cumulative Stock ("PERCS"), which provide an investor, such as the Fund, with
the opportunity to earn higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally features 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, if after three years the issuer's common stock is trading
at a price below that set by the capital appreciation limit, each PERCS would
convert to one share of common stock. If, however, the issuer's common stock is
trading at a price above that set by the capital appreciation limit, the holder
of the PERCS would receive less than one full share of common stock. The amount
of that fractional share of common stock received by the PERCS holder is
determined by dividing the price set by the capital appreciation limit of the
PERCS 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. However if
called early 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 of the PERCS.
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
company issued convertible preferred stock, 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, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will 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 or by a different issuer, e.g., an investment bank company.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not named here which are also similar to those described in which a
Fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
SYNTHETIC CONVERTIBLES. The Asset Allocation Fund, International Fund, and the
Pacific Fund may each invest a portion of its assets in "synthetic convertible"
securities. A synthetic convertible is created by combining distinct securities
which together possess the two principle characteristics of a true convertible
security, i.e., fixed income and the right to acquire the underlying equity
security. This combination is achieved by investing in nonconvertible
fixed-income securities and in warrants or stock or stock index call options
which grant the holder the right to purchase a specified quantity of securities
within a specified period of time at a specified price or to receive cash in the
case of stock index options. Synthetic convertible securities are generally not
considered to be "Equity Securities" for purposes of each Fund's investment
policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the Managers expect
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the Fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when the Managers determine that such a
combination would better promote a Fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
DEBT OBLIGATIONS
Debt obligations are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and may also be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). The Managers consider both credit risk and market risk
in making investment decisions as to corporate debt obligations for a Fund. Debt
obligations in which the Funds may invest will tend to decrease in value when
prevailing interest rates rise and increase in value when prevailing interest
rates fall. Generally, long-term debt obligations are more sensitive to interest
rate fluctuations than short-term obligations. Because a Fund's investments in
debt obligations are interest rate sensitive, a Fund's performance may be
affected by the Managers' ability to anticipate and respond to fluctuations in
market interest rates. Debt obligations include U.S. Government Securities, debt
obligations of states or municipalities or state or municipal government
agencies or instrumentalities or foreign sovereign entities, U.S. or foreign
corporate debt obligations, preferred stock, zero coupon bonds and mortgage- or
asset-backed securities.
CORPORATE DEBT OBLIGATIONS. See "Highlighted Risk Considerations -
Lower Rated Corporate Debt Obligations."
MONEY MARKET INSTRUMENTS. The investments described in the Money Market Fund,
without regard to required ratings, maturity, and other criteria under rule 2a-7
of the 1940 Act governing money market funds which define them as "Eligible
Securities" for purposes of the Fund, will be referred to generally as "Money
Market Instruments" in this prospectus.
MORTGAGE-BACKED (INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS) AND ASSET-BACKED
SECURITIES. Mortgage-backed securities, including collateralized mortgage
obligations, represent direct or indirect participation in, or are
collateralized by and payable from, mortgage loans secured by real property.
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sale contracts,
installment loan contracts, leases of various types of real and personal
property, receivables from revolving credit (credit card) agreements and other
categories of receivables. Such securities are generally issued by trusts and
special purpose corporations.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity dates would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods
of declining interest rates, prepayment of loans underlying mortgage-backed and
asset-backed securities can be expected to accelerate, and thus impair a Fund's
ability to reinvest the returns of principal at comparable yields. Accordingly,
the market values of such securities will vary with changes in market interest
rates generally and in yield differentials among various kinds of U.S.
Government Securities and other mortgage-backed and asset-backed securities.
Asset-backed securities present certain additional risks that are not presented
by mortgage-backed securities because asset-backed securities generally do not
have the benefit of a security interest in collateral that is comparable to
mortgage assets. There is the possibility that, in some cases, recoveries on
repossessed collateral may not be available to support payments on these
securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which a Fund may invest.
Stripped mortgage securities are purchased and sold by institutional investors,
such as the Funds, 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 such securities. Accordingly, some
of these securities may generally be illiquid. The staff of the SEC (the
"Staff") has indicated that only government-issued IO or PO securities which 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 of
Trustees may, in the future, adopt procedures which would permit a 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 10%
of a Fund's net assets. Such 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.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving 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 on an IO 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, and a rapid rate of
principal payments may have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories, AAA or Aaa, by S&P or Moody's, respectively.
MUNICIPAL SECURITIES. Municipal securities are debt obligations issued by local
and state governments that provide interest income which can be either taxable
or tax exempt. Municipal securities include both municipal bonds (those
securities with maturities of five years or more) and municipal notes (those
with maturities of less than five years). Generally, municipal securities are
used to raise money for various public purposes such as constructing public
facilities and making loans to public institutions. Taxable municipal bonds are
generally issued to provide funding for privately operated facilities. Municipal
notes are issued to meet the short-term funding requirements of local, regional,
and state governments. General obligation municipal securities are secured by
the issuer's pledge of full faith, credit and taxing power. Revenue or special
tax bonds are payable from the revenues derived from a particular facility or,
in some cases, from a special excise or other tax, but not from general tax
revenue.
U.S. GOVERNMENT SECURITIES. All of the Funds may purchase U.S. Government
Securities. U.S. Government Securities are marketable fixed, floating and
variable rate securities issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities. Some U.S. Government Securities,
such as U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of more than ten years) which differ only in their interest rates,
maturities and times of issuance are supported by the full faith and credit of
the U. S. Others, such as obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the full
faith and credit of the U.S. Government (such as securities of the Small
Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of the Federal Home Loan Banks), (c) the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as FNMA securities), or (d) only the credit of the issuer. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government agencies, authorities or instrumentalities in the future.
U.S. Government Securities may also include zero coupon bonds and Government
National Mortgage Association ("GNMA") mortgage-backed certificates. The yields
provided by GNMAs have historically exceeded the yields on other types of U.S.
Government Securities with comparable maturities. Unpredictable prepayments of
principal, however, can greatly change realized yields. In a period of declining
interest rates, it is more likely that mortgages contained in GMNA pools will be
prepaid thus reducing the effective yield.
Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities are considered to include (i)
securities for which the payment of principal and interest is backed by a
guarantee of, or an irrevocable letter of credit issued by, the U.S. Government,
its agencies, authorities or instrumentalities and (ii) participation in loans
made to foreign governments or their agencies that are so guaranteed. The
secondary market for certain of these participations is limited. Such
participations may therefore be regarded as illiquid.
Each Fund may also invest in separately traded principal and interest components
of securities guaranteed or issued by the U.S. Treasury if such components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS"). See "Zero Coupon Securities" below.
ZERO COUPON SECURITIES. Zero coupon bonds are debt obligations which are issued
at a significant discount from face value. The original discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate of interest
reflecting the market rate of the security at the time of issuance. A zero
coupon security pays no interest to its holder during its life and its value
(above its cost to a Fund) consists of the difference between its face value at
maturity and its cost. While zero coupon bonds do not require the periodic
payment of interest, deferred interest bonds generally provide for a period of
delay before the regular payment of interest begins. Although this period of
delay is different for each deferred interest bond, a typical period is
approximately one-third of the bond's term to maturity. Such investments benefit
the issuer by mitigating its initial need for cash to meet debt obligations
service, but some also provide a higher rate of return to attract investors who
are willing to defer receipt of such cash. Such investments experience greater
volatility in market value due to changes in interest rates than debt
obligations which provide for regular payments of interest. A Fund will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
One particular zero coupon security a Fund may purchase is the FICO STRIP, each
of which represents an interest in securities issued by the Financing
Corporation ("FICO"), whose sole purpose is to function as a financing vehicle
for recapitalizing the Federal Savings and Loan Insurance Corporation ("FSLIC").
FICO STRIPS are not backed by the full faith and credit of the U.S. Government
but are generally treated as U.S. Government Securities by a Fund.
DERIVATIVES
As described in the individual Fund sections or the SAI, certain of the Funds
may use certain types of instruments, sometimes referred to as "derivatives."
Derivatives are used to help (a) manage risks relating to interest rates,
currency fluctuations and other market factors ("hedging"); (b) increase
liquidity; and/or (c) invest in a particular stock or bond in a more efficient
or less expensive way. Derivatives are broadly defined as financial instruments
whose performance is derived, at least in part, from the performance of an
underlying asset, such as stock prices or indices of securities, interest rates,
currency exchange rates, or commodity prices. Some, all, or the component parts
of, the following instruments might be considered derivatives or complex
securities: adjustable rate mortgage securities; adjustable rate securities;
collateralized mortgage obligations; convertible securities with enhanced yield
features such as PERCS, ACES, DECS, and PEPS; forward contracts; futures
contracts; inverse floaters and super floaters; multiclass pass-throughs,
stripped mortgage securities, and other asset-backed securities; options; real
estate mortgage investment conduits; spreads and straddles; swaps; synthetic
convertible securities; and uncovered mortgage dollar rolls. These instruments
and their risks are discussed in this section, the individual Fund sections,
and/or in the SAI.
DIVERSIFICATION
Each Fund intends to diversify its investments to meet the requirements under
Section 5 of the 1940 Act (except the Global Income Fund), under Section 851 of
the Code relating to regulated investment companies, under Section 817 of the
Code relating to the treatment of variable contracts issued by insurance
companies, and under a certain state's staff guidelines on foreign investments.
As diversified funds under the 1940 Act, each such Fund may not, with respect to
75% of its total assets, purchase the securities of any one issuer (except U.S.
Government Securities) if more than 5% of the value of the Fund's assets would
be invested in such issuer.
In order to comply with the Code's diversification requirements under Section
817, each Fund will diversify its investments such that (i) no more than 55% of
the Fund's assets is represented by any one investment; (ii) no more than 70% of
the Fund's assets is represented by any two investments; (iii) no more than 80%
of the Fund's assets is represented by any three investments; and (iv) no more
than 90% of the Fund's assets is represented by any four investments. In the
case of Funds investing in obligations of U.S. government agencies or
instrumentalities, each agency or instrumentality is treated as a separate
issuer for purposes of the above rules.
To comply with a certain state's staff guidelines, each Fund which invests in
foreign countries, as a nonfundamental policy, will follow certain
diversification guidelines with respect to the amount of net assets and the
number of foreign countries in which it may invest. Each such Fund will be
invested in a minimum of five different foreign countries if it has 80% or more
of its net assets invested in foreign countries. Each such Fund may, however,
reduce this minimum to four foreign countries if less than 80% of its net assets
are invested in foreign countries. Each Fund may further reduce the minimum to
three foreign countries if less than 60%; to two foreign countries if less than
40%; and to one foreign country if less than 20% of such Fund's net assets are
invested in issuers located in foreign countries.
No Fund will have more than 20% of its net assets invested in issuers located in
any one foreign country except that a Fund may have up to an additional 15% of
its net assets in securities of issuers located in any one of the following
countries: Australia, Canada, France, Japan, the United Kingdom and Germany.
These diversification guidelines do not apply to a Fund's investment in issuers
located in the U.S.
LOAN PARTICIPATIONS
Certain Funds may acquire loan participations in which a Fund will purchase from
a lender a portion of a larger loan which it has made to a borrower. These
instruments are typically interests in floating or variable rate senior loans to
U.S. corporations, partnerships, and other entities. Generally such loan
participations trade at par value, are sold without guarantee or recourse to the
lending institution, and are subject to the credit risks of both the borrower
and the lending institution. They may enable a Fund to acquire an interest in a
loan from a financially strong borrower which it could not do directly. Some
loan participations sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, the loan
participations may appreciate in value. Such loan participations, however, carry
substantially the same risk as that for defaulted debt obligations and may cause
loss of the entire investment. Most loan participations are illiquid and, as
such, will be included in a fund's percentage limitation for illiquid
securities.
LOANS OF PORTFOLIO SECURITIES
Consistent with procedures approved by the Board of Trustees and subject to
various conditions, the Funds may lend their portfolio securities to qualified
securities dealers or other institutional investors, provided that such loans do
not exceed 30% of the value of a Fund's total assets at the time of the most
recent loan (one-third of the Fund's assets in the case of the International,
Pacific, Asset Allocation, and Developing Markets Funds), and further provided
that the borrower deposits and maintains 100% collateral in the form of cash,
U.S. government securities, or irrevocable letters of credit for the benefit of
the Fund with the Fund's custodian. The lending of securities is a common
practice in the securities industry. A Fund will engage in security loan
arrangements with the objective of increasing the Fund's income either through
investing the cash collateral in short-term, interest bearing obligations or by
receiving loan premiums from the borrower. The Fund will continue to be entitled
to all dividends or interest on any loaned securities. If the borrower defaults
on its obligations to return borrowed securities because of insolvency or
otherwise, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
OPTIONS AND FUTURES CONTRACTS
Certain of the Funds may invest in options and futures contracts. The discussion
below is intended to be generic for those funds permitted under their investment
policies to purchase options and futures and any limitations noted in this
section are qualified by the Funds' individual policies as stated in the
descriptions of each of the Funds. UNLESS OTHERWISE NOTED IN THE INDIVIDUAL FUND
DESCRIPTIONS ABOVE, NONE OF THE FUNDS INVESTING IN THESE CONTRACTS WILL PURCHASE
OR SELL FUTURES CONTRACTS OR OPTIONS ON FUTURES CONTRACTS IF IMMEDIATELY
THEREAFTER THE AGGREGATE AMOUNT OF INITIAL MARGIN DEPOSITS ON ALL THE FUTURES
POSITIONS OF THE FUND AND PREMIUMS PAID ON OPTIONS ON FUTURES CONTRACTS WOULD
EXCEED 5% OF THE MARKET VALUE OF THE TOTAL ASSETS OF THE RESPECTIVE FUND. See
the "Investment Objectives and Policies" of the specific Fund for a discussion
of whether, and to what extent, the Fund may purchase these investments.
OPTIONS ON SECURITIES. Covered call options in which a Fund may invest are
typically listed for trading on a national securities exchange. All options
written by a Fund will be "covered."
Call options written by a Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price. Put options written by a
Fund give the holder the right to sell the underlying security to the Fund at a
stated exercise price. A call option written by a Fund is "covered" if that Fund
owns the underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if a Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by a Fund in cash and high grade debt obligations
in a segregated account with its custodian.
A put option written by a Fund is "covered" if the Fund maintains cash and high
grade debt obligations with a value equal to the exercise price in a segregated
account with its custodian, or else holds a put on the same security and in the
same principal amount as the put written where the exercise price of the put
held is equal to or greater than the exercise price of the put written. The
premium paid by the purchaser of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option 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 canceled by the clearing corporation. However, a
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased.
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, a Fund may attempt 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.
Call options on securities may be purchased to limit the risk of a substantial
increase in the market price of such security. A Fund may also purchase call
options on securities held in its portfolio and on which it has written a call
option. 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.
PURCHASING PUT OPTIONS. Put options on particular securities may be purchased to
protect against a decline in the market value of the underlying security below
the exercise price less the premium paid for the option. A put option gives the
holder the right to sell the underlying security at the option exercise price at
any time during the option period. The ability to purchase put options will
allow a Fund to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. In addition, a Fund will
continue to receive interest or dividend income on the security. A Fund may sell
a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such sales will result in a net gain or loss,
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs paid for the put option that is sold. Such
gain or loss may be wholly or partially offset by a change in the value of the
underlying security which the Fund owns or has the right to acquire.
PUT AND CALL OPTIONS ON THE SAME SECURITIES. A Fund may buy puts and write calls
on the same portfolio security in "forward conversion" transactions. All options
written by a Fund will be covered. In a forward conversion, a Fund will purchase
securities and write call options and purchase put options on such securities.
By purchasing puts, the Fund protects the underlying security from depreciation
in value. By selling or writing calls on the same security, a Fund receives
premiums which may offset part or all of the cost of purchasing the puts while
forgoing the opportunity for appreciation in the value of the underlying
security. A Fund will not exercise a put it has purchased while a call option on
the same security is outstanding. The use of options in connection with forward
conversions is intended to hedge against fluctuations in the market value of the
underlying security. Although it is generally intended in forward conversion
transactions that the exercise price of put and call options would be identical,
situations might occur in which some option positions are acquired with
different exercise prices. Therefore, each Fund's return may depend in part on
movements in the price of the underlying security because of the different
exercise prices of the call and put options. Such price movements may also
affect each Fund's total return if the conversion is terminated prior to the
expiration date of the options. In such event, a Fund's return may be greater or
less than it would otherwise have been if it had hedged the security only by
purchasing put options.
SPREAD AND STRADDLE TRANSACTIONS. In addition to the options strategies
described above, a Fund may engage in "spread" transactions in which a Fund
purchases and writes a put or call option on the same underlying security with
the options having different exercise prices and/or expiration dates. All
options written by a Fund will be covered. A Fund may also engage in so-called
"straddles," in which the Fund may purchase or write combinations of put and
call options on the same security. When a Fund engages in spread and straddle
transactions, it seeks to profit from differentials in the option premiums paid
and received and in the market prices of the related options positions when they
are closed out or sold. Because the purchase of options by a Fund in connection
with these transactions may, under certain circumstances, involve a limited
degree of investment leverage, a Fund will not enter into any spreads or
straddles or otherwise purchase puts or calls if, as a result, more than 5% of
its net assets will be invested at any time in such option transactions. Spread
and straddle transactions require a Fund to purchase and/or write more than one
option simultaneously. Accordingly, a Fund's ability to enter into such
transactions and to liquidate its positions when necessary or deemed advisable
may be more limited than if the Fund was to purchase or sell a single option.
Similarly, costs incurred by a Fund in connection with these transactions will
in many cases be greater than if the Fund was to purchase or sell a single
option. The ability of a Fund to engage in spread or straddle transactions may
be further limited by state securities laws.
OPTIONS ON STOCK INDICES. Call and put options on stock indices may be purchased
and written to hedge against the risk of market or industry-wide stock price
fluctuations or to increase income to the Fund. A Fund may also purchase and
sell options with respect to securities. An option on a security is a contract
that permits the purchaser of the option, in return for the premium paid, the
right to buy a specified security (in the case of a call option) or to sell a
specified security (in the case of a put option) from or to the writer of the
option at a designated price during the term of the option. Call and put options
on stock indices are similar to options on securities except that, rather than
the right to purchase or sell particular securities at a specified price,
options on a stock index give the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the underlying stock index
is greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements in individual securities.
When a Fund writes an option on a stock index, it will establish a segregated
account containing cash or high quality fixed-income securities with its
custodian in an amount at least equal to the market value of the option and will
maintain the account while the option is open or will otherwise cover the
transaction. A Fund may write a call or put option to generate income, and will
do so only if the option is "covered." This means that so long as a Fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the call, or hold a call at the same or lower exercise price, for the
same exercise period, and on the same securities as the written call. A put is
covered if the Fund maintains liquid assets with a value at least equal to the
exercise price in a segregated account, or holds a put on the same underlying
securities at an equal or greater exercise price.
FINANCIAL FUTURES CONTRACTS. A Fund permitted to do so under its investment
policies may, for bona fide hedging purposes or for other appropriate risk
management purposes permitted under regulations promulgated by the Commodity
Futures Trading Commission ("CFTC"), purchase or sell futures contracts on
interest rates, financial indices, currencies and stock indices, and U.S.
government securities, and may purchase and write on a covered basis put and
call options on futures contracts. Investment decisions relating to futures
contracts and options thereon will be based upon, among other considerations,
the composition of a Fund's portfolio and the Managers' expectations concerning
interest rates and the currency and securities markets. In addition, for hedging
purposes or to increase income to a Fund, the Fund may purchase put and call
options and write covered put and call options on securities, currencies and
securities indices traded on U.S. exchanges and, to the extent permitted by law,
foreign exchanges, as well as over-the-counter.
For bona fide hedging purposes or for other appropriate risk management purposes
pursuant to the Commodity Exchange Act, as amended, and the rules promulgated
thereunder by the CFTC, a Fund may enter into contracts for the purchase or sale
for future delivery of U.S. Treasury or foreign securities. Each Fund may
similarly enter into futures contracts based upon financial indices. A Fund may
enter into financial futures contracts, stock index futures contracts, foreign
currency futures contracts and options on any of the foregoing. These futures
contracts are referred to collectively as "financial futures." Financial futures
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 U.S.
Treasury or other securities or foreign currencies, or the cash value of a
securities index during a specified future period at a specified price. A "sale"
of these types of futures contracts means the acquisition of a contractual
obligation to deliver the securities or the cash value of the index called for
by the contract at a specified price on a specified date. A "purchase" of these
types of futures contracts means the acquisition of a contractual obligation to
acquire the securities or the cash value of the index called for by the contract
at a specified price on a specified date.
At the same time a futures contract is purchased or sold, a Fund must allocate
cash or securities as a deposit payment ("initial deposit"). The futures
contract is valued daily thereafter and the payment of some amount of "variation
margin" may be required, reflecting any decline or increase in the contract's
value.
To the extent a Fund enters into contracts for the purchase or sale for future
delivery of financial futures and to the extent required by SEC rules, it will
maintain, with its custodian bank, assets in a segregated account to cover its
obligations with respect to such contracts which will consist of cash, cash
equivalents or high quality debt obligations from its portfolio in an amount
equal to the difference between the fluctuating market value of such futures
contracts and the aggregate value of the initial and variation margin payments
made by the Fund with respect to such futures contracts.
INTEREST RATE FUTURES CONTRACTS. Certain Funds may purchase and sell interest
rate futures contracts and options thereon traded on domestic exchanges and, to
the extent such contracts have been approved by the CFTC for sale to customers
in the U.S., on foreign exchanges. A Fund may enter into interest rate futures
contracts in order to protect its portfolio securities from fluctuations in
interest rates without necessarily buying or selling the underlying fixed-income
securities. For example, if a Fund owns bonds, and interest rates are expected
to increase, it might sell futures contracts on debt obligations having
characteristics similar to those held in the portfolio. Such a sale would have
much the same effect as selling an equivalent value of the bonds owned by the
Fund. If interest rates did increase, the value of the debt obligations in the
portfolio would decline, but the value of the futures contracts to the Funds
would increase at approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise would have. A Fund
could accomplish similar results by selling bonds with longer maturities and
investing in bonds with shorter maturities when interest rates are expected to
increase. However, since the futures market may be more liquid than the cash
market, the use of futures contracts as a risk management technique allows a
Fund to maintain a defensive position without having to sell its portfolio
securities.
Similarly, when it is expected that interest rates may decline, a Fund may
purchase interest rate futures contracts in an attempt to hedge against having
to make future anticipated purchases of bonds at the higher prices expected to
prevail in the future. Since the fluctuations in the value of appropriately
selected futures contracts should be similar to that of the bonds that will be
purchased, the Fund could take advantage of the anticipated rise in the cost of
the bonds without actually buying them until the market had stabilized. At that
time, the Fund could make the intended purchase of the bonds in the cash market
and the futures contracts could be liquidated.
OPTIONS ON INTEREST RATE FUTURES CONTRACTS. A Fund may also purchase call and
put options and write covered call and put options on interest rate futures
contracts traded on domestic exchanges and, to the extent such contracts have
been approved by the CFTC for sale to customers in the U.S., on foreign
exchanges to hedge against risks associated with shifts in interest rates and
may enter into closing transactions with respect to such options.
STOCK INDEX FUTURES CONTRACTS. Certain Funds may purchase and sell stock index
futures contracts and options on stock index futures contracts traded on
domestic exchanges and, to the extent such contracts have been approved by the
CFTC for sale to customers in the U.S., on foreign exchanges. A stock index
futures contract obligates the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. Open futures contracts
are valued on a daily basis and a Fund may be obligated to provide or receive
cash reflecting any decline or increase in the contract's value. No physical
delivery of the underlying stocks in the index is made in the future.
A Fund may sell stock index futures contracts in anticipation of or during a
market decline in an attempt to offset the decrease in market value of its
securities that might otherwise result. When a Fund is not fully invested in
stocks and anticipates a significant market advance, it may purchase stock index
futures in order to gain rapid market exposure that may offset increases in the
cost of common stocks that it intends to purchase.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Call and put options on stock index
futures may be purchased or sold to hedge against risks of market-side price
movements. Such options may be traded on domestic exchanges and, to the extent
such contracts have been approved by the CFTC for sale to customers in the U.S.,
on foreign exchanges. The need to hedge against such risks will depend on the
extent of diversification of a Fund's common stock portfolio and the sensitivity
of such investments to factors influencing the stock market as a whole.
RISKS IN INVESTING IN OPTIONS AND FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of futures contracts and options thereon, as well as the
purchase and writing of options on securities and securities indices and
currencies, involve risks different from those involved with direct investments
in securities. A liquid secondary market for any futures or options contract may
not be available when a futures or options position is sought to be closed and
the inability to close such positions could leave an adverse impact on a Fund's
ability to effectively hedge its securities on foreign currency exposure. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is based
and movements in the securities or currency in the Fund's portfolio. Successful
use of futures or options contracts is further dependent on the Managers'
ability to correctly predict movements in the securities or foreign currency
markets and no assurance can be given that its judgment will be correct.
Successful use of options on securities or stock indices is subject to similar
risk considerations. In addition, by writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to profit from any
price increase in the underlying security above the option exercise price.
While utilization of options, futures contracts and similar instruments may be
advantageous to the Funds, if the Managers are not successful in employing such
instruments in managing each Fund's investments, each Fund's performance will be
worse than if they did not employ such strategies. In addition, each Fund will
pay commissions and other costs in connection with such investments, which may
increase each Fund's expenses and reduce its return. In writing options on
futures, each Fund's loss is potentially unlimited and may exceed the amount of
the premium received.
The risk of loss in trading foreign futures contracts and foreign options can be
substantial. Investors should be aware of the following: (i) participation in
foreign futures contracts and foreign options transactions involves the
execution and clearing of trades on, or subject to, the rules of a foreign board
of trade; and (ii) applicable foreign law which will vary, depending on where
the foreign futures or options transaction occurs. For these reasons, a Fund
might not be afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations and the rules of the National
Futures Association and any domestic exchange. In addition, the price of any
foreign futures or foreign options contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange rate
between the time a particular order is placed and the time it is liquidated,
offset or exercised.
In certain cases the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed more effectively and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. However, there are risks involved in
these transactions as discussed above.
Certain provisions of the Code may limit the extent to which the Funds may enter
into futures and forward contracts or engage in options transactions. See "Tax
Considerations."
Any Fund's investment in options, futures contracts and forward contracts,
options on futures contracts and stock indices, including transactions involving
actual or deemed short sales or foreign exchange gains or losses, may give rise
to taxable income, gain or loss and will be subject to special tax treatment
under certain mark-to-market and straddle rules, the effect of which may be to
accelerate income to a Fund, defer Fund losses, cause adjustments in the holding
periods of Fund securities, convert capital gains and losses into ordinary
income and losses, convert long-term capital gains into short-term capital
gains, and convert short-term capital losses into long-term capital losses.
These rules could, therefore, affect the amount, timing and character of
distributions to shareholders. Certain elections may be available to a Fund to
mitigate some of the unfavorable consequences of the provisions described in
this paragraph. These investments and transactions are discussed in the SAI.
UNLESS OTHERWISE NOTED IN A FUND'S POLICIES, THE VALUE OF THE UNDERLYING
SECURITIES ON WHICH OPTIONS MAY BE WRITTEN AT ANY ONE TIME WILL NOT EXCEED 15%
OF THE TOTAL ASSETS OF A FUND. UNLESS OTHERWISE NOTED IN A FUND'S POLICIES, A
FUND WILL NOT PURCHASE PUT OR CALL OPTIONS IF THE AGGREGATE PREMIUM PAID FOR
SUCH OPTIONS WOULD EXCEED 5% OF ITS TOTAL ASSETS AT THE TIME OF PURCHASE.
PORTFOLIO TURNOVER
Each Fund may purchase and sell securities without regard to the length of time
the security has been held, and the frequency of Fund transactions (turnover
rate) will vary from year to year, depending on market conditions. Higher
portfolio turnover involves higher transaction costs to the Fund. It is
anticipated that each Fund's annual turnover rate generally will not exceed 100%
with the following exceptions: the Intermediate Bond Fund may exceed 100% per
year; and the Growth and Income Fund may exceed 100% and be in the range of
150-200% in 1995 as portfolio holdings are gradually shifted to reflect the
Fund's change in investment strategy to place greater emphasis on
income-producing securities, but its subsequent turnover rate generally is not
expected to exceed 100% per year. Portfolio turnover rates for recent years are
shown in the "Financial Highlights." More information is in the SAI.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
REPURCHASE AGREEMENTS. Each Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at a mutually agreed price and date. The transaction requires the
collateralization of the seller's obligation by U.S. Government Securities held
with the Fund's custodian, with an initial market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the Fund, with
the value of the underlying security marked to market daily to maintain coverage
of at least 100%. A default by the seller might cause the Fund to experience a
loss or delay in the liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in liquidating the
collateral. Each Fund intends to enter into repurchase agreements only with
qualified securities dealers or other institutional investors deemed
creditworthy by the Fund's investment manager. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security.
REVERSE REPURCHASE AGREEMENTS. A Fund authorized to do so may also enter into
reverse repurchase agreements which are the opposite of repurchase agreements
but involve similar mechanics and risks. The Fund sells securities to a bank or
broker and agrees to repurchase them at a mutually agreed price and date. Cash
or liquid high-grade debt obligations having an initial market value, including
accrued interest, equal to at least 102% of the dollar amount sold by the Fund
are segregated as collateral and marked to market daily to maintain coverage of
at least 100%. A default by the purchaser might cause the Fund to experience a
loss or delay in the liquidation of the collateral and also disposition costs.
Each Fund intends to enter into repurchase agreements only with government
securities dealers recognized by the Federal Reserve Board or with member banks
of the Federal Reserve System.
RESTRICTED AND ILLIQUID SECURITIES
IT IS A FUNDAMENTAL POLICY OF THE FUNDS TO NOT INVEST MORE THAN 10% OF THEIR
RESPECTIVE NET ASSETS IN ILLIQUID INVESTMENTS, which includes most repurchase
agreements of more than seven days duration, currency and interest rate swaps,
time deposits with a notice or demand period of more than seven days, certain
over-the-counter option contracts, participation interests in loans, securities
that are not readily marketable and "restricted securities," i.e., securities
that are not registered or are offered in an exempt non-public offering under
the Securities Act of 1933 ("1933 Act"). Such restriction shall not apply to
restricted securities offered and sold to "qualified institutional buyers" under
Rule 144A under the 1933 Act or to foreign securities which are offered or sold
outside the United States where the Managers determine, based upon a continuing
review of the trading markets for the specific restricted security, that such
restricted securities are liquid.
The Board of Trustees has adopted guidelines and delegated to the Managers the
daily function of determining and monitoring the liquidity of restricted
securities. The Board, however, will retain sufficient oversight and be
ultimately responsible for the determinations. To the extent a Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in a Fund may be increased if qualified institutional buyers become uninterested
in purchasing these securities or the market for these securities contracts.
The purchase price and subsequent valuation of restricted securities normally
reflect a discount from the price at which such securities would trade if they
were not restricted, since the restriction makes them less liquid. The amount of
the discount from the prevailing market prices is expected to vary, depending
upon the type of security, the character of the issuer, the party who will bear
the expenses of registering the restricted securities and prevailing supply and
demand conditions.
"ROLLS"
Funds that may purchase Treasury securities may also enter into "U.S. Treasury
rolls" in which the Fund sells outstanding U.S. Treasury securities and buys
back "when-issued" U.S. Treasury securities of slightly longer maturity for
simultaneous settlement on the settlement date of the when-issued U.S. Treasury
security. During the period prior to settlement date, the Fund continues to earn
interest on the securities it is selling. It does not earn interest on the
securities which it is purchasing until after settlement date. Two potential
advantages of such a strategy are 1) that the Fund can regularly and
incrementally adjust its weighted average maturity (which otherwise would
constantly diminish with the passage of time); and 2) in a normal yield curve
environment (in which shorter maturities yield less than longer maturities), a
gain in yield to maturity can be obtained along with the desired extension. The
Fund could suffer an opportunity loss if the counterparty to the roll failed to
perform its obligations on settlement date, in that market conditions may have
changed adversely. The Fund, however, intends to enter into U.S. Treasury rolls
only with government securities dealers recognized by the Federal Reserve Board
or with member banks of the Federal Reserve System.
Funds that may purchase mortgage-backed securities 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 roll period, the Fund forgoes principal and interest paid on the
mortgage-backed securities. The Fund is compensated by the difference between
the current sales price and the lower forward 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 dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction and is maintained in a segregated account. A Fund will not
enter into any dollar rolls that are not covered rolls.
SMALL CAPITALIZATION ISSUERS
Certain of the Funds may invest in relatively new or unseasoned companies which
are in their early stages of development, or small companies positioned in new
and emerging industries where the opportunity for rapid growth is expected to be
above average. These are typically companies which have a market capitalization
of less than $1 billion. Investing in securities of small companies may offer
greater potential for capital appreciation since they are often overlooked by
investors or undervalued in relation to their earnings power. Securities of
unseasoned companies may present greater risks than securities of larger, more
established companies. Small companies may suffer significant losses as well as
realize substantial growth, and investments in such companies tend to be more
volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in price
than the larger capitalization stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of small companies to changing economic conditions. Besides
exhibiting greater volatility, small company stocks may, to a degree, fluctuate
independently of larger company stocks. Small company stocks may decline in
price as large company stocks rise, or rise in price as large company stocks
decline. Investors should therefore expect that the value of a Fund's shares
which invests a substantial portion of its net assets in small company stocks
may be more volatile than the shares of a fund that invests solely in larger
capitalization stocks. FOR MORE INFORMATION, REFER TO THE "SMALL CAP FUND"
DESCRIPTION.
STRUCTURED NOTES
A structured note is a derivative instrument which entitles its holder to
receive some portion of the principal or interest payments which would be due on
a traditional debt obligation. A zero coupon bond, which is the right to receive
only the principal portion of a debt security, is a simple form of structured
note. A structured note's performance or value may be linked to a change in
return, interest rate, or value at maturity of the change in an identified or
"linked" equity security, currency, interest rate, index or other financial
indicator ("reference index"). The holder's right to receive principal or
interest payments on a structured note may also vary in timing or amount,
depending upon changes in certain rates of interest or other external events.
Structured notes may be much more volatile than the underlying instruments
themselves, depending on the direction of interest rates, and may present many
of the same risks as investing in futures and options. Certain structured notes
without leverage characteristics may still be considered risky and an investor
could lose an amount equal to the amount invested. As with any debt instruments,
structured notes pose credit risk, i.e., the issuer may be unable to make the
required payments. Finally, some structured notes may be illiquid, because few
investors or dealers trade in such securities or because the notes are complex
and difficult to price. Such potential illiquidity may be especially pronounced
during severe bond market corrections. The Board will monitor the liquidity of
structured notes and notes determined to be illiquid will be subject to a Fund's
percentage limits on illiquid securities. THE TEMPLETON MANAGERS MAY
OCCASIONALLY INVEST UNDER 5% OF THEIR RESPECTIVE FUND'S ASSETS IN STRUCTURED
NOTES THAT ARE LINKED TO A REFERENCE INDEX, ON A NON-LEVERAGED, ONE-TO-ONE
BASIS.
TEMPORARY INVESTMENTS
In any period of market weakness or of uncertain market or economic conditions
or while awaiting suitable investment opportunities, a Fund may establish a
temporary defensive position by investing in high quality Money Market
Investments. Any decision to withdraw substantially, and, for a sustained period
of time, from a Fund's "defined" market(s) based on its investment objectives
will be reviewed by the Board of Trustees. All Funds, except the Money Fund, may
therefore invest up to 100% of their respective net assets in, for example, U.S.
Government Securities, bank obligations, the highest quality commercial paper,
or in repurchase agreements as described above. Rising Dividends may also invest
in short-term fixed-income securities.
The Asset Allocation, Global Income, Global Growth, International, Pacific, and
Developing Markets Funds may also invest in non-U.S. currency and short-term
instruments denominated in non-U.S. currencies for temporary defensive purposes.
The Developing Markets Fund may also invest in medium-term (not more than five
years to maturity) obligations issued or guaranteed by the U.S. government or
the governments of foreign countries, their agencies or instrumentalities.
It is not possible to predict with any certainty when or for how long a Fund
will employ defensive strategies.
TRADE CLAIMS
Trade claims are purchased from creditors of companies in financial difficulty
who seek to reduce the number of debt obligations they are owed. Such trade
creditors generally sell their claims in an attempt to improve their balance
sheets and reduce uncertainty regarding payments. For purchasers, trade claims
offer the potential for profits since they are often purchased at a
significantly discounted value and, consequently, have the potential for higher
income and capital appreciation should the debt issuer's financial position
improve. Trade claims are generally liquid as there is a secondary market but
the Board of Trustees will monitor their liquidity.
An investment in trade claims is speculative and there can be no guarantee that
the debt issuer will ever be able to satisfy the obligation. Further, trading in
trade claims is not regulated by federal securities laws but primarily by
bankruptcy laws and commercial laws. Because trade claims are unsecured
obligations, holders may have a lower priority than secured or preferred
creditors.
WARRANTS
A warrant is typically a long-term option issued by a corporation which gives
the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
an expiration date.
Stock index warrants entitle the holder to receive, upon exercise, an amount in
cash determined by reference to fluctuations in the level of a specified stock
index. If a Fund does not exercise or dispose of a warrant prior to its
expiration, it will expire worthless.
"WHEN-ISSUED" AND "DELAYED
DELIVERY" TRANSACTIONS
A Fund may purchase debt obligations on a "when-issued" or "delayed delivery"
basis (in the case of GNMA Certificates, a "To-Be-Announced" basis). Such
securities are subject to market fluctuations prior to delivery to the Fund and
generally do not earn interest until their scheduled delivery date. When the
Fund is the buyer in such transactions, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of such 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 the Fund's investment objectives and policies, and
not for the purpose of investment leverage. Nonetheless, purchases of securities
on such basis may involve more risk than other types of purchases, for example,
counterparty delivery risk. If the seller fails to complete the transaction, the
Fund may miss a price or yield considered advantageous. See the SAI for
additional information.
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of additional investment restrictions, some of
which are fundamental policies and, like the investment objective of each Fund,
may be changed only with the approval of shareholders as required by the 1940
Act. For a list of these additional restrictions and more information concerning
the policies discussed above, please see the SAI.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trust has a Board of Trustees which has the primary responsibility for the
overall management of the Trust and each of the Funds. The Trustees elect the
officers of the Trust who are responsible for administering its day-to-day
operations.
MANAGERS
The Manager for all series of the Trust, except the Asset Allocation, Global
Growth, and Developing Markets Funds, is Franklin Advisers, Inc. ("Advisers"),
777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777. In
addition, Advisers employs Templeton Investment Counsel, Inc. ("Templeton
Florida"), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394,
to act as subadviser to the International Fund, the Pacific Fund, and the Global
Income Fund.
The Manager for the Asset Allocation and Global Growth Funds is Templeton,
Galbraith & Hansberger, Ltd. ("Templeton Nassau"), Lyford Cay Nassau, N.P.
Bahamas. Templeton Nassau employs Templeton Florida to act as subadviser to the
Asset Allocation Fund.
The Manager for Developing Markets Fund is Templeton Investment Management (Hong
Kong) Limited ("Templeton Hong Kong"), Two Exchange Square, Suite 908, Hong
Kong. (Advisers, Templeton Nassau, Templeton Hong Kong, Templeton Florida, and
Templeton New York may be referred to as the "Manager" or "Managers" throughout
the prospectus and SAI.)
Advisers acts as investment manager or administrator to 33 U.S. registered
investment companies (111 separate series) with aggregate assets of over $75
billion. The Managers are direct or indirect wholly owned subsidiaries of
Franklin Resources, Inc., a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of its outstanding shares. Through its
subsidiaries, Resources manages over $118 billion in assets worldwide for over
3.8 million mutual fund shareholders, in addition to foundations and endowments,
employee benefit plans, and individuals. The Managers, subject to the
overall policies, control, direction and review of the Board of Trustees (and to
the instructions and supervision of Advisers and Templeton Nassau in the case of
Templeton Florida are responsible for recommending and providing advice with
respect to each Fund's investments, and for determining which securities will be
purchased, retained or sold as well as for execution of portfolio transactions.
The Managers, also subject to the overall review of the Board of Trustees, may,
from time to time, use various methods of selecting securities for the Fund's
portfolio, and these methods are changed and improved by the Managers' research
on superior selection methods. The Managers may also employ and rely on
independent or affiliated sources of information and ideas in connection with
management of a Fund's portfolio. Securities are selected for a Fund's portfolio
largely on the basis of fundamental company-by-company analysis. Determinations
of eligible securities will be made by the Managers based on publicly available
information and inquiries made to the companies. The Templeton Managers use a
disciplined, long-term approach to value oriented global and international
investing. The Managers and their affiliates have approximately 4,100 employees
in 10 different countries and an extensive global network of investment research
sources.
MANAGEMENT FEES. The management agreements provide for the management of each
Fund's portfolio and, except for the Asset Allocation Fund, for certain
administrative services and facilities which are necessary to conduct the Fund's
business, for which each Fund is obligated to pay a management fee. Under a
management agreement with Advisers, each Fund managed by Advisers, except for
the Rising Dividends Fund, the International Fund, the Small Cap Fund, and the
Pacific Fund, is obligated to pay Advisers, a monthly fee equal to an annual
rate of 0.625% of average daily net assets up to and including $100 million. The
Rising Dividends Fund is obligated to pay Advisers a monthly fee computed at the
annual rate of 0.75% of average daily net assets up to and including $500
million and the International and Pacific Funds are obligated to pay Advisers a
monthly fee equal to the annual rate of 1.00% of average daily net assets up to
and including $100 million. The Small Cap Fund is obligated to pay Advisers a
monthly fee computed at the annual rate of -----% of average daily net assets up
to and including $100 million, plus----% of the value of average daily net
assets up to and including $250 million, plus_----% of the value of average
daily net assets up to and including $10 billion, plus_----% of the value of
average daily net assets up to and including $12.5 billion, plus_----% of the
value of average daily net assets up to and including $15 billion, plus_----% of
the value of average daily net assets over $15 billion. The fees paid by each
Fund are on a declining scale thereafter based on such Fund's assets. Please
refer to the SAI for further details.
Under a management agreement with Templeton Nassau, the Global Growth Fund is
obligated to pay the Manager a monthly fee equal to an annual rate of 1.0% of
the value of the Fund's average daily net assets up to and including $100
million, with various reductions in the rate as the Fund's assets increase.
Under a management agreement with Templeton Nassau, the Asset Allocation Fund is
obligated to pay the Manager a monthly fee equal to an annual rate of 0.65% of
the value of the Fund's average daily net assets up to and including $200
million, 0.585% of the value of the Fund's average daily net assets over $200
million up to and including $1.3 billion; and 0.52% of the value of the Fund's
average daily net assets over $1.3 billion.
Under a management agreement with Templeton Hong Kong, the Developing Markets
Fund is obligated to pay the Manager a monthly fee equal to an annual rate of
1.25% of the value of the Fund's average daily net assets.
The fees which the Funds investing in global securities are obligated to pay the
Managers are higher than advisory fees paid by most other U.S. investment
companies, primarily because investing in equity securities of companies outside
the U.S., and especially in developing market countries, which are not widely
followed by professional analysts, requires the Managers to invest additional
time and incur added expense in developing specialized resources, including
research sources.
OPERATING EXPENSES. Each Fund is responsible for its own
operating expenses. Expenses incurred jointly by more than one Fund will be
apportioned on a pro rata basis. In addition to the Managers' fees, and Business
Managers fees in the case of the Asset Allocation Fund, the Funds are
responsible for their pro rata portion of the Trust's operating expenses,
including, but not limited to, taxes, if any; custodian, legal and auditing
fees; fees and expenses of trustees who are not members of, affiliated with or
interested persons of the Managers; salaries of any personnel not affiliated
with the Managers; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the value of the Fund's net assets;
printing and other expenses which are not expressly assumed by the Managers.
Any of the Managers may determine to limit the management fees or assume
responsibility for the payment of certain operating expenses with respect to any
Fund in order to reduce total expenses or increase the yield of each such Fund.
Voluntary reductions of fees or assumption of a Fund's operating expenses by any
of the Managers may be terminated by the Managers at any time or when reaching a
certain level of assets.
For the year ended December 31, 1994, Advisers agreed to limit its management
fees for the Zero Coupon Funds - 1995, - 2000, - 2005, and - 2010 so that
aggregate expenses did not exceed 0.40% of each of the Fund's average monthly
net assets, including management fees of 0.36%, 0.36%, 0.35% and 0.35%, of the
respective Funds. Until at least December 31, 1995, Advisers has agreed to keep
the total expenses of each Zero Coupon Fund to a maximum of 0.40% of each Fund's
average monthly net assets. During the period July 7, 1994 to December 31, 1994,
Advisers limited its management fees such that aggregate expenses, including
management fees of 0.43%, represented 0.46% of the Money Fund's average daily
net assets.
There were no reductions of management fees by the Managers for any of the other
Funds. Please refer to "Financial Highlights" for information on the expense
ratios of each Fund.
BROKER/DEALER SELECTION. Under each management agreement, the Manager selects
the brokers and dealers through whom transactions in each Fund's investment
securities will be effected. The Managers try to obtain the best execution on
all such transactions. If it is felt that more than one broker is able to
provide the best execution, the Managers will consider the receipt of quotations
and other market services, and of research, statistical and other data in
selecting a broker-dealer to execute a transaction. Sales of the Policies by
broker-dealers or their affiliates may be a factor in considering the placement
of portfolio transactions, provided the Managers are satisfied that the Funds
are receiving the best execution. For further information see "The Funds'
Policies Regarding Brokers Used on Securities Transactions" in the SAI.
SUBADVISORS
Templeton Florida is paid a fee by Advisers equal to an annual rate of 0.50% of
the value of each of the International and the Pacific Fund's average daily net
assets up to and including $100 million; 0.40% of the value of average daily net
assets over $100 million up to and including $250 million; 0.30% of the value of
average daily net assets over $250 million up to and including $500 million; and
0.25% of the value of average daily net assets over $500 million. With respect
to the Global Income Fund, Templeton Florida is paid a monthly fee by Advisers
computed at the annual rate equal to 0.35% of the Fund's average daily net
assets up to and including $100 million, 0.25% of the average daily net assets
over $100 million up to and including $250 million, and 0.20% of average daily
net assets in excess of $250 million. In all cases, Templeton Florida's fees are
not a separate expense of the respective Funds but are paid by the Managers from
the management fees they receive from their respective management agreements
with the Funds.
With respect to the Asset Allocation Fund, Templeton Florida is paid a monthly
fee by Templeton Nassau computed at the annual rate equal to 0.25% of the Fund's
average daily net assets up to and including $200 million; 0.225% of average
daily net assets over $200 million up to and including $1.3 billion, and 0.20%
of average daily net assets over $1.3 billion.
Templeton Florida will pay all expenses incurred by it in connection with its
activities under the subadvisory agreement with the Managers, other than the
cost of securities purchased for the Funds and brokerage commissions in
connection with such purchases.
BUSINESS MANAGER
Templeton Global Investors, Inc. ("Business Manager"), Broward Financial Centre,
Suite 2100, Fort Lauderdale, Florida 33394, provides certain administrative
facilities and services for certain of the Funds, including payment of salaries
of officers, preparation and maintenance of books and records, preparation of
tax reports, preparation of financial reports, and monitoring compliance with
regulatory requirements. The Business Manager is employed directly by the Asset
Allocation Fund and receives a monthly fee equivalent on an annual basis to
0.15% of the combined average daily net assets of the Fund, reduced to 0.135% of
such assets in excess of $200 million to 0.10% of such assets in excess of $700
million and to 0.075% of such assets in excess of $1.2 billion.
The Business Manager is employed through subcontracts by the Managers of the
Developing Markets, Global Growth, Global Income, International Equity, and
Pacific Growth Funds. The Business Manager receives monthly fees equivalent on
an annual basis to 0.15% of the combined average daily net assets of each of
these Funds, reduced for each Fund to 0.135% of such assets in excess of $200
million, to 0.10% of such assets in excess of $700 million, and to 0.075% of
such assets in excess of $1.2 billion. These fees are not separate expenses of
these Funds but are paid by their Managers from the management fees they receive
from their management agreements with the Funds.
PORTFOLIO OPERATIONS
The following persons are responsible for the day-to-day operations of the funds
of the Trust, other than the Money Fund.
ADJUSTABLE U.S. GOVERNMENT FUND
T. Anthony Coffey
Roger Bayston
Jack Lemein
GLOBAL INCOME FUND
Neil S. Devlin
Thomas J. Dickson
GROWTH AND INCOME FUND
(formerly, "Equity Growth Fund")
Frank Felicelli
Douglas Barton
Howard McEldowney
HIGH INCOME FUND
R. Martin Wiskemann
Chris Molumphy
Betsy Hofman-Schwab
INCOME SECURITIES FUND
Charles B. Johnson
Matt Avery
INVESTMENT GRADE INTERMEDIATE BOND FUND
Philip H. W. Smith
William Lippman
Margaret McGee
PRECIOUS METALS FUND
R. Martin Wiskemann
Suzanne Willoughby Killea
Shan Green
REAL ESTATE SECURITIES FUND
Matt Avery
Tom Branch
RISING DIVIDENDS FUND
William Lippman
Bruce C. Baughman
Margaret McGee
SMALL CAP FUND
Edward B. Jamieson
Nicholas Moore
Michael McCarthy
TEMPLETON DEVELOPING MARKETS EQUITY FUND
J. Mark Mobius, Ph.D.
H. Allan Lam
Tom Wu
TEMPLETON ASSET ALLOCATION FUND
Jeffrey A. Everett
Thomas J. Dickson
Sean Farrington
TEMPLETON GLOBAL GROWTH FUND
Mark G. Holowesko
Jeffrey A. Everett
Sean Farrington
TEMPLETON INTERNATIONAL EQUITY FUND
Marc S. Joseph
Mark Beveridge
TEMPLETON PACIFIC GROWTH FUND
William T. Howard
Mark Beveridge
Gary Clemons
U.S. GOVERNMENT SECURITIES FUND
Jack Lemein
David Capurro
Roger Bayston
UTILITY EQUITY FUND
Gregory E. Johnson
Sally Edwards-Haff
Ian Link
ZERO COUPON FUNDS
David Capurro
Jack Lemein
Tony Coffey
BIOGRAPHICAL INFORMATION
Matt Avery
Portfolio Manager
Franklin Advisers, Inc.
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles. He earned his Bachelor of Science degree in
industrial engineering from Stanford University. He has been in the securities
industry since 1982 and with Franklin since 1987. Mr. Avery managed the Income
Securities Fund and the Real Estate Fund since their inception.
Douglas Barton
Portfolio Manager
Franklin Advisers, Inc.
Mr. Barton is a Chartered Financial Analyst and holds a Master of Business
Administration degree from California State University in Hayward and a Bachelor
of Science degree from California State University in Chico. Mr. Barton joined
Franklin in July 1988 and has managed the Growth and Income Fund since May of
1995.
Bruce C. Baughman
Portfolio Manager
Franklin Advisers, Inc.
Mr. Baughman holds a Master of Science degree in accounting from New York
University. He earned his Bachelor of Arts degree from Stanford University.
Prior to joining Franklin, Mr. Baughman had been in the securities industry for
over ten years and with Franklin since 1988. He has managed the Rising Dividends
Fund since its inception.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. Prior to
joining Franklin, Mr. Bayston was an Assistant Treasurer for Bankers Trust
Company. Following completion of the Masters degree program, Mr. Bayston joined
Franklin in 1991. Mr. Bayston has managed the Adjustable Fund since August 1991
and the Government Fund since November 1993.
Mark R. Beveridge
Vice President and
Portfolio Manager
Templeton Investment Counsel Inc.
Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business
Administration degree in finance from the University of Miami. He joined
Templeton in 1985 and started managing the International and Pacific Growth
Funds in January 1994.
Tom Branch
Portfolio Manager
Franklin Advisers, Inc.
Mr. Branch received a Bachelor of Science degree in Business Administration with
a concentration in finance from California Polytechnic State University, San
Luis Obispo. Mr. Branch joined Franklin in July of 1993 and has managed the Real
Estate Fund since 1994.
David Capurro
Portfolio Manager
Franklin Advisers, Inc.
Mr. Capurro holds a Master of Business Administration degree in finance from
California State University at Hayward. He earned his Bachelor of Science degree
in business administration at California State University at Hayward. Mr.
Capurro joined Franklin in 1983 and has managed the Government Fund and the Zero
Coupon Funds since inception.
Gary Clemons
Portfolio Manager
Templeton Investment Counsel Inc.
Mr. Clemons holds a Master of Business Administration degree from the University
of Wisconsin at Madison. He earned his Bachelor of Science degree in earth
science from the University of Nevada at Reno. Mr. Clemons was a research
analyst for Structured Asset Management. He joined Templeton in 1990 and has
managed the Pacific Fund since 1994.
T. Anthony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned his
Bachelor of Arts degree from Harvard University. Prior to joining Franklin, Mr.
Coffey was an associate with the Analysis Group. He is a member of several
securities industry committees and associations and joined Franklin in 1989. He
has managed the Zero Coupon Funds since August 1989 and the Adjustable Fund
since its inception.
Neil S. Devlin
Executive Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Devlin holds a Bachelor of Arts degree in economics and philosophy from
Brandeis University. He is currently a level III CFA candidate. Prior to joining
Templeton in 1987, Mr. Devlin was a portfolio manager and a bond analyst with
Constitutional Capital Management of Boston and a bond trader and research
analyst for the Bank of New England. He has managed the Global Income Fund since
1994.
Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Dickson received his Bachelor of Science degree in managerial economics from
the University of California at Davis. Mr. Dickson joined Franklin in 1992 and
moved to Templeton in 1994. He started managing the Global Income Fund in 1994,
and has managed the Asset Allocation Fund from inception.
Jeffrey A. Everett
Vice President and
Portfolio Manager
Templeton, Galbraith & Hansberger Ltd.
Mr. Everett is a Chartered Financial Analyst and holds a Bachelor of Science
degree in finance from Pennsylvania State University. Prior to joining
Templeton, he was an Investment Officer at First Pennsylvania Corporation and a
research coordinator for Centre Square Investment Group. He joined Templeton in
1990, has managed the Global Growth Fund from inception and has managed the
Asset Allocation Fund from inception.
Sally Edwards-Haff
Portfolio Manager
Franklin Advisers, Inc.
Ms. Edwards-Haff, is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in economics from the University of California at Santa Barbara. Ms.
Edwards-Haff is a member of several securities industry committees and
associations. She joined Franklin in 1986 and has managed the Utility Fund since
October 1990.
Sean Farrington
Portfolio Manager
Templeton, Galbraith & Hansberger Ltd.
Mr. Farrington, a Chartered Financial Analyst, has a Bachelor of Arts in
Economics from Harvard University. He is a member of a securities association.
He joined Templeton in 1991. He has managed the Global Growth Fund since 1995
and has managed the Asset Allocation Fund from inception.
Frank Felicelli
Executive Vice President
Franklin Management, Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Felicelli, a Chartered Financial Analyst, has a Master in Business
Administration from Golden Gate University and a Bachelor of Arts in economics
from the University of Illinois. He is a member of several securities
industry-related committees and associations. Mr. Felicelli has been in the
industry since 1980 and with Franklin since 1986. He has managed the Growth and
Income Fund since May of 1995.
Shan Green
Portfolio Manager
Franklin Advisers, Inc.
Ms. Green holds a Master of Business Administration degree from the University
of California at Berkeley. She earned her Bachelor of Science degree from State
University of New York at Stoney Brook. Ms. Green has managed the Precious Metal
Fund since joining Franklin in 1994.
Betsy Hofman-Schwab
Portfolio Manager
Franklin Advisers, Inc.
Ms. Hoffman holds a Master of Business Administration degree from the College of
Notre Dame in California. She earned her Bachelor of Science degree in
accounting at the College of Notre Dame in California. She is a member of
securities industry associations. She has been with Franklin since 1981 and has
managed the High Income Fund since its inception.
Mark G. Holowesko
Director of Global Equity Research
Templeton Worldwide, Inc.
and Portfolio Manager
Templeton, Galbraith & Hansberger Ltd.
Mr. Holowesko is a Chartered Financial Analyst and Chartered Investment
Counselor. He holds a Master of Business Administration degree from Babson
College in Worcester, Massachusetts and a Bachelor of Arts degree in economics
from the College of The Holy Cross, also in Worcester, Massachusetts. He is a
member of several securities industry associations. Mr. Holowesko joined
Templeton in 1985 and has managed the Global Growth Fund from inception.
William T. Howard, Jr.
Vice President and
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Howard is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Emory University. He earned his Bachelor of Arts
degree from Rhodes College. Prior to joining Templeton, Mr. Howard was the
international portfolio manager and analyst with the State of Tennessee
Consolidated Retirement System. He has managed the Pacific Fund since joining
Templeton in 1993.
Edward B. Jamieson
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Jamieson holds a Bachelor of Arts degree from Bucknell University and a
Master's degree in accounting and finance from the University of Chicago
Graduate School of Business. He has been with Advisers since 1987. He is a
member of several securities industry-related committees and associations. He
will manage the Small Cap Fund from inception.
Charles B. Johnson
Chairman of the Board, Director
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Arts degree in economics and political science
from Yale University. He has been with Franklin since 1957. Mr. Johnson is a
member of several securities industry committees and associations. He has
managed the Income Securities Fund and the Utility Fund since their inception.
Gregory E. Johnson
Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Science degree in accounting and business
administration from Washington and Lee University. He joined Franklin in 1986.
Mr. Johnson is a member of several securities industry committees and
associations. He has managed the Utility Fund since its inception.
Marc S. Joseph
Vice President and
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Joseph holds a Doctor of Jurisprudence degree from Harvard Law School. He
earned a Master of Business Administration degree from Harvard Business School
and a Bachelor of Science degree in computer science from William and Mary
College. Prior to joining Templeton, Mr. Joseph was a vice president with
Pacific Financial Research and a management consultant at McKinsey Co. He
started managing the International Fund upon joining Templeton in 1993.
Suzanne Willoughby Killea
Portfolio Manager
Franklin Advisers, Inc.
Ms. Killea holds a Master of Business Administration degree from Stanford
University. She earned her Bachelor of Arts degree in architecture from
Princeton University. Prior to joining Franklin, Ms. Killea worked as a summer
intern with Dillon Read & Co., Inc. (1990) and Dodge & Cox (1989), and for five
years as a broker with the Rubicon Group, a commercial real estate services
firm. Ms. Killea joined Franklin in 1991 and has managed the Precious Metals
Fund since 1994.
H. Allan Lam
Vice President
Templeton Investment Management
(Hong Kong) Limited
Mr. Lam holds a Bachelors of Arts degree in accounting from Rutgers University.
He has had extensive auditing experience with Deloitte Touche & Tohmatsu and
KMPG Peat Marwick. He joined Templeton in 1987 and has managed the Developing
Markets Fund from inception.
Jack Lemein
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a bachelor of science degree in finance from the University of
Illinois. Mr. Lemein has been in the securities industry since 1967. He is a
member of several securities industry-related committees and associations. Mr.
Lemein joined Franklin in 1984 and has managed the Government Fund, the Zero
Coupon Funds, and the Adjustable Fund since their inception.
Ian Link
Portfolio Manager
Franklin Advisers, Inc.
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree in
economics from the University of California at Davis. He is a member of several
securities industry-related committees and associations. Mr. Link joined
Franklin in 1989, and has managed the Utility Fund since March 1995.
William Lippman
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lippman holds a Master of Business Administration degree from the Graduate
School of Business Administration of New York University. He earned his Bachelor
of Science degree in business administration from City College New York. Mr.
Lippman has been in the securities industry for over 30 years and with Franklin
since 1988. He has managed the Intermediate Bond Fund and the Rising Dividend
Fund since their inception.
Michael McCarthy
Portfolio Manager
Franklin Advisers, Inc.
Mr. McCarthy holds a Bachelor of Arts degree in history from the University of
California at Los Angeles. He has been with Advisers since 1992. He will manage
the Small Cap Fund from inception.
Howard McEldowney
President
Franklin Management Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. McEldowney has a Master in Business Administration from Columbia University
School of Business and a Bachelor of Arts degree from Harvard University. Mr.
McEldowney has been in the industry since 1964 and with Franklin since April
1984.
Margaret McGee
Portfolio Manager
Franklin Advisers, Inc.
Ms. McGee holds a Bachelor of Arts degree from William Paterson College. She has
been in the securities industry since 1985 and with Franklin since 1988. Ms.
McGee is a member of several securities industry-related committees and
associations. She has managed the Rising Dividend Fund and the Intermediate Bond
Fund since their inception.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Investment Management
(Hong Kong) Limited
Mr. Mobius holds a Doctor of Philosophy degree in economics and political
science from the Massachusetts Institute of Technology. He earned his bachelor's
and master's degrees from Boston University. He is a member of several
industry-related associations. Mr. Mobius joined the Templeton organization in
1987 and has managed the Developing Markets Fund from inception.
Chris Molumphy
Portfolio Manager
Franklin Advisers, Inc.
Mr. Molumphy is a Chartered Financial Analyst and holds a Master's of Business
Administration degree in finance from the University of Chicago. He earned his
Bachelor of Arts degree in economics from Stanford University. Mr. Molumphy is a
member of several securities industry associations. He joined Franklin in 1988
and has managed the High Income Fund since its inception.
Nicholas Moore
Portfolio Manager
Franklin Advisers, Inc.
Mr. Moore holds a Bachelor of Science degree in business administration, with a
focus on accounting and finance, from the School of Business, Menlo College,
Menlo Park, California. He has been with Advisers since 1986. He will manage the
Small Cap Fund from inception.
Philip H. W. Smith
Portfolio Manager
Franklin Advisers, Inc.
Mr. Smith holds a Doctor of Jurisprudence degree from Yale Law School. He earned
his Bachelor of Arts degree from Princeton University. Mr. Smith has been in the
securities industry since 1964. He joined Franklin in 1988 and has managed the
Intermediate Bond Fund since its inception.
R. Martin Wiskemann
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Wiskemann holds a degree in business administration from the Handelsschule
of the State of Zurich, Switzerland. He has been in the securities business for
more than 30 years, managing mutual fund equity and fixed-income portfolios, and
private investment accounts. He is a member of several securities industry
associations. He joined Franklin in 1972 and has managed the High Income Fund
and the Metals Fund since their inception.
Tom Wu
Vice President and
Portfolio Manager
Templeton Investment Management
(Hong Kong) Limited
Mr. Wu holds a Master of Business Administration degree from the University of
Oregon. He earned a Bachelor of Social Science Degree in economics from the
University of Hong Kong. Prior to joining Templeton, he was a stockbroker at
Vickers da Costa Hong Kong Ltd. He joined Templeton in 1987 and has managed the
Developing Markets Fund from inception.
PURCHASE, REDEMPTION,
AND EXCHANGE OF SHARES
PURCHASES OF SHARES
As noted in the Introduction, shares of each Fund are currently sold only to the
Variable Accounts of Allianz Life to fund the benefits under its Policies. The
Trust does not foresee any disadvantage to purchasers of variable life insurance
policies and variable annuity contracts arising out of the fact that the Trust
may be made available to Variable Accounts which are used in connection with
both types of products. Nevertheless, the Trust's Board of Trustees intends to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the Variable Accounts
might withdraw its investment in the Trust. This might force the Trust to sell
portfolio securities at disadvantageous prices.
The applicable Variable Account of Allianz Life purchases shares of each Fund
using premiums allocated to one or more of the Sub-Accounts of each Variable
Account, as selected by the Policyholders. All shares are sold at net asset
value without a sales charge. Shares are purchased at the net asset value of
each respective Fund next determined after Allianz Life receives the premium
payment in good order.
All investments in each Fund are credited to each Sub-Account in the form of
full and fractional shares of the designated Fund (rounded to the nearest 1/1000
of a share). The Funds do not issue share certificates. Initial and subsequent
payments allocated to a specific Fund are subject to the limits applicable in
the Policies issued by Allianz Life.
The investment objectives and policies of most of the Funds are similar to those
of other Franklin Templeton Funds. Following is a list of the Funds and each
such similar fund in the Franklin Templeton Fund:
FRANKLIN VALUEMARK FUNDS FRANKLIN TEMPLETON FUNDS
High Income Fund AGE High Income Fund, Inc.
FRANKLIN CUSTODIAN FUNDS, INC.:
Income Securities Fund -Income Series
Precious Metals Fund Franklin Gold Fund
FRANKLIN INTERNATIONAL TRUST:
Templeton Pacific Growth Fund -Franklin Pacific Growth Fund
Templeton Internationa Equity Fund -Franklin International Equity Fund
FRANKLIN INVESTORS SECURITIES TRUST:
Adjustable U.S. Government Fund -Franklin Adjustable U.S. Government
Securities Fund
Global Income Fund -Franklin Global Government Income Fund
FRANKLIN MANAGED TRUST:
Rising Dividends Fund -Franklin Rising Dividends Fund
Investment Grade Intermediate Bond Fund -Franklin Investment Grade Income Fund
Franklin Money Fund Franklin Money Fund
FRANKLIN REAL ESTATE SECURITIES TRUST
Real Estate Securities Fund -Franklin Real Estate Securities Fund
FRANKLIN STRATEGIC SERIES
Small Cap Fund -Franklin Small Cap Growth Fund
Templeton Developing Markets Equity Templeton Developing Markets Fund, Inc.
Fund
Templeton Global Growth Fund Templeton Growth Fund, Inc.
TEMPLETON VARIABLE PRODUCTS SERIES FUND:
Templeton Global Asset Allocation Fund -Templeton Asset Allocation Fund
BECAUSE OF DIFFERENCES IN PORTFOLIO SIZE, THE INVESTMENTS HELD, THE TIMING OF
PURCHASES OF SIMILAR INVESTMENTS, CASH FLOWS, AND ADDITIONAL ADMINISTRATIVE AND
INSURANCE COSTS ASSOCIATED WITH INSURANCE COMPANY SEPARATE ACCOUNTS, THE
INVESTMENT PERFORMANCE OF THE FRANKLIN VALUEMARK FUNDS WILL DIFFER FROM THE
PERFORMANCE OF THE CORRESPONDING FRANKLIN TEMPLETON FUNDS.
REDEMPTIONS OF SHARES
Allianz Life redeems shares of the applicable Fund to make benefit or surrender
payments under the terms of its Policies. Redemptions are processed on any day
on which the Funds are open for business (each day the New York Stock Exchange
is open) and are effected at the Fund's net asset value next determined after
the insurance company receives the appropriate order from its Policyholder.
Payment for redeemed shares will be made promptly, but in no event later than
seven days after receipt of the redemption order in proper form. However, the
right of redemption may be suspended or the date of payment postponed in
accordance with the rules under the 1940 Act. Redemptions are taxable events,
and the amount received upon redemption of the shares of any of the Funds may be
more or less than the amount paid for the shares, depending upon the
fluctuations in the market value of the assets constituting the portfolios of
that Fund.
EXCHANGES OF SHARES
Shares of any one Fund may be exchanged by Allianz Life for shares of any of the
other Funds in the Trust, all of which are described in this Prospectus.
Exchanges are treated as a redemption of shares of one Fund and a purchase of
shares of one or more of the other Funds and are effected at the respective net
asset value per share of each Fund on the date of the exchange.
Neither the Trust nor the Variable Accounts are designed for professional market
timing organizations or other entities using programmed and frequent transfers.
The Variable Accounts, in coordination with the Trust, reserve the right to
temporarily or permanently refuse exchange requests if, in the Managers'
judgment, a Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. In particular, a pattern of exchanges that coincide with a "market
timing" strategy may be disruptive to a Fund and therefore may be refused.
Investors should consult the Variable Account prospectus of the specific
insurance product that accompanies this Trust prospectus for information on
other specific limitations on the transfer privilege.
The Trust reserves the right to modify or discontinue its exchange program at
any time upon 60 days' notice to Allianz Life.
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS
Each Fund, other than the Money Market Fund, will declare and pay to the
appropriate Sub-Account of the Variable Account once each year following the
close of the calendar year (i) all net investment income (which includes
dividends and interest paid on each Fund's investments less expenses incurred in
the Fund's operations) and (ii) all net realized short-term and long-term
capital gains, if any, earned during the preceding year.
The Money Fund declares a dividend each day the Fund's net asset value is
calculated, equal to all of its daily net income, payable to the appropriate
Sub-Account of the Variable Account as of the close of business the preceding
day. The amount of dividend may fluctuate from day to day and may be omitted on
some days, depending on changes in the factors that comprise the Fund's net
income.
All distributions, whether from net capital gains or net investment income, will
be paid in the form of additional shares of that Fund, acquired at net asset
value. Because the value of each Fund's shares is based directly on the amount
of its net assets, including any undistributed net income, any distribution of
income or capital gains will result in a decrease in the value of that Fund's
shares equal to the amount of the distribution. The price of each Fund's shares
is quoted ex-dividend on the business day following the record date.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund will be determined separately after
the close of trading on the New York Stock Exchange (the "Exchange") (generally
4:00 p.m. Eastern time) on each day that the Exchange is open for trading.
FUNDS - OTHER THAN MONEY FUND
The net asset value per share for all the Funds, except the Money Fund, is
determined in the following manner: the aggregate of all liabilities, including,
without limitation, the current market value of any outstanding options written
by a Fund, if any, accrued expenses and taxes and any necessary reserves, is
deducted from the total gross value of all assets, and the difference is divided
by the number of shares of that Fund outstanding at the time. For the purpose of
determining the aggregate net assets of each Fund (except the Money Fund), cash
and receivables are valued at their realizable amounts, interest is recorded as
accrued, and dividends are recorded on the ex-dividend date.
Portfolio securities listed on a securities exchange or on NASDAQ for which
market quotations are readily available are valued at the last quoted sale price
of the day or, if there is no such reported sale, within the range of the most
recent quoted bid and ask prices. Over-the-counter portfolio securities for
which market quotations are readily available are valued within the range of the
most recent bid and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Managers. Portfolio
securities underlying actively traded options are valued at their market price
as determined above. The current market value of any option held by a Fund is
its last sales price on the relevant Exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices if such valuation is believed to fairly reflect the
contract's market value. If a Fund should have an open option position as to a
security, the valuation of the contract will be within the range of the bid and
ask prices.
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 of Trustees.
The value of a foreign security is determined in its national currency as of the
close of trading on the foreign exchange on which it is traded or as of the
scheduled close of trading on the Exchange, if that is earlier, and that value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at noon, Eastern time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the mean between the current
bid and ask price is used. Occasionally, events which affect the values of
foreign securities and foreign exchange rates may occur between the times at
which values and rates are determined and the close of the Exchange and will,
therefore, not be reflected in the computation of a Fund's net asset value. If
events materially affecting the value of these foreign securities occur during
such periods, then these securities will be valued in accordance with procedures
established by the Board of Trustees.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
in New York on each day on which the Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or countries, may
not take place on every Exchange business day. Furthermore, trading takes place
in various foreign markets on days which are not business days for the Exchange
and on which the Fund's net asset value is not calculated. Each Fund calculates
net asset value per Share, and therefore effects sales and redemptions of its
Shares, as of the close of the Exchange once on each day on which that Exchange
is open. Such calculation does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in such
calculation and if events occur which materially affect the value of these
foreign securities, they will be valued at fair market value as determined by
the Managers and approved in good faith by the Board of Trustees.
All Money Market Instruments are valued at current market, as discussed above.
With the approval of trustees, a Fund may utilize a pricing service, bank or
broker/dealer to perform any of the above described functions.
MONEY FUND
The net asset value per share of the Money Fund is calculated by adding the
value of all portfolio holdings and other assets, deducting its liabilities, and
dividing the result by the number of shares outstanding.
The valuation of the Fund's portfolio securities is based upon their amortized
cost value, which does not take into account unrealized capital gain or loss.
This involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Further information is included under "Additional Information Regarding
Valuation and Redemption of Shares of the Funds" in the SAI.
TAX CONSIDERATIONS
Each Fund of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, qualified as such and intends to continue to so
qualify. As a regulated investment company, each Fund will not be subject to
federal income tax, provided that it distributes all of its investment company
income and net capital gains for each taxable year to its shareholders in
accordance with the timing requirements imposed by the Code.
It is generally not the intention of Funds that invest in foreign securities to
invest in foreign equity securities of an issuer which meets the definition in
the Code of a Passive Foreign Investment Company (PFIC). If any Fund invests in
the securities of certain countries, including South Korea and Taiwan, Republic
of China, its only option may be to invest in the stocks of PFICs. To the extent
that a Fund makes such an investment, it may be subject to both an income tax
and an additional tax in the form of an interest charge with respect to such
investment.
In order to qualify as a regulated investment company, each Fund must satisfy
certain requirements concerning the nature of its income, diversification of its
assets and distribution of its income to shareholders. In order to ensure that
individuals holding the Policies whose assets are invested in a Fund will not be
subject to federal income tax on distributions made by the Fund prior to the
receipt of payments under the Policies, each Fund intends to comply with the
additional requirements of Section 817(h) of the Code relating to
diversification of its assets. Any Fund's investment in options, futures
contracts, forward contracts, options on stock indices and futures contracts,
foreign currencies and securities, foreign currency and related deposits, gold
bullion and loan participations (as described in the section "Investment
Objectives and Policies") may also be limited by the requirements of the Code
for qualification as a regulated investment company.
The Funds are not subject to any federal excise tax on undistributed income
because their shares are held exclusively by segregated asset accounts of an
insurance company in connection with variable contracts.
Foreign exchange gains and losses realized by the Funds in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt obligations, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Funds' income or loss from such transactions
and, in turn, its distributions to shareholders.
The Metals Fund's ability to invest in gold bullion will be limited by the
requirements for qualification as a regulated investment company. For example,
no more than 10% of the Fund's annual gross income may be derived from income
from nonqualifying sources, including gain from the disposition of gold bullion
or gold derivative instruments.
Holders of Policies under which assets are invested in the Trust should refer to
the Prospectus for the Policies for information regarding the tax aspects of
ownership of such Policies.
PERFORMANCE INFORMATION
From time to time, the Money Fund may advertise its "yield" and "effective
yield." Both yield figures will be based on historical earnings and are not
intended to indicate future performance. The "yield" of the Money Fund refers to
the income generated by an investment in the Money Fund over a seven-day period
(which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Money
Fund is assumed to be reinvested. The "effective yield" will be slightly higher
than the "yield" because of the compounding effect of this assumed reinvestment.
From time to time, the other Funds may publish their current yield and total
return in advertisements and communications to Policyholders. 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. Total return information will include the
Fund's average annual compounded rate of return over the most recent four
calendar quarters and the period from the Fund's inception of operations, based
upon the value of the shares acquired through a hypothetical $1,000 investment
at the beginning of the specified period and the net asset or redemption value
of such shares at the end of the period, assuming reinvestment of all
distributions at net asset value. Each Fund may also advertise aggregate and
average total return information over different periods of time.
Each Fund may also publish a distribution rate in Policyholder communications
preceded or accompanied by a copy of the Funds' current Prospectus. The current
distribution rate for a Fund 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.
Each Fund will publish uniformly computed yield and total return figures along
with publication of its distribution rate.
In each case, the yield, distribution rates and total return figures will
reflect all recurring charges against that Fund's income, including mortality
and expense guarantees and other insurance-related administrative charges for
the applicable time period. Investors should note that the investment results of
each Fund will fluctuate over time, and any presentation of a Fund's current
yield, distribution rate or total return for any prior period should not be
considered as a representation of what an investment may earn or what an
investor's yield, distribution rate or total return may be in any future period.
See "Calculation of Performance Data" in the Allianz Life SAI.
GENERAL INFORMATION
CUSTODY OF ASSETS
Under a custody agreement with the Trust, Bank of America NT & SA serves as the
custodian of the Funds' assets. In addition, Chase Manhattan Bank serves as
custodian for the Asset Allocation, Developing Markets, Global Growth, Global
Income, International, and Pacific Funds.
DISTRIBUTION PLANS
Each Fund's management agreement includes a distribution plan (the "Plan")
pursuant to rule 12b-1 under the 1940 Act. However, no payments are to be made
by any Fund as a result of the Plan. The Funds do not make any payments other
than payments for which the Funds are otherwise obligated to make pursuant to
the applicable then effective management agreement or as incurred in the
ordinary course of their business. To the extent any of the foregoing are
nevertheless deemed indirectly to be payments for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of rule 12b-1, such payments shall be deemed to have been made pursuant
to the Plan (sometimes referred to as a "defensive 12b-1 Plan"). In connection
with their approval of the applicable management agreements, the Board of
Trustees, including a majority of the non-interested trustees, determined that,
in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the implementation of
the respective Plans will benefit each Fund and the Policyholders whose premium
payments have indirectly been invested in each Fund. For further details of this
Plan, see the SAI.
REPORTS
The Trust's fiscal year ends December 31. Annual Reports containing audited
financial statements of the Trust and Semi-Annual Reports containing unaudited
financial statements, as well as proxy materials, are sent to Policyholders,
annuitants or beneficiaries, as appropriate. Inquiries may be directed to the
Trust at the telephone number or address set forth on the cover page of this
prospectus.
TRANSFER AGENT
Franklin Templeton Investor Services, Inc., 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777, also a wholly-owned subsidiary of
Franklin Resources, Inc., maintains shareholder records, processes purchases and
redemptions of each Fund's shares, and serves as each Fund's dividend-paying
agent.
VOTING PRIVILEGES AND OTHER RIGHTS
The Trust was organized as a Massachusetts business trust under an Agreement and
Declaration of Trust which permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest, with a par value of $.01,
which may be issued in any number of series. Shares issued by each Fund will be
fully paid and nonassessable and will have no preemptive, conversion, or sinking
rights.
Shares of each Fund have equal rights as to voting and vote separately (from
other Funds in the Trust) as to issues affecting that Fund, or the Trust, unless
otherwise permitted by the 1940 Act. Voting privileges are not cumulative, so
that the holders of more than 50% of the shares voting in any election of
trustees can, if they choose to do so, elect all of the trustees. The Trust does
not intend to hold annual shareholders' meetings. The Trust may, however, hold a
special shareholders' meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by the trustees, in their discretion, or by
shareholders holding at least ten percent of the outstanding shares of any Fund.
Shareholders will receive assistance in communicating with other shareholders in
connection with the election or removal of trustees, similar to the provisions
contained in Section 16(c) of the 1940 Act. For information regarding voting
privileges of Policyholders, see Allianz Life Prospectus "Voting Rights."
The Board of Trustees may from time to time issue other series, the assets and
liabilities of which will likewise be separate and distinct from any other
series.
APPENDIX
DESCRIPTION OF BOND RATINGS*
MOODY'S
Aaa: Bonds which are 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
edge." Interest payments are protected by a large or by an 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 which are rated Aa are judged to be of 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 as in Aaa securities or fluctuations or protective elements
may be of greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
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. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements: their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be 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 which are 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 which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: Bonds rated AAA are highest grade debt obligations. This rating 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 they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are 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 adequate 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 obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C: This 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.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S. Moody's Commercial Paper ratings, which are also applicable to
municipal paper investments permitted to be made by the Trust, 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 obligations 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.
However, the relative degree of safety 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
change in circumstances than obligations carrying the higher designations.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
FRANKLIN VALUEMARK FUNDS
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 1, 1995
777 Mariners Island Blvd., P.O. Box 7777 1994
San Mateo, CA 94403-7777 1-800/342-3863
Franklin Valuemark Funds (the "Trust") is an investment company, organized as a
Massachusetts business trust, and consisting of twenty-two separate investment
portfolios or funds (the "Fund" or "Funds") each of which has different fund
investment objectives. Shares of the Funds are sold only to insurance company
separate accounts to fund the benefits of variable life insurance policies or
variable annuity contracts owned by their respective policyholders or
contractholders. Certain Funds may not be available in connection with a
particular policy or contract or in a particular state. Investors should consult
the separate account prospectus for the specific insurance product that
accompanies the Trust prospectus for information on any applicable restrictions
or limitations with respect to the Funds.
A Prospectus for the Trust, dated November 1, 1995, as may be amended from time
to time, provides the basic information an investor should know before investing
in any Fund and may be obtained without charge from the Trust at the address
listed above.
This Statement of Additional Information is not a prospectus. It contains
information in addition to, and in more detail than set forth in, the
Prospectus. This Statement is intended to provide the prospective investor with
additional information regarding the activities and operations of the Trust and
the Funds and should be read in conjunction with the Prospectus.
Contents Page
Introduction (See also "introduction" and
"General Information" in the Prospectus)
Fund Investment Objectives and Policies
See also "Fund Investment Objectives
and Policies" in the Prospectus)
Highlighted Risk Considerations
(See also "Highlighted Risks
Considerations" in the Prospectus)
Foreign Securities
Currency Management Techniques
Adjustable Fund - Special Considerations
Metals Fund - Special Considerations
Zero Coupon Funds - Special Considerations
Common Investment
Methods and Risks
Borrowing
Country Diversification
Illiquid Securities
Interest Rate Swaps
Inverse Floaters
Options and Futures
Portfolio Turnover
Real Estate Fund
Repurchase Transactions
When-Issued Securities
Fundamental Investment Restrictions
Officers and Trustees
Investment Management
and Other Services (See also
"Management" in the Prospectus)
Business Managers
Transfer Agent
Custodians
Independent Auditors
Research Services
Policies Regarding Brokers
Used on Securities Transactions
Additional Information Regarding
Valuation and Redemption of
Shares of the Funds
(See also "Purchase, Redemption and
Exchange of Shares" and "Determination
of Net Asset Value" in the Prospectus)
Money Market Fund
Additional Information
Additional Information Regarding Taxation
Miscellaneous Information
Financial Statements
INTRODUCTION
Franklin Valuemark Funds (the "Trust") is an open-end management investment
company, or mutual fund, organized as a Massachusetts business trust on April
26, 1988 and registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 (the "1940 Act"). Shares of the Trust
are currently sold only to the separate accounts (the "Variable Accounts") of
Allianz Life Insurance Company of North America and its affiliates ("Allianz
Life") to fund the benefits under variable life insurance policies and variable
annuity contracts (collectively the "Policies") issued by Allianz Life. The
Variable Accounts are divided into sub-accounts (the "Sub-Accounts"), each of
which will invest in one of the Funds, as directed within the limitations
described in the appropriate Policies, by the owners of the respective Policies
issued by Allianz Life (collectively the "Policyholders"). The Trust issues a
separate series of shares of beneficial interest for each Fund. Each Fund
maintains a totally separate and distinct investment portfolio. Some of the
current Funds in the Trust may not be available in connection with a particular
Policy or in a particular state. Policyholders should consult the insurance
product prospectus accompanying the Trust prospectus which describes the
specific Policy or Allianz Life for information on available Funds and any
applicable limitations with respect to a separate account's investments in the
Funds.
FUND INVESTMENT OBJECTIVES AND POLICIES
Each Fund has one or more investment objectives and related investment policies
and uses various investment techniques to pursue these objectives and policies,
all of which are described more completely in the Trust's Prospectus. There can
be no assurance that any of the Funds will achieve its investment objective or
objectives. Investors should not consider any one Fund alone to be a complete
investment program and should evaluate each Fund in relation to their personal
financial situation, goals, and tolerance for risk. All of the Funds are subject
to the risk of changing economic conditions, as well as the risk related to the
ability of the Managers to make changes in the portfolio composition of the Fund
in anticipation of changes in economic, business, and financial conditions. As
with any security, a risk of loss of all or a portion of the principal amount
invested accompanies an investment in the shares of any of the Funds.
SUMMARY OF FUND INVESTMENT OBJECTIVES AND POLICIES
FUNDS SEEKING STABILITY
OF PRINCIPAL AND INCOME
Money Market Fund ("Money Fund")1 seeks high current income, consistent with
capital preservation and liquidity. The Fund will pursue its objective by
investing exclusively in high quality money market instruments. An investment in
the Money Market Fund is neither insured nor guaranteed by the U.S. Government.
The Fund attempts to maintain a stable net asset value of $1.00 per share,
although no assurances can be given that the Fund will be able to do so.
Zero Coupon Funds, 1995, 2000, 2005, 2010, seek a high investment return
consistent with the preservation of capital, by investing primarily in zero
coupon securities. In response to interest rate changes, these securities may
experience greater fluctuations in market value than interest-paying securities
of similar maturities. The Funds may not be appropriate for short-term investors
or those who intend to withdraw money before the maturity date. The Zero Coupon
Fund - 1995 will mature December 15, 1995.
FUNDS SEEKING CURRENT INCOME
Adjustable U.S. Government Fund ("Adjustable Fund") seeks a high level of
current income, consistent with lower volatility of principal, by investing
primarily in adjustable rate securities which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
Global Income Fund1 seeks a high level of current income, consistent with
preservation of capital, with capital appreciation as a secondary consideration,
through investing in foreign and domestic debt obligations, including up to 25%
in high yield, high risk, lower rated debt obligations (commonly referred to as
"junk bonds"), and related currency transactions. Investing in a non-diversified
fund of global securities including those of developing markets issuers,
involves increased susceptibility to the special risks associated with foreign
investing.
High Income Fund2 seeks a high level of current income, with capital
appreciation as a secondary objective, by investing in debt obligations and
dividend-paying common and preferred stocks. Debt obligations include high
yield, high risk, lower rated obligations (commonly referred to as "junk bonds")
which involve increased risks related to the creditworthiness of their issuers.
Investment Grade Intermediate Bond Fund ("Intermediate Bond Fund")1 seeks
current income, consistent with preservation of capital, primarily through
investment in intermediate-term, investment grade corporate obligations and U.S.
government securities.
The U.S. Government Securities Fund ("Government Fund") seeks current income and
safety of capital by investing exclusively in obligations issued or guaranteed
by the U.S. government or its agencies or instrumentalities.
FUNDS SEEKING GROWTH AND INCOME
Growth and Income Fund (formerly the Equity Growth Fund) seeks capital
appreciation, with current income return as a secondary objective, by investing
primarily in U.S. common stocks, securities convertible into common stocks,
preferred stocks, and debt securities.
Income Securities Fund1,2 seeks to maximize income while maintaining prospects
for capital appreciation by investing in a diversified portfolio of domestic and
foreign, including developing markets, debt obligations and/or equity
securities. Debt obligations include high yield, high risk, lower rated
obligations (commonly referred to as "junk bonds") which involve increased risks
related to the creditworthiness of their issuers.
Rising Dividends Fund seeks capital appreciation, primarily through investment
in the equity securities of companies that have paid consistently rising
dividends over the past ten years. Preservation of capital is also an important
consideration. The Fund seeks current income incidental to capital appreciation.
Templeton Global Asset Allocation Fund ("Asset Allocation Fund")1 seeks a high
level of total return through a flexible policy of investing in equity
securities, debt obligations, and money market instruments of issuers in any
nation, including developing markets nations. The mix of investments among the
three market segments will be adjusted in an attempt to capitalize on the total
return potential produced by changing economic conditions throughout the world.
Foreign investing involves special risks.
Utility Equity Fund ("Utility Fund")1 seeks both capital appreciation and
current income by investing in securities of domestic and foreign, including
developing markets, issuers engaged in the public utilities industry.
FUNDS SEEKING CAPITAL GROWTH
Precious Metals Fund ("Metals Fund")1 seeks capital appreciation, with current
income return as a secondary objective, by concentrating its investments in
securities of U.S. and foreign companies, including those in developing markets,
engaged in mining, processing or dealing in gold and other precious metals.
Real Estate Securities Fund ("Real Estate Fund") seeks capital appreciation,
with current income return as a secondary objective, by concentrating its
investments in publicly traded securities of U.S. companies in the real estate
industry.
Small Cap Fund seeks long-term capital growth. The Fund seeks to accomplish its
objective by investing primarily in equity securities of small capitalization
growth companies. The Fund may also invest in foreign securities, including
those of developing markets issuers. Because of the Fund's investments in small
capitalization companies, an investment in the Fund may involve greater risks
and higher volatility and should not be considered a complete investment
program.
Templeton Developing Markets Equity Fund ("Developing Markets Fund")1 seeks
long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equities of issuers in countries having developing
markets. The Fund is subject to the heightened foreign securities investment
risks that accompany foreign developing markets and an investment in the Fund
may be considered speculative.
Templeton Global Growth Fund ("Global Growth Fund")1 seeks long-term capital
growth. The Fund hopes to achieve its objective through a flexible policy of
investing in stocks and debt obligations of companies and governments of any
nation, including developing markets. The realization of income, if any, is only
incidental to accomplishment of the Fund's objective of long-term capital
growth. Foreign investing involves special risks.
Templeton International Equity Fund ("International Fund")1 seeks long-term
growth of capital. Under normal conditions, the International Equity Fund will
invest at least 65% of its total assets in an internationally mixed portfolio of
foreign equity securities which trade on markets in countries other than the
U.S., including developing markets, and are (i) issued by companies domiciled in
countries other than the U.S., or (ii) issued by companies that derive at least
50% of either their revenues or pre-tax income from activities outside of the
U.S. Foreign investing involves special risks.
Templeton Pacific Growth Fund ("Pacific Fund")1 seeks long-term growth of
capital, primarily through investing at least 65% of its total assets in equity
securities which trade on markets in the Pacific Rim, including developing
markets, and are (i) issued by companies domiciled in the Pacific Rim including
developing markets or (ii) issued by companies that derive at least 50% of
either their revenues or pre-tax income from activities in the Pacific Rim.
Investing in a portfolio of geographically concentrated foreign securities,
including developing markets, involves increased susceptibility to the special
risks of foreign investing and an investment in the Fund may be considered
speculative.
1 The Asset Allocation, Developing Markets, Global Growth, Global Income, Income
Securities, Intermediate Bond, International, Money Market, Pacific, Precious
Metals, Small Cap, and Utility Equity Funds may invest more than 10% of their
total net assets in foreign securities which are subject to special and
additional risks related to currency fluctuations, market volatility, and
economic, social, and political uncertainty; investing in developing markets
involves similar but heightened risks related to the relatively small size and
lesser liquidity of these markets. See "Highlighted Risk Considerations, Foreign
Transactions" in the Prospectus.
2 The High Income and Income Securities Funds may invest up to 100% of their
respective net assets in debt obligations rated below investment grade, commonly
known as "junk bonds," or in investments which have not been rated by any rating
agency. Investments rated below investment grade involve greater risks,
including price volatility and risk of default than investments in higher rated
securities. Investors should carefully consider the risks associated with an
investment in these Funds in light of the securities in which they invest. See
"Highlighted Risk Considerations, Lower Rated Debt Obligations" in the
Prospectus.
HIGHLIGHTED RISK CONSIDERATIONS
As described more fully in the individual Fund sections in the Trust prospectus
and as supplemented below, an investment in certain of the Funds involves
special additional risks as a result of their ability to invest a substantial
portion of their assets in high yield, high risk, lower rated debt obligations,
foreign investments including those of "developing market" issuers located in
emerging nations as defined by the World Bank, specialized industry sectors, or
derivative instruments. These and other types of investments and investment
techniques authorized for more than one Fund, as stated in the individual Fund
descriptions in the Prospectus, are described in greater detail, including the
risks of each and any limitations, in the Trust Prospectus, this section, and
"Common Investment Methods and Risks." All policies and percentage limitations
are considered at the time of purchase. Each of the Funds will not necessarily
use the strategies described to the full extent permitted unless the Managers
believe that doing so will help a Fund reach its objectives, and not all
instruments or strategies will be used at all times.
Foreign Securities
Investors should consider carefully the substantial risks involved in securities
of companies and governments of foreign nations, which are in addition to the
usual risks associated with investing in U.S. issuers. There is generally less
government supervision and regulation of securities exchanges, brokers, dealers
and listed companies than in the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
With respect to American Depositary Receipts ("ADRs") a Fund may purchase the
securities of foreign issuers directly in foreign markets if no ADRs are
available or the Managers believe these securities offer better opportunities
than the ADRs, with reasonable liquidity.
Even though the Funds authorized to invest in foreign securities intend to
acquire the securities of foreign issuers generally where there are public
trading markets, investments by a Fund in the securities of foreign issuers may
tend to increase the risks with respect to the liquidity of that Fund's
portfolio and that Fund's ability to meet large 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. Changes of governmental
administrations or of economic or monetary policies, in the U.S. or abroad, or
changed circumstances in dealings between nations could result in investment
losses for a Fund and could affect adversely that Fund's operations. A Fund's
purchase of securities in foreign countries will involve currencies of the U.S.
and of foreign countries; consequently, changes in exchange rates, currency,
convertibility and repatriation may favorably or adversely affect each Fund.
Securities which are acquired by a Fund outside the U.S. and which are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
the securities in the foreign trading market, the Fund reasonably believes it
can readily dispose of the securities for cash in the U.S. or foreign market and
current market quotations are readily available. Investments may be in
securities of foreign issuers, whether located in developed or undeveloped
countries.
Investments in foreign securities where delivery takes place outside the U.S.
will have to be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes of governmental administrations or of economic or monetary
policies, in the U.S. or abroad, or changed circumstances in dealings between
nations or currency convertibility or exchange rates could result in investment
losses for a Fund. Investments in foreign securities may also subject a 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 Funds permitted to
invest in foreign securities generally intend to acquire the securities of
foreign issuers where there are public trading markets, investments by each Fund
in the securities of foreign issuers may tend to increase the risks with respect
to the liquidity of a Fund's portfolio and a Fund's ability to meet a large
number of shareholder redemption requests should there be economic or political
turmoil in a country in which a Fund has a substantial portion of its assets
invested or should relations between the U.S. and foreign countries deteriorate
markedly. Furthermore, the reporting and disclosure requirements applicable to
foreign issuers may differ from those applicable to domestic issuers, and there
may be difficulties in obtaining or enforcing judgments against foreign issuers.
A 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 a 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 a Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. The Managers endeavor to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time they place a Fund's investments.
The exercise of this 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.
Developing Markets. Among the foreign securities in which the Funds authorized
to do so, may invest, will be the obligations of governments, government
agencies and corporations of developing countries. As many developing countries
restructure their existing bank debt and economic conditions improve, these
obligations have become available and may offer the Funds the potential for
current U.S. dollar income. Such instruments are not traded on any exchange.
However, the Managers believe there may be a market for such securities either
in multinational companies wishing to purchase such assets at a discount for
further investment or from the issuing governments which may decide to redeem
their obligations at a discount.
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 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 Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States 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.
Despite the recent dissolution of the Soviet Union, the Communist Party may
continue to exercise a significant role in certain Eastern European countries.
To the extent of the Communist Party's influence, investments in such countries
will involve risks of nationalization, expropriation and confiscatory taxation.
The communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of such expropriation, the Fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in Eastern European countries. Finally,
even though certain Eastern European Currencies may be convertible into U.S.
dollars, the conversion rates may be artificial to the actual market values and
may be adverse to Fund investors.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.
Authoritarian governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of the Fund's
assets invested in such country. To the extent such governmental or
quasi-governmental authorities do not satisfy the requirements of the 1940 Act
to act as foreign custodians of the Fund's cash and securities, the Fund's
investment in such countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental confiscation may
be increased in such countries.
The Funds endeavor 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 a Fund changes investment 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 which would prevent a Fund from transferring cash out of the
country or withhold portions of interest and dividends at the source, or impose
other taxes with respect to a Fund's investments in securities of issuers of
that country. Although the Managers place a Fund's investments only in foreign
nations which they consider as having relatively stable and friendly
governments, there is the possibility of cessation of trading on national
exchanges, expropriation, nationalization, confiscatory or other taxation,
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 which
could affect investments in securities of issuers in those nations.
Currency Management Techniques
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A forward contract may be for a single price or for a range of
prices. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers or
between broker-dealers and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Some forward contracts, however, have a cancellation fee which a Fund must pay
upon cancellation if such Fund determines that cancelling the contract is more
favorable to the Fund than completing the contract.
At the maturity of a forward contract, a Fund may either accept or make delivery
of the currency specified in the contract or, at or prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
A Fund may enter into forward contracts in several circumstances. For example,
when a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on such a security which it
holds, the Fund may desire to "lock in" the dollar price of the security or the
dollar equivalent of such dividend or interest payment, as the case may be. In
addition, when a Manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency.
A Fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
For example, an Italian lira-denominated position could be constructed by
purchasing 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 (which are
relatively limited in size and number), while also obtaining the benefits of
liquidity available from German mark-denominated debt securities, which
currently have a lower yield. 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. Such difference may be enhanced or offset by premiums which may be
available in connection with the forward contract.
While a Fund may enter into forward contracts to reduce currency exchange rate
risks, changes in currency prices may result in a poorer overall performance for
the Fund than if it had not engaged in any such transaction. Moreover, there may
be an imperfect correlation between the Fund's holding of securities denominated
in a particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may prevent a Fund from achieving the intended hedge or
expose the Fund to the risk of foreign exchange loss.
Certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which a Fund may enter into forward contracts.
Such transactions may also affect the character and timing of income, gain or
loss recognized by the Fund for U.S. federal income tax purposes.
Certain Funds may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency, if the Managers determine that there is a pattern of
correlation between the two currencies. A Fund may also purchase and sell
forward contracts for non-hedging purposes when the Managers anticipate that the
foreign currency will appreciate or depreciate in value, but securities
denominated in that currency do not present attractive investment opportunities
and are not held in the Fund's portfolio.
The Fund's custodian will place cash or liquid high grade debt securities (i.e.,
securities rated in one of the top three ratings categories by Moody's Investors
Service ("Moody's") or Standard & Poor's Corporation ("S&P") or, if unrated,
deemed by the Manager to be of comparable credit quality, into a segregated
account of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward contracts requiring the Fund to
purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Fund's commitments with respect to such contracts. The segregated account
will be marked-to-market on a daily basis. Although forward contracts are not
presently regulated by the Commodity Futures Trading Commission (the "CFTC"),
the CFTC may in the future assert authority to regulate these contracts. In such
event, a Fund's ability to utilize forward contracts may be restricted.
A Fund generally will not enter into a forward contract with a term greater than
one year.
Although a Fund may enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while a Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may cause a Fund to sustain losses which will prevent the
Fund from achieving a complete hedge or expose the Fund to risk of foreign
exchange loss. The Funds may, but are not required, to hedge currency risks.
Adjustable Fund - Special Considerations
Mortgage Securities
A mortgage security is an interest in a pool of mortgage loans. Most mortgage
securities are pass-through securities, which means that they provide investors
with payments consisting of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrower. The dominant issuers or
guarantors of mortgage securities today are the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation ("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.
Many of the mortgage securities either issued or guaranteed by GNMA, FHLMC, or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's, FHLMC's, or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool are passed through monthly to
the holder of the Certificate (i.e., the Adjustable Fund). The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. FNMA guarantees full and timely payment of
all interest and principal, while FHLMC guarantees timely payment of interest
and ultimate collection of principal. Mortgage securities from FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government; however,
their close relationship with the U.S. government makes them high quality
securities with minimal credit risks. The yields provided by these mortgage
securities have historically exceeded the yields on other types of U.S.
government securities with comparable maturities. Unpredictable prepayments of
principal, however, can 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. (See "Common Investment Methods and
Risks" in the Prospectus.)
The originators of mortgages also may make mortgage loans that carry an
adjustable rate of interest as well as the older, more traditional fixed-rate
loans. These adjustable rate mortgages ("ARMs") have become an increasingly
important form of residential financing. Generally, ARMs are mortgages
originated by thrift institutions that have a specified maturity date and which
amortize principal much in the fashion of a fixed-rate mortgage. As a result, in
periods of declining interest rates there is a reasonable likelihood that ARMs
will behave like fixed-rate mortgages in that current levels of prepayments of
principal on the underlying mortgages could accelerate. However, one difference
between ARMs and fixed-rate mortgages is that, for certain types of ARM
securities, the rate of amortization of principal, as well as interest payments,
can and does change in accordance with movements in a particular, pre-specified,
published interest rate index. 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. It is these
special characteristics which are unique to ARMs that the Fund's Manager
believes make them attractive investments in seeking to accomplish the Fund's
objective.
Characteristics of the Mortgage Securities
in Which the Adjustable Fund Invests
Collateralized Mortgage Obligations ("CMOs"). As stated in the Prospectus,
the Fund may also invest in CMOs. CMOs purchased by the Fund may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government;
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and the guarantee is collateralized by
U.S. government securities; or
(3) securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
The Fund may also purchase mortgage securities issued by persons that are not
excluded from the definition of investment company under Section 3(c)(5)(C) of
the 1940 Act.
Resets. As stated in the Prospectus, the interest rates paid on the ARMs and
CMOs in which the Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate index. Commonly
utilized indices include the one-year, three-year and five-year constant
maturity Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the 11th District
Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the
one-month, three-month, six-month or one year London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
Metals Fund - Special Considerations
Concentration of Investments. As a fundamental policy, the Metals Fund intends
to concentrate its investments in securities of issuers engaged in mining,
processing or dealing in gold and other precious metals, such as silver,
platinum and palladium. Such investments may include securities of gold mining
finance companies, as well as operating companies with long-life mines,
medium-life mines or short-life mines. Accordingly, the Metals Fund will have at
least 65% of the value of its assets invested in such securities, except for
temporary periods when unusual and adverse economic conditions exist in that
industry, and it may invest up to 100% of the value of its assets in such
securities.
There are risks inherent in this Fund's policies of investing in securities
engaged in mining, processing or dealing in gold and other precious metals and
in gold bullion. In addition to the general considerations described above, such
investments may involve the following special considerations:
1. Fluctuations in the Price of Gold. The price of gold has been subject to
substantial upward and downward price movements over short periods of time and
may be affected by unpredictable international monetary and political policies,
such as currency devaluations or revaluations, economic conditions within an
individual country, trade imbalances, trade or currency restrictions between
countries and world inflation and interest rates. The price of gold, in turn, is
likely to affect the market prices of securities of companies mining, processing
or dealing in gold and, accordingly, the value of the Fund's investments in such
securities also may be affected.
2. Foreign Securities. As a result of the concentration of investments in gold
and precious metal-related issuers, a substantial portion of the Metals Fund's
assets will be in securities issued by companies domiciled and operating outside
the U.S. or in securities issued by foreign governments. Although the Metals
Fund is not obligated to do so, the Fund presently expects that under normal
conditions more than 50% of the value of its assets may be invested in foreign
securities. At any particular time, a substantial portion of the Fund's assets
may be invested in companies domiciled or operating in very few foreign
countries. In the opinion of the Fund's Manager, current regulations do not
limit seriously the Fund's investment activities, if regulations were changed in
the future, however, they might restrict the ability of the Fund to make its
investments or tend to impair the liquidity of the Fund's investments.
3. Potential Effect of Concentration of Source of Supply and Control Sales. At
the current time there are only four major sources of supply of primary gold
production, and the market share of each source cannot be readily ascertained.
The two largest national producers of gold bullion and platinum are the Republic
of South Africa and the Commonwealth of Independent States (formerly, the Union
of Soviet Socialist Republics). Changes in political and economic conditions
affecting either country may have a direct impact on that country's sales of
gold. Under South African law, the only authorized sales agent for gold produced
in South Africa is the Reserve Bank of South Africa which, through its retention
policies, controls the time and place of any sale of South African bullion. The
South African Ministry of Mines determines gold mining policy. South Africa
depends predominantly on gold sales for the foreign exchange necessary to
finance its imports, and its sales policy is necessarily subject to national and
international economic and political developments.
4. Tax and Currency Laws. Changes in the tax or currency laws of the U.S.,
and of foreign countries, may inhibit the Fund's ability to pursue, or may
increase the cost of pursuing, its investment programs.
5. Unpredictable Monetary Policies, Economic and Political Conditions. The
Fund's assets might be less liquid or the change in the value of its assets
might be more volatile (and less related to general price movements in the U.S.
markets) than would be the case with investments in the securities of larger
U.S. companies, particularly because the price of gold and other precious metals
may be affected by unpredictable international monetary policies and economic
and political considerations, governmental controls, conditions of scarcity,
surplus or speculation. In addition, the use of gold or Special Drawing Rights
(which are also used by members of the International Monetary Fund for
international settlements) to settle net deficits and surpluses in trade and
capital movements between nations subjects the supply and demand, and therefore
the price, of gold to a variety of economic factors which normally would not
affect other types of commodities.
6. Gold Bullion. As a means of seeking its principal objective of capital
appreciation and when it is believed to be appropriate as a possible hedge
against inflation, the Metals Fund may invest a portion of its assets in gold
bullion and may hold a portion of its cash in foreign currency in the form of
gold coins. There is, of course, no assurance that such investments will provide
capital appreciation as a hedge against inflation. The Fund's ability to invest
in gold bullion will be limited to a maximum of 10% of its total assets,
although the extent to which the Fund may make such investments may be further
restricted by the requirements which the Fund must meet in order to qualify as a
regulated investment company under the Code, as well as the diversification
requirements of the 1940 Act applicable to investment companies and the
provisions of the Code applicable to variable annuity policies.
The Metals Fund's assets will be invested in gold bullion at such times as the
prospects of such investments are, in the opinion of its Manager, attractive in
relation to other possible investments. The basic trading unit for gold bullion
is a gold bar weighing approximately 400 troy ounces with a purity of at least
995/1000, although gold bullion is also sold in much smaller units. Gold bars
and wafers are usually numbered and bear an indication of purity by the stamp or
assay mark of the refinery or assay office which certifies the bar's purity.
Bars of gold bullion historically have traded primarily in the London and Zurich
gold markets and, in terms of volume, such gold markets have been the major
markets for trading in gold bullion. Prices in the Zurich gold market generally
correspond to the prices in the London gold market. Since the ownership of gold
bullion became legal in the U.S. on December 31, 1974, U.S. markets for trading
gold bullion have developed. It is anticipated that transactions in gold will
generally be made in such U.S. markets, although such transactions may be made
in foreign markets when it is deemed to be in the best interest of the Fund.
Transactions in gold bullion by the Fund are negotiated with principal bullion
dealers unless, in the Manager's opinion, more favorable prices (including the
costs and expenses described below) are otherwise obtainable. Prices at which
gold bullion is purchased or sold include dealer mark-ups or mark-downs,
insurance expenses, assay charges and shipping costs for delivery to our
custodian. Such costs and expenses may be a greater or lesser percentage of the
price from time to time, depending on whether the price of gold bullion
decreases or increases. Since gold bullion does not generate any investment
income, the only source of return to the Metals Fund on such an investment will
be from any gains realized upon its sales, and a negative return will be
realized, of course, to the extent the Fund sells its gold bullion at a loss.
7. New and Developing Markets for Private Gold Ownership. Between 1933 and
December 31, 1974, a market did not exist in the U.S. in which gold bullion
could be purchased by individuals for investment purposes. Since it became legal
to invest in gold, markets have developed in the U.S. Any large purchases or
sales of gold bullion could have an effect on the price of gold bullion. From
time to time, several Central Banks have been sellers of gold bullion from their
reserves. Sales by central banks and/or rumors of such sales may have a negative
effect on gold prices.
8. Expertise of the Manager and Available Information. The successful management
of the Fund may be more dependent upon the skills and expertise of its Manager
than is the case for most funds because of the need to evaluate the factors
identified above. Moreover, in some countries, disclosures concerning an
issuer's financial condition and results and other matters may be subject to
less stringent regulatory provisions, or may be presented on a less uniform
basis, than is the case for issuers subject to U.S. securities laws. Issuers and
securities exchanges in some countries also may be subject to less stringent
government regulations than is the case for U.S. companies.
Zero Coupon Funds - Special Considerations
As stated in the Prospectus, each of the Zero Coupon Funds will be primarily
invested in Stripped Government Securities. These include zero coupon securities
issued by the U.S. government and its agencies and instrumentalities, by a
variety of tax-exempt issuers such as state and local governments and their
agencies and instrumentalities and by "mixed-ownership government corporations."
Zero coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligation of comparable maturities which make current
distributions of interest (cash). As a result, the net asset value of shares of
a Fund prior to its Target Date may fluctuate over a greater range than shares
of other mutual funds investing in U.S. Treasury securities making current
distributions of interest and having similar maturities. The current net asset
value of a Fund generally will vary inversely with changes in current interest
rates.
The Zero Coupon Fund's zero coupon securities investments will include: Stripped
Treasury Securities, Stripped Government Securities, Stripped Corporate
Securities and Stripped Eurodollar Obligations, as defined in the Prospectus. A
holder will separate the interest coupons from the underlying principal (the
"corpus") of the security. A number of securities firms and banks have stripped
the interest coupons and resold them in custodial receipt programs with a number
of different names, including, in the case of stripped Treasury securities,
"Treasury Income Growth Receipts"("TIGRS") and Certificate of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof. Counsel to
the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that for federal tax and securities
purposes, in their opinion, purchasers of such certificates, such as the Funds,
most likely will be deemed the beneficial holders of the underlying U.S.
government securities.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program, a
Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities. When U.S. Treasury obligations have been stripped of their
unmatured interest coupons by the holder, the stripped coupons are sold
separately or grouped with other coupons with like maturity dates and sold in
such bundled form. The principal or corpus is sold at a deep discount because
the buyer receives only the right to receive a future fixed payment on the
security and does not receive any rights to periodic interest (cash) payments.
Purchasers of stripped obligations acquire, in effect, discount obligations that
are economically identical to the zero coupon securities that the Treasury sells
itself. Other facilities are available to facilitate the transfer of ownership
of non-Treasury zero coupon securities by accounting separately for the
beneficial ownership of particular interest coupon and corpus payments on such
securities through a book-entry record-keeping system.
Under normal circumstances, each Zero Coupon Fund will invest at least 65% of
its net assets in stripped securities. For short-term or emergency purchases,
the Zero Coupon Funds may purchase interest-paying U.S. government securities
and other money market instruments. The Zero Coupon Funds may enter into
repurchase agreements with respect to securities in which the Zero Coupon Funds
invest. These interest-paying securities produce income which may be an
efficient way to provide for expenses and redemptions to make benefit or
surrender payments, among other things.
Management of Reinvestment Risk and Anticipated Growth - The Zero Coupon Funds
seek to minimize unknown reinvestment risk. Reinvestment risk arises from the
uncertainty as to the total return which will be realized from conventional
interest-paying bonds due to the fact that periodic interest (cash) will be
reinvested in the future at interest rates unknown at the time of the original
purchase. With zero coupon securities, however, there are no cash distributions
to reinvest, so owners thereof bear no unknown reinvestment risk if they hold a
zero coupon security to maturity.
For a person who makes a direct investment in a zero coupon security (rather
than through a fund which invests in such instruments) and holds it to maturity,
the return or yield to maturity is certain regardless of whether interim
reinvestment rates rise or fall. (See table below).
Initial Total Ending Value on a $1,000
Coupon Yield to Investment (Realized Yield) if
Interest Maturity Maturity Reinvestment Rates are:
6% 8% 10% 12% 14%
---------------------------
10% 10 Years 10% $2345 $2490 $2655 $2841 $3052
(8.7%) (9.3%) (10%) (10.7%) (11.5%)
0% 10 Years 10% $2655 $2655 $2655 $2655 $2655
(10%) (10%) (10%) (10%) (10%)
*These results assume semi-annual compounding. For illustration purposes only,
the table above assumes these reinvestment rates would remain constant over the
life of the bond. The actual reinvestment rates and total returns of
coupon-paying bonds will vary with changing market conditions.
Due to the nature of Stripped Government Securities, which may comprise 80% or
more of the investments of each Zero Coupon Fund, the reinvestment risk
accompanying these Funds is expected to be less than would be the case if these
Funds were entirely invested in interest (cash)-paying securities. Furthermore,
the Fund's Manager will attempt to manage reinvestment risk by maintaining each
Fund's average duration within twelve months of a Fund's Target Date.
Duration is a measure of the length of an investment which takes into account,
through present value analysis, the timing and amount of any interest payments
as well as the amount of the principal repayment. Duration is commonly used by
professional Managers to help control reinvestment risk by balancing investments
with slightly longer and shorter maturities than the investment horizon of the
overall portfolio.
The investment return of a Zero Coupon Fund, if the investment is held to
maturity, will consist primarily of the amortization of discount on the
underlying securities owned by such Fund (i.e., the difference between their
purchase price and their maturity value) and will be realized on the specified
Target Date. Changes in the market value of the Fund's securities will affect
investment return should investors redeem prior to maturity, as can the skill of
the Manager in managing the Fund.
Liquidation and Distribution of Assets in Target Year - As securities in a Zero
Coupon Fund's portfolio mature or are sold throughout the Target Year, the
proceeds will be invested in Money Market Instruments. By December of that year,
substantially all of the assets of the Fund will consist of such Money Market
Instruments and other then-maturing securities. These instruments will be sold
or allowed to mature, the liabilities of the Fund will be discharged or
provision made therefor, and the net assets will be reinvested at the direction
of Policyholders in one of the other Funds of the Trust or automatically
reinvested as stated in the Prospectus. The estimated expenses of terminating
and liquidating a Fund will be accrued ratably over its Target Year. These
expenses, which are charged to income as are all expenses, are not expected to
exceed significantly the ordinary annual expenses incurred by the Fund and,
therefore, should have no significant additional effect on the maturity value of
the Fund.
COMMON INVESTMENT METHODS AND RISKS
Certain types of investments and investment techniques authorized for more than
one fund, as stated in the descriptions of the individual Funds in the
Prospectus, are described below and in the Prospectus. All policies and
percentage limitations are considered at the time of purchase. Each of the Funds
will not necessarily use the strategies described to the full extent permitted
unless the Managers believe that doing so will help a Fund reach its objectives,
and not all instruments or strategies will be used at all times.
Borrowing
To comply with a certain state's staff guidelines, the Funds that currently may
borrow in excess of 5% of their net assets will nevertheless limit their
borrowing to (1) 10% of net asset value when borrowing for any general purpose
and (2) 25% of net asset value when borrowing as a temporary measure to
facilitate redemptions.
Country Diversification
To comply with a certain state's staff guidelines, the Funds which invest in
foreign countries, as a nonfundamental policy, will follow certain
diversification guidelines with respect to the amount of net assets and the
number of foreign countries in which such Funds may invest. Such a Fund will be
invested in a minimum of five different foreign countries if it has 80% or more
of its net assets invested in foreign countries. Such a Fund may, however,
reduce this minimum to four foreign countries if less than 80% of the Fund's net
assets are invested in foreign countries. The Fund may further reduce the
minimum to three foreign countries if less than 60%; to two foreign countries if
less than 40%; and to one foreign country if less than 20% of such Fund's net
assets are invested in issuers located in foreign countries.
No Fund will have more than 20% of its net assets invested in issuers located in
any one foreign country except that a Fund may have up to an additional 15% of
its net assets in securities of issuers located in any one of the following
countries: Australia, Canada, France, Japan, the United Kingdom and Germany.
These diversification guidelines do not apply to a Fund's investment in issuers
located in the U.S.
Illiquid Securities
The Funds reserve the right to invest up to 10% of their net assets in illiquid
securities. It is the current policy of the International Fund and the Pacific
Fund, however (which may be changed without the approval of the Funds'
shareholders), to limit any such investments to 5% of each Fund's 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
of Trustees has authorized each Fund to invest in restricted securities where
such investment is consistent with the Fund's investment objective and has
authorized such securities to be considered to be liquid to the extent the
Fund's Manager determines that there is a liquid institutional or other market
for such securities N for example, restricted securities which may be freely
transferred among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, and for which a liquid institutional market
has developed. The Board of Trustees will review any determination by the Fund's
advisers to treat a restricted security as liquid on a monthly basis, including
the 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, the Funds' advisers and the Board of
Trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers,
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent a Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the applicable Fund may be
increased if qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts.
Interest Rate Swaps
Certain of the Funds may also participate in interest rate swaps. An interest
rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity while the other
has an interest rate that changes in accordance with changes in a designated
benchmark (e.g., LIBOR, prime, commercial paper, or other benchmarks). The
obligations to make repayment of principal on the underlying securities are not
exchanged. Such 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 such 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 which 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 capital markets. The
success of such a transaction depends in large part on the availability of
fixed-rate obligations at a low enough coupon rate to cover the cost involved.
Inverse Floaters
These are instruments with floating or variable interest rates that move in the
opposite direction, usually at an accelerated speed, to short-term interest
rates or interest rate indices. As with other mortgage-backed securities,
interest rate declines may result in accelerated prepayment of mortgages and the
proceeds from such prepayment must be reinvested at lower prevailing interest
rates. During periods of extreme fluctuations in interest rates, the resulting
fluctuation could affect the net asset value of the Fund in proportion to the
Fund's investment in inverse floaters. An accelerated decline in interest rates
creates a higher degree of volatility and risk.
Options and Futures
Options. As a means of seeking to increase overall return, certain Funds, as
described in the Trust's Prospectus, may write covered put and call options, as
well as purchase put and call options.
When a Fund writes a call option on one of its portfolio securities and the
underlying securities do not reach a price level which would make the exercise
of the option profitable to the holder of the option, the option will generally
expire without being exercised. However, if the underlying securities rise in
price and the option is exercised, the Fund will not participate in any increase
in the price of the underlying securities beyond the exercise price of the
option.
It will generally be a Fund's policy, in order to avoid the exercise of a call
or put option written by it, to cancel its obligations under the call or put
option by entering into a "closing purchase transaction," if available, unless
it is determined to be in the Fund's interest to deliver the underlying
securities from its portfolio. A closing purchase transaction consists of a Fund
purchasing an option having the same terms as the option written by that Fund
and has the effect of cancelling that Fund's positions as an options writer. An
option position may be closed out only where there exists a secondary market for
an option of the same series. If a secondary market does not exist, it might not
be possible to effect closing sale transactions in particular options held by a
Fund, with the result that the Fund would have to exercise the options in order
to realize any profit. The premium which a Fund will pay in executing a closing
purchase transaction may be higher or lower than the premium it received when
writing the option, depending in large part upon the relative price of the
underlying security at the time of each transaction. If a Fund is unable to
effect a closing purchase transaction with respect to options it has written in
a secondary market, it will not be able to sell the underlying security or other
asset covering the option until the option expires or it delivers the underlying
security or asset upon exercise.
In the event that it is determined that it is in a Fund's interest to sell the
underlying portfolio securities on which it has written a covered call option in
order to minimize a loss in the underlying security, the policies of each Fund
that engages in option writing authorize its Manager to determine, on the basis
of its opinion of market conditions, whether to cancel the obligation on such
option by entering into a closing purchase transaction or to sell such
underlying security and leave the call option uncovered until it is deemed
advisable to repurchase the underlying security to cover the option or until the
option written by the Fund expires.
A Fund may write options in connection with buy-and-write transactions; that is,
such Fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money")
the current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call
option, plus the appreciation in the market price of the underlying security up
to the exercise price, will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, a Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price for the security and the exercise price. If the options
are not exercised and the price of the underlying security declines, the amount
of such decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. 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, a Fund may elect to close the position or wait for
the option to be exercised and take delivery of the security at the exercise
price. The Fund's return will be the premium received from the put option, minus
the amount by which the market price of the security is below the exercise
price. Out-of-the-money, at-the-money, and in-the-money put options may be used
by such Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
A Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, such Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option, plus transaction costs.
A Fund may purchase call options to hedge against an increase in the price of
U.S. or foreign government securities that such Fund anticipates purchasing in
the future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise of the option.
Unless the price of the underlying security rises sufficiently, the option may
expire worthless to the Fund.
Options on securities may be traded over-the-counter. In an over-the-counter
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could therefore continue to an unlimited extent
over a period of time. The Fund, when it is the purchaser of an option, is at
risk only to the full extent of the premium it has paid for the option. The
Fund, when it is the writer of an option, is at risk for the difference between
the price at which the option is exercisable and the market price of the
underlying security, minus the amount of the premium received.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements. Over-the-counter options and the assets used
to cover such options will be considered illiquid securities and will not,
together with any other illiquid securities, exceed 10% of a Fund's net assets.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities. In addition, a foreign exchange may
impose different exercise and settlement terms and procedures and margin
requirements than a U.S. exchange.
Options on Foreign Currencies. A Fund may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities or other assets to be acquired. As in the case
of other kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received,
and a Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, such Fund may forfeit the entire amount of the premium,
plus related transaction costs.
Special Risks Associated With Options. An exchange traded options position may
be closed out only on an options exchange which provides a secondary market for
an option of the same series. Although a Fund will generally purchase or write
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option, or at any particular time. For some options, no
secondary market on an exchange may exist. In such event, it might not be
possible to effect closing transactions in particular options, with the result
that a Fund would have to exercise its options in order to realize any profit
and would incur transaction costs upon the sale of underlying securities
pursuant to the exercise of put options. If a Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying currency (or security denominated in
that currency) until the option expires or it delivers the underlying currency
upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent consistent
with its limitation on investments in restricted securities, as described in the
Prospectus. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to close-out options purchased or
written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
Futures Contracts. Certain of the Funds may enter into contracts for the
purchase or sale for future delivery of debt securities or currency ("futures
contracts"), or may purchase and sell financial futures contracts. As long as
required by regulatory authorities, a Fund will limit its use of futures
contracts to hedging transactions in order to avoid being a commodity pool. A
"sale" of a futures contract means the acquisition and assumption of a
contractual right and obligation to deliver the securities or currency called
for by the contract at a specified price on a specified settlement date. A
"purchase" of a futures contract means the acquisition and assumption of a
contractual right and obligation to acquire the securities or currency called
for by the contract at a specified price on a specified date. U.S. futures
contracts have been designed by exchanges which have been designated "contract
markets" by the CFTC and must be executed through a futures commission merchant
or brokerage firm, which is a member of the relevant contract market. Existing
contract markets for futures contracts on debt securities include the Chicago
Board of Trade, the New York Cotton Exchange, the Mid-America Commodity Exchange
(the "MCE"), and International Money Market of the Chicago Mercantile Exchange
(the "IMM"). Existing contract markets for futures contracts on currency include
the MCE, the IMM and the London International Financial Futures Exchange.
Futures contracts trade on these markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. A fund may enter into futures contracts
which are based on foreign currencies, interest rates, or on debt securities
that are backed by the full faith and credit of the U.S. government, such as
long-term U.S. Treasury bonds, Treasury notes, Government National Mortgage
Association modified pass-through mortgage-backed securities, and three-month
U.S. Treasury bills. A Fund may also enter into futures contracts which are
based on corporate securities and non-U.S. government debt securities, but such
futures contracts are not currently available.
At the time a futures contract is purchased or sold, the Fund must deposit cash
or securities in a segregated account ("initial deposit") with the Fund's
custodian. It is expected that the initial deposit would be approximately 1% to
5% of a contract's face value. Thereafter, the futures contract is valued daily
and the payment of "variation margin" may be required since each day the Fund
would pay or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of currency or securities, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities. The termination of a contractual obligation
is accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical offsetting 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 underlying
currency or security. Since all transactions in the futures market are made,
offset or fulfilled through a clearing house associated with the exchange on
which the contracts are traded, the Funds will incur brokerage fees when they
purchase or sell futures contracts.
The purpose of the purchase or sale of a futures contract by the Funds is to
attempt to protect the Funds from fluctuations in interest or currency exchange
rates without actually buying or selling long-term, fixed-income securities or
currency. For example, if a Fund owns long-term bonds and interest rates were
expected to increase, such Fund might enter into futures contracts for the sale
of debt securities. Such a sale would have much the same effect as selling an
equivalent value of the long-term bonds owned by a Fund. If interest rates did
increase, the value of the debt securities owned by a Fund would decline, but
the value of the futures contracts to such Fund would increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is often more liquid than the cash (securities) market, the use of futures
contracts as an investment technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if a Fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the Fund may sell futures contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the Fund's futures position.
Alternatively, when it is expected that interest rates may decline, futures
contracts may be purchased in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of futures contracts should be similar to that of long-term bonds, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and such Fund could then buy
long-term bonds on the cash (securities) market. Similarly, if a Fund intends to
acquire a security or other asset denominated in a currency that is expected to
appreciate against the U.S. dollar, the Fund may purchase futures contracts on
that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency. To the extent a
Fund enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Fund's purchase obligations
with respect to such futures contracts 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 contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such futures contracts.
The ordinary spreads between prices in the cash (securities or foreign currency)
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets 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 (securities or foreign currency) 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 causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the Manager may still not result in a successful hedging transaction.
In addition, futures contracts entail certain risks. Although the Managers
believe that the use of such contracts will benefit a Fund, if the Manager's
investment judgment about the general direction of interest or currency exchange
rates is incorrect, a Fund's overall performance would be poorer than if it had
not entered into any such contract. For example, if 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. Similarly, if a Fund sells a foreign currency futures contract and
the U.S. dollar value of the currency unexpectedly increases, the Fund will lose
the beneficial effect of such increase on the value of the security denominated
in that currency. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. Such Fund may have to sell
securities at a time when it may be disadvantageous to do so.
Options on Futures Contracts. Certain of the Funds are permitted to purchase and
write options on futures contracts for hedging purposes only. The purchase of a
call option on a futures contract is similar in some respects to the purchase of
a call option on an individual security or currency. Depending on the pricing of
the option compared to either the price of the futures contract upon which it is
based or the price of the underlying debt securities or currency, it may or may
not be less risky than direct ownership of the futures contract of the
underlying debt securities or currency. As with the purchase of futures
contracts, when the Fund is not fully invested, it may purchase a call option on
a futures contract to hedge against a market advance due to declining interest
rates or appreciation in the value of a foreign currency against the U.S.
dollar.
If a Fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
such Fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option a Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, a
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The amount of risk a Fund assumes when it purchases an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased. A
Fund will purchase a put option on a futures contract only to hedge the Fund's
portfolio against the risk of rising interest rates or the decline in the value
of securities denominated in a foreign currency.
A Fund's ability to engage in the options and futures strategies described above
will depend on the availability of liquid markets in such instruments. Markets
in options and futures are relatively new and still developing, and it is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore, no assurance can be given that the Fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, a Fund's ability to engage in options and futures
transactions may be limited by tax considerations.
The Funds will engage in futures contracts and related options transactions only
for bona fide hedging or other appropriate risk management purposes in
accordance with CFTC regulations, which permit principals of an investment
company registered under the Investment Company Act of 1940 ("1940 Act") to
engage in such transactions without registering as commodity pool operators.
"Appropriate risk management purposes" means activities in addition to bona fide
hedging which the CFTC deems appropriate for operators of entities, including
registered investment companies, that are excluded from the definition of
commodity pool operator. Such a Fund is not permitted to engage in speculative
futures trading. Each Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by a Fund or
which it expects to purchase. Except as stated below, a Fund's futures
transactions will be entered into for traditional hedging purposes, i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency will be purchased to protect a Fund against an
increase in the price of securities or the currency in which they are
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures (or option) position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets denominated in the related currency) in
the cash market at the time when the futures (or option) position is closed out.
However, in particular cases, when it is economically advantageous for a Fund to
do so, a long futures position may be terminated (or an option may expire)
without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits each Fund to elect to comply with a different test,
under which (i) each Fund's long futures positions will be used as part of its
portfolio management strategy and will be incidental to its activities in the
underlying cash market and (ii) the underlying commodity value of such positions
will not exceed the sum of (a) cash or cash equivalents segregated for this
purpose, (b) cash proceeds on existing investments due within 30 days, and (c)
accrued profits on such futures or options positions.
A Fund will engage in transactions in future contracts and related options only
to the extent such transactions are consistent with the requirements of the Code
for maintaining its qualification as a regulated investment company for federal
income tax purposes (see "Tax Considerations" in the Prospectus).
A Fund investing in such investments may not purchase or sell futures contracts
or purchase or sell related options, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of margin deposits
on a Fund's outstanding futures and related options positions and the amount of
premiums paid for outstanding options on futures would exceed 5% of the market
value of the Fund's total assets. These transactions involve brokerage costs,
require margin deposits and, in the case of contracts and options obligating a
Fund to purchase securities or currencies, require the Fund to segregate assets
to cover such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio positions
may be difficult to achieve because no futures contracts based on corporate
fixed-income securities are currently available. In addition, it is not possible
to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
Portfolio Turnover
Because the investment outlook of the type of securities which each Fund may
purchase may change as a result of unexpected developments in national or
international securities markets, or in economic, monetary or political
relationships, a Fund's Manager will consider the economic effect of portfolio
turnover but generally not treat portfolio turnover as a limiting factor in
making investment decisions. Investment decisions affecting turnover may include
changes in investment strategies or nonfundamental investment policies,
including changes in management personnel, as well as individual portfolio
transactions.
Moreover, turnover may be increased by certain factors wholly outside the
control of the Managers. For example, during periods of rapidly declining
interest rates, such as the U.S. experienced in 1991 through 1993, the rate of
mortgage prepayments may increase rapidly, resulting in the return of principal
to funds which invest in mortgage securities, thus increasing "sales" of
portfolio securities. Similarly, the rate of bond calls by issuers of
fixed-income securities may increase as interest rates decline, thereby forcing
the "sale" of called bonds by funds which invest in fixed-income securities and
subsequent purchase of replacement investments. In other periods, increased
merger and acquisition activity, or increased rates of bankruptcy or default,
may create involuntary transactions for funds which hold affected stocks and
bonds, especially high-yield bonds. Changes in particular portfolio holdings may
be made whenever it is considered that a security is no longer the most
appropriate investment for a Fund, or that another security appears to have a
relatively greater opportunity, and will be made without regard to the length of
time a security has been held.
The portfolio turnover rates for each Fund are disclosed in the prospectus for
the Funds, in the section entitled "Financial Highlights". Portfolio turnover is
a measure of how frequently a fund's portfolio securities are bought and sold.
As required by the SEC, annual portfolio turnover is calculated generally as the
dollar value of the lesser of a fund's purchases or sales of portfolio
securities during a given year, divided by the monthly average value of the
fund's portfolio securities during that year (excluding securities whose
maturity or expiration at the time of acquisition were less than one year). For
example, a fund reporting a 100% portfolio turnover rate would have purchased
and sold securities worth as much as the monthly average value of its portfolio
securities during the year. Except for certain Funds noted in the Prospectus,
the Funds generally do not expect their annual turnover rates to exceed 100%.
Because so many variable factors are beyond the control of the Managers, it is
not possible to estimate future turnover rates with complete accuracy. Higher
portfolio turnover rates generally increase transaction costs, which are fund
expenses, but would not create taxable capital gains for investors because of
the tax-deferred status of variable annuity and life insurance investments.
Real Estate Fund
Real Estate Related Investments. In addition to the Fund's investments in real
estate securities, as defined in the Trust Prospectus, the Fund may also invest
a portion of its assets in debt obligations or equity securities of issuers
engaged in businesses whose products and services are closely related to the
real estate industry, and publicly traded on an exchange or in the
over-the-counter market, including principal mortgage pools, CMOs, and related
instruments which are publicly traded (including, without limitation, pools
containing GNMA and FNMA mortgages). The Fund will invest no more than 55% of
its assets in either GNMA or FNMA securities and no more than 70% of its assets
in GNMA and FNMA securities, in the aggregate. In addition, the Fund does not
invest in the "residual interests" of real estate mortgage investment conduits
("REMICs");
Repurchase Transactions
Each Fund may enter into repurchase agreements. A repurchase agreement is an
agreement in which the seller of a security agrees to repurchase the security
sold at a mutually agreed upon time and price. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security. The resale price is normally in
excess of the purchase price, reflecting an agreed upon interest rate. The
interest rate is effective for the period of time in which the Fund is invested
in the agreement and is not related to the coupon rate on the underlying
security. The period of these repurchase agreements will usually be short, from
overnight to one week, and at no time will a Fund invest in repurchase
agreements for more than one year. However, the securities which are subject to
repurchase agreements may have maturity dates in excess of one year from the
effective date of the repurchase agreements. The transaction requires the
initial collateralization of the seller's obligation by securities with a market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund, with the value marked-to-market daily to maintain 100%
coverage. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Funds might also incur disposition costs in liquidating the collateral. The
Funds may not enter into a repurchase agreement with more than seven days
duration if, as a result, the market value of the Funds' net assets, together
with investments in other securities deemed to be not readily marketable, would
be invested in such repurchase agreements in excess of the Funds' policy on
investments in illiquid securities. The Funds intend to enter into repurchase
agreements only with financial institutions such as broker-dealers and banks
which are deemed creditworthy by their respective Managers. The securities held
subject to resale (the collateral) will be held on behalf of a Fund by a
custodian approved by the Board and will be held pursuant to a written
agreement.
When-Issued Securities
Securities when originally issued are sometimes offered on a "when-issued"
basis. When so offered, the price, which is generally expressed in yield terms,
is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase of such securities;
during the period between purchase and settlement, no payment is made by the
purchaser to the issuer and no interest accrues to the purchaser. To the extent
that assets of a Fund are not vested prior to the settlement of a purchase of
securities, the Fund will earn no income; however, it is intended that each Fund
will be fully invested to the extent practicable and subject to the policies
stated above. While when-issued securities may be sold prior to the settlement
date, it is intended that each Fund will purchase such securities with the
purpose of actually acquiring them, unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
when-issued securities may be more or less than the purchase price. The Trust
does not believe that the net asset value or income of any of the Funds will be
adversely affected by their purchase of securities on a when-issued basis. The
Trust will establish for each Fund a segregated account with its custodian bank
in which it will maintain cash and/or high grade marketable securities equal in
value to commitments for when-issued securities. Such segregated securities will
either mature or, if necessary, be sold on or before the settlement date. There
are no restrictions on the percentage of net assets of any Fund which may be
invested in when-issued securities at any given time.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies (except
as otherwise indicated), which means that they may not be changed without the
approval of a majority of that Fund's shares. In order to change any of these
restrictions, the lesser of (i) holders of 67% or more of a Fund's voting
securities present at a meeting of shareholders if the holders of more than 50%
of its voting securities are represented at the meeting or (ii) holders of more
than 50% of that Fund's outstanding voting securities must vote to make the
change.
Each of the Funds may not:
1. with respect to 75% of its total assets, purchase the securities of any one
issuer (other than cash, cash items and obligations of the U.S. government) if
immediately thereafter, and as a result of the purchase, the Fund would (a) have
more than 5% of the value of its total assets invested in the securities of such
issuer or (b) hold more than 10% of any or all classes of the securities of any
one issuer;
2. borrow money in an amount in excess of 5% of the value of its total assets,
except from banks for temporary or emergency purposes, and not for direct
investment in securities (excepting the Asset Allocation, Developing Markets,
and Small Cap Funds). The Asset Allocation, Developing Markets, and Small Cap
Funds may borrow money from banks in an amount not exceeding 33 1/3% of the
value of the Fund's total assets including the amount borrowed. Each of these
Funds may also pledge, mortgage or hypothecate its assets to secure borrowings
to an extent not greater than 15% of the Fund's total assets. Arrangements with
respect to margin for futures contracts, forward contracts and related options
are not deemed to be a pledge of assets.
3. lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of a type customarily purchased by
institutional investors, or through loans of portfolio securities, or to the
extent the entry into a repurchase agreement may be deemed a loan;
4. underwrite securities of other issuers, except as noted in number 6 below
and except insofar as a Fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities;
5. purchase illiquid securities, including illiquid securities which, at the
time of acquisition, could be disposed of publicly by the Funds only after
registration under the Securities Act of 1933, if as a result more than 10% of
their net assets would be invested in such illiquid securities;
6. invest in securities for the purpose of exercising management or control
of the issuer;
7. invest more than 25% of its assets (measured at the time of the most recent
investment) in any single industry (not applicable to the Metals Fund, the
Utility Equity Fund, the Real Estate Securities Fund, the Global Income Fund,
the International Fund, the Pacific Fund, or the Asset Allocation Fund);
8. invest in companies which have a record of less than three years of
continuous operation, including the operations of any predecessor companies,
except that the Metals Fund, the Real Estate Fund, the Equity Fund, the Global
Income Fund, the International Fund, the Pacific Fund, the Global Growth Fund,
the Developing Markets Fund, and the Asset Allocation Fund may invest up to 5%
of their respective assets in such companies and such limitation shall not apply
to the Asset Allocation Fund or Small Cap Fund;
9. maintain a margin account with a securities dealer or effect short sales
(with the exceptions that (i) the Equity Fund and the Income Securities Fund may
effect short sales if either owns securities equivalent in kind and amount to
those sold and (ii) the Global Income Fund, the Global Growth Fund, the
Developing Markets Fund, the Intermediate Bond Fund, the Asset Allocation Fund,
the International Fund, the Pacific Fund and the Small Cap Fund may make initial
deposits and pay variation margin in connection with futures contracts);
10. invest in commodities or commodity pools, except that (i) certain Funds may
purchase and sell Forward Contracts in amounts necessary to effect transactions
in foreign securities, (ii) the Global Income Fund, the International Equity
Fund, the Pacific Growth Fund, the Global Growth Fund, the Developing Markets
Fund, the Asset Allocation Fund, the Small Cap Fund and the Intermediate Bond
Fund may enter into Futures Contracts and may invest in foreign currency and
(iii) the Metals Fund may invest in gold bullion and foreign currency in the
form of gold coins;
11. invest directly in real estate although certain Funds (including the Asset
Allocation fund, Global Growth Fund, Developing Markets Fund and Small Cap Fund
which, as a non-fundamental policy, will not invest more than 10% of its assets
in such real estate securities) may invest in real estate investment trusts or
other publicly traded securities engaged in the real estate industry;
12. invest in the securities of other open-end investment companies (except that
securities of another open-end investment company may be acquired pursuant to a
plan of reorganization, merger, consolidation or acquisition and except that the
Global Growth Fund, as a non-fundamental policy, may invest in closed-end
investment companies). This restriction is not applicable to the International
Fund, the Pacific Fund, the Asset Allocation Fund, and the Developing Markets
Fund;
13. invest in assessable securities or securities involving unlimited
liability on the part of the Fund;
14. invest an aggregate of more than 10% of its assets in securities with legal
or contractual restrictions on resale, securities which are not readily
marketable (including over-the-counter options and assets used to cover such
options), and repurchase agreements with more than seven days to maturity (this
restriction does not apply to the Asset Allocation Fund);
15. purchase or retain any security if any officer, director or security holder
of the issuer is at the same time an officer, trustee or employee of the Trust
or of the Fund's Manager and such person owns beneficially more than one-half of
1% of the securities and all such persons owning more than one-half of 1% own
more than 5% of the outstanding securities of the issuer; or
16. invest its assets in a manner which does not comply with the investment
diversification requirements of Section 817(h) of the Code.
17. The Adjustable Fund may invest up to 5% of its total assets in securities
that cannot be offered to the public for sale without first being registered
under the Securities Act of 1933 ("restricted securities") or in other
securities which, in the opinion of the Board of Trustees, may be otherwise
illiquid. It is also the policy of the Trust that illiquid securities (including
illiquid equity securities, repurchase agreements of more than seven days
duration, over-the-counter options and the assets used to cover such options,
and other securities which are not readily marketable) may not constitute, at
the time of purchase or at any time, more than 10% of the value of the total net
assets of the Fund in which they are held.
18. The Global Growth and Developing Markets Funds may not invest more than 5%
of their respective assets in warrants, whether or not listed on the New York or
American Exchange, including no more than 2% of their respective total assets
which may be invested in warrants that are not listed on those exchanges.
Warrants acquired by the Fund in units or attached to securities are not
included in this restriction.
19. The Global Growth Fund, and Developing Markets Fund will not invest more
than 15% of their respective assets in securities of foreign issuers that are
not listed on a recognized U.S. or foreign securities exchange, including no
more than 10% in illiquid investments.
In addition to these fundamental policies, it is the present policy of each Fund
(which may be changed without the approval of a majority of its outstanding
shares) not to pledge, mortgage or hypothecate its assets as security for loans
(except to the extent of allowable temporary loans), nor to engage in joint or
joint and several trading accounts in securities, except that the Funds may
participate with other investment companies in the Franklin Group of Funds
in a joint account to engage in certain large repurchase transactions and may
combine orders to purchase or sell securities with orders from other persons to
obtain lower brokerage commissions. It is not any Fund's policy to invest in
interests (other than publicly traded equity securities) in oil, gas or other
mineral exploration or development programs.
As non-fundamental investment policies, which may be changed by the Board of
Trustees of the Trust without shareholder approval, the Asset Allocation Fund
will not invest more than 15% of its total assets in securities of foreign
issuers which are not listed on a recognized United States or foreign securities
exchange, or more than 10% of its total assets in (a) securities with a limited
trading market, (b) securities subject to legal or contractual restrictions as
to resale, (c) repurchase agreements not terminable within seven days, and (d)
debt obligations rated Baa or lower by Moody's Investors Service, Inc. or BBB or
lower by Standard & Poor's Corporation or, if unrated, are of comparable
investment quality as determined by the Managers.
Whenever any investment policy or investment restriction states a maximum
percentage of a Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property.
OFFICERS AND TRUSTEES
The Trust is managed by a Board of Trustees who have been elected for an
indefinite term. The Board of Trustees is responsible for the overall management
of the Trust and each Fund, including overseeing the investment of each Fund's
assets. The Board elects the officers who are responsible for administering the
day-to-day operations of the Trust and each Fund. Listed below are the trustees
and officers of the Trust and a brief description of the business experience and
affiliations of each during at least the past five years. Trustees who are
"interested persons" of the Trust, as defined in the 1940 Act, are designated by
an asterisk(*).
Frank H. Abbott, III
(74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
*Lowell C. Anderson
(58)
Allianz Life Insurance Company of North America
1750 Hennepin Avenue South
Minneapolis, MN 55403-2195
Trustee
Chairman, President and Chief Executive Officer, Allianz Life Insurance Company
of North America (privately owned company formerly North American Life &
Casualty Company); Director, Preferred Life Insurance Company of New York.
Harris J. Ashton
(63)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
Harmon E. Burns
(50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato
(63)
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 of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano
(80)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson
(62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson
(39)
777 Mariners Island Blvd.
San Mateo CA 94404
President and Trustee
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 24 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr.
(55)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye
(66)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin
(67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Kenneth V. Domingues
(63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan
(35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek
(46)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 37 of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam
(56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey
(58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
As indicated above, certain of the directors and officers hold positions with
other companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds.
Trustees not affiliated with the Managers or Allianz ("non affiliated trustees")
are currently paid fees of $550 per month plus $183 per meeting attended. During
the fiscal year ended December 31, 1994, fees totaling $63,250 were paid to non
affiliated trustees of the Trust. As indicated above, certain of the trustees
and officers hold positions with other companies in the Franklin Group of
Funds(R) and the Templeton Funds("Franklin Templeton Funds"). The following
table shows the fees paid, for the fiscal year ended December 31, 1994, by the
Trust to its non affiliated trustees and the total fees paid to such trustees by
the Trust and other Franklin Templeton Funds for which they serve as directors,
trustees or managing general partners.
Aggregate Number of Franklin Total Compensation
Compensation Templeton Funds from Franklin
Name from Trust+ Boards on Which Templeton Funds,
Each Serves** including the Trust+
Frank H. Abbott $11,000 30 $176,870
Harris Ashton 10,450 56 319,925
S. Joseph Fortunato 10,450 58 336,065
David Garbellano 10,450 29 153,300
Frank W.T. LaHaye 10,817 25 150,817
Gordon Macklin 10,450 53 303,685
+Figures rounded to the nearest dollar.
**The number of boards is based on the number of registered investment companies
in the Franklin Templeton Group of Funds and does not include the total number
of series or funds within each investment company for which the trustees are
responsible. The Franklin Templeton Group of Funds currently includes 61
registered investment companies, consisting of 162 U.S. based mutual funds or
series.
Non affiliated trustees are also reimbursed for expenses incurred in connection
with attending Board meetings, paid pro rata by each Franklin Templeton fund on
whose Board they serve. No officer or trustee received any other compensation
directly from the Trust. For additional information concerning trustee
compensation and expenses, please see the Trust's Annual Report to Shareholders.
As of --------, 1995, [to be updated] no officer or trustee of the Trust owned
of record or beneficially shares of any Fund of the Trust. Many of the Fund's
trustees own shares in various of the other funds in the Franklin Templeton
Funds. Certain officers or directors 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. Charles B. Johnson
and Rupert H. Johnson, Jr. are brothers and are the father and uncle,
respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Manager for all series of the Trust, except The Asset Allocation Fund,
Global Growth Fund, and Developing Markets Fund, is Franklin Advisers,
Inc.("Advisers"), 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
California 94403-7777. In addition, Advisers employs Templeton Investment
Counsel, Inc. ("Templeton Florida"), Broward Financial Centre, Suite 2100, Fort
Lauderdale, Florida 33394, to act as subadviser to the International Fund, the
Pacific Fund, and the Global Income Fund. The Manager for the Asset Allocation
and Global Growth Fund is Templeton, Galbraith & Hansberger, Ltd. ("Templeton
Nassau"), Lyford Cay Nassau, N.P. Bahamas. The Manager for Developing Markets
Fund is Templeton Investment Management (Hong Kong) Limited ("Templeton Hong
Kong"), Two Exchange Square, Suite 908, Hong Kong. Templeton Nassau employs
Templeton Florida to act as subadviser to the Asset Allocation Fund. Advisers,
Templeton Nassau, Templeton Hong Kong, and Templeton Florida, may be referred to
as the "Manager" or "Managers" throughout the SAI and Prospectus.
Each Fund, except the International Fund, the Pacific Fund, the Rising Dividends
Fund, the Small Cap Fund, the Global Growth Fund, the Developing Markets Fund
and the Asset Allocation Fund is obligated to pay Advisers a fee as compensation
for its services, which is paid monthly and accrues daily based upon each Fund's
average net assets at the annual rate of 0.625% of the value of average daily
net assets up to and including $100 million; 0.50% of the value of average daily
net assets over $100 million up to and including $250 million; 0.45% of the
value of average daily net assets over $250 million up to and including $10
billion; 0.44% of the value of average daily net assets over $10 billion up to
and including $12.5 billion; 0.42% of the value of average daily net assets over
$12.5 billion up to and including $15 billion; and 0.40% of the value of average
daily net assets over $15 billion.
The International Fund and the Pacific Fund are each obligated to pay Advisers a
monthly fee, based upon each Fund's average daily net assets, at the annual rate
of 1% of the value of average daily net assets up to and including $100 million;
0.90% of the average daily net assets over $100 million up to and including $250
million; 0.80% of average daily net assets over $250 million up to and including
$500 million and 0.75% of average net assets over $500 million. Templeton,
Florida, as the subadviser for the International Fund and the Pacific Fund under
a contract with Advisers, receives a monthly fee from Advisers at the annual
rate of 0.50% of the value of average daily net assets up to and including $100
million; 0.40% of the average daily net assets over $100 million up to and
including $250 million; 0.30% of average daily net assets over $250 million up
to and including $500 million and 0.25% of average net assets over $500 million.
The Rising Dividends Fund is obligated to pay Advisers a monthly fee computed at
the annual rate of 0.75 of 1% of average daily net assets on the first $500
million of average daily net assets; 0.625 of 1% on the next $500 million of
average daily net assets; and 0.50 of 1% on average daily net assets in excess
of $1 billion. The Small Cap Fund is obligated to pay Advisers a monthly fee
computed at the annual rate of ------% of average daily net assets of the Fund;
----- up to and including $100 million, plus----% of the value of average daily
net assets up to and including $250 million, plus_----% of the value of average
daily net assets up to and including $10 billion, plus_----% of the value of
average daily net assets up to and including $12.5 billion, plus_----% of the
value of average daily net assets up to and including $15 billion, plus_----% of
the value of average daily net assets over $15 billion.
Under the management agreement with Templeton Nassau which became effective
March 15, 1994, the Global Growth Fund is obligated to pay Templeton, Nassau a
monthly fee equal to an annual rate of 1.0% of the value of the Fund's average
daily net assets up to and including $100 million; 0.90% of the value of the
Fund's average daily net assets over $100 million up to and including $250
million; 0.80% of the value of the Fund's average daily net assets over $250
million up to and including $500 million; and 0.75% of the value of the Fund's
average daily net assets over $500 million.
Under the management agreement with Templeton Hong Kong which became effective
March 15, 1994, the Developing Markets Fund is obligated to pay Templeton Hong
Kong a monthly fee equal to an annual rate of 1.25% of the value of the Fund's
average daily net assets.
The Managers may determine in advance to limit the management fees or to assume
responsibility for the payment of certain operating expenses relating to the
operations of any Fund, which may have the effect of decreasing the total
expenses and increasing the yield of such Fund. Any such action is voluntary and
may be terminated by the Managers at any time unless otherwise indicated. For at
least to the end of the fiscal year, December 31, 1995, Advisers has agreed to
limit its management fees and, if necessary, to assume responsibility for
payment of each Zero Coupon Fund operating expenses so that each Fund's total
expenses will not exceed 0.40% of each Fund's average net assets.
Under the management agreement with Templeton Nassau, the Asset Allocation Fund
is obligated to pay the Manager a monthly fee equal to an annual rate of 0.65%
of the value of the Fund's average daily net assets up to and including $200
million, 0.585% of the value of the Fund's average daily net assets over $200
million up to and including $1.3 billion; and 0.52% of the value of the Fund's
average daily net assets over $1.3 billion.
The management agreements specify that the management fees will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by a Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Managers to reduce or eliminate fees to the extent that aggregate operating
expenses of a Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 2 1/2% of the first $30 million of average net assets of the Fund,
2% of the next $70 million of average net assets of the Fund and 1 1/2% of
average net assets of the Fund in excess of $100 million. Expense reductions
have not been necessary based on state requirements.
The management agreements with Advisers, Templeton Hong Kong, and Templeton
Nassau and the subadvisory agreements with Templeton Florida are in effect until
April 30, 1996, and may continue thereafter provided they are approved for
periods not to exceed one year by (i) the Trust's Board of Trustees or the vote
of a majority of the outstanding shares of that Fund, and (ii) a majority of the
Trustees who are not parties to the Agreement or interested persons of any such
party (other than as Trustees). The management agreements for the Asset
Allocation Fund and Small Cap Fund are in effect for an initial period of one
year and may continue from year to year thereafter under the same provisions
mentioned above. The management agreement with respect to any Fund may be
terminated without penalty at any time by the Fund or by the Managers on 60
days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
Pursuant to the management agreements and subadvisory agreements, the Managers
provide investment research and portfolio management services, including the
selection of securities for each Fund to purchase, hold or sell, and the
selection of brokers through whom each such Fund's portfolio transactions are
executed. The Managers' activities are subject to the review and supervision of
the Board of Trustees (and, in the case of Templeton Florida) subject to the
overview of Advisers and also in the case of Templeton Florida, subject to the
overview of Templeton Nassau), to whom the Managers render periodic reports of
each such Fund's investment activities. The Managers, or in certain cases, The
Business Managers, provide each Fund with executive and administrative
personnel, office space and facilities, and pays certain additional
administrative expenses incurred in connection with the operation of each such
Fund. Each such Fund bears all of its expenses not assumed by the Managers. See
the Statement of Operations in the financial statements at the end of this
Statement of Additional Information for additional details of these expenses.
The table below sets forth on a per Fund basis the management fees that would
have been accrued by the Managers and the management fees actually paid by the
Funds for the fiscal years ended December 31, 1994, 1993 and 1992.
Management Fees Management Fees
Accrued Paid
by Advisers by Fund
1994
Money Market Fund $1,970,057 $1,652,138
Adjustable Fund 1,522,439 1,522,439
Global Income Fund 1,404,652 1,404,652
High Income Fund 1,264,737 1,264,737
Intermediate Bond Fund 845,739 845,739
Government Fund 3,100,250 3,100,250
Zero Coupon Fund - 1995 314,767 177,189
Zero Coupon Fund - 2000 522,841 301,577
Zero Coupon Fund - 2005 281,567 158,311
Zero Coupon Fund - 2010 198,571 110,499
Income Securities Fund 4,475,467 4,475,467
Rising Dividends Fund 2,262,988 2,262,988
Utility Equity Fund 5,985,899 5,985,899
Equity Fund 2,314,166 2,314,166
Metals Fund 644,295 644,295
Real Estate Fund 932,770 932,770
International Fund 5,356,301 5,356,301
Pacific Fund 3,051,140 3,057,140
Developing Markets 511,882 511,882
Global Growth Fund 578,011 578,011
1993
Money Market Fund $ 638,179 $ 638,179
Adjustable Fund 1,524,197 1,524,197
Global Income Fund 703,801 703,801
High Income Fund 752,653 752,653
Intermediate Bond Fund 517,568 517,568
Government Fund 2,635,431 2,635,431
Zero Coupon Fund - 1995 288,583 141,180
Zero Coupon Fund - 2000 411,580 212,328
Zero Coupon Fund - 2005 200,090 102,160
Zero Coupon Fund - 2010 133,886 42,611
Income Securities Fund 2,119,921 2,119,921
Rising Dividends Fund 1,596,300 1,596,300
Utility Equity Fund 5,487,597 5,487,597
Equity Fund 1,561,955 1,561,955
Metals Fund 227,312 227,312
Real Estate Fund 282,364 282,364
International Fund 897,997 897,997
Pacific Fund 527,003 527,003
1992
Money Market Fund $ 465,736 $ 465,736
Adjustable Fund 1,160,323 1,130,813
Global Income Fund 368,106 368,106
High Income Fund 291,533 291,533
Intermediate Bond Fund 194,052 94,052
Government Fund 1,436,117 1,436,117
Zero Coupon Fund - 1995 244,941 77,859
Zero Coupon Fund - 2000 230,971 73,346
Zero Coupon Fund - 2005 85,993 25,904
Zero Coupon Fund - 2010 91,721 27,477
Income Securities Fund 683,715 683,715
Rising Dividends Fund 191,426 168,133
Utility Equity Fund 2,141,899 2,141,899
Equity Fund 961,485 961,485
Metals Fund 71,244 71,244
Real Estate Fund 60,627 60,627
International Fund 46,805 46,805
Pacific Fund 18,893 0
Please refer to the "Officers and Trustees" table which indicates officers and
trustees who are affiliated persons of the Trust, the Managers and Allianz Life.
Business Managers
Templeton Global Investors, Inc. ("Business Manager"), Broward Financial Centre,
Suite 2100, Fort Lauderdale, Florida 33394, provides certain administrative
facilities and services for certain of the Funds as described in the Prospectus.
The Business Manager is employed directly by the Asset Allocation Fund and,
through subcontracts by the Managers of the Developing Markets, Global Growth,
Global Income, International and Pacific Funds.
Transfer Agent
Franklin Templeton Investor Services, Inc., a wholly owned subsidiary of
Resources, maintains shareholder's records, processes purchases and redemptions
of each Fund's shares and acts as the Trust's transfer agent and dividend-paying
agent.
Custodians
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Trust. In addition, Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New
York 11245, also acts as custodian for the Global Growth, Global Income,
Developing Markets, Asset Allocation, Pacific, and International Equity Funds.
The Custodians do not participate in decisions relating to the purchase and sale
of portfolio securities.
Independent Auditors
Coopers & Lybrand L.L.P, 333 Market Street, San Francisco, California 94105,
serves as the Trust's independent auditors. During the fiscal year ended
December 31, 1994, its auditing services consisted of rendering an opinion on
the financial statements of the Trust included in the Trust's Annual Report to
Shareholders and in this Statement of Additional Information.
Research Services
Research services may be provided to the Managers by various affiliates. Such
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.
POLICIES REGARDING BROKERS USED ON SECURITIES TRANSACTIONS
The selection of brokers and dealers to execute transactions is made by the
Managers, in accordance with criteria set forth in the respective management and
subadvisory agreements referenced herein and any directions which the Board of
Trustees may give.
When placing a portfolio transaction, the Managers attempt to obtain the best
execution of the transaction. On portfolio transactions which are done on a
securities exchange, the amount of commission paid by each Fund is negotiated
between the Funds' Managers and the broker executing the transaction, and the
Funds' Managers seek to obtain the lowest commission rate available from brokers
which are believed to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Managers will ordinarily
place orders for the purchase and sale of 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 Funds will seek to
obtain prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Funds' best
interests, the Managers may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Funds will
have to pay a higher commission than would be the case if no weight were given
to the broker's furnishing of these services. However, this will be done only
if, in the opinion of the Managers, the amount of any additional commission is
reasonable in relation to the value of the services. Higher commissions will be
paid only when the brokerage and research services received are bona fide and
produce a direct benefit to the Funds or assist their advisers in carrying out
their responsibilities to the Funds, or when it is otherwise in the best
interest of the Funds to do so, whether or not such data may also be useful to
the Managers in advising other clients.
When it is believed that several brokers are equally able to provide the best
execution, the Managers are directed to execute transactions with: (i) brokers
who provide quotations and other services to the Funds, specifically including
the quotations necessary to determine the value of each Fund's net assets, in
such amount of total brokerage as may reasonably be required in light of such
services and (ii) brokers who supply research, statistical and other data to the
Funds and the Managers which the Managers or affiliates may lawfully and
appropriately use in their investment advisory capacities, in such amount of
total brokerage as may reasonably be required.
It is not possible to place a dollar value on the special executions or on the
research services received by the Managers from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Managers to supplement their own
research and analysis activities and to make available 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.
Provided that the Trust's officers are satisfied that the best execution is
obtained, the sale of Policies may also be considered as a factor in the
selection of broker dealers to execute the Fund's portfolio transactions.
Because Franklin/Templeton Distributors, Inc. ("Distributors"), an affiliate of
the Managers and principal underwriter for many of the mutual funds in the
Franklin/Templeton Group, is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when a Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
reducing the expenses of a Fund, any portfolio securities tendered by a Fund
will be tendered through Distributors if it is legally permissible to do so. In
turn, the next management fee payable to the Manager under the applicable
management agreement will be reduced by the amount of any fees received by
Distributors in cash, less certain costs and expenses incurred in connection
therewith.
If purchases or sales of securities of a Fund and one or more other funds or
other investment companies or clients supervised by the Managers or their
affiliates are considered at or about the same time, transactions in such
securities will be allocated among the several investment companies and clients
in a manner deemed equitable to all by the Managers, taking into account the
respective sizes of the Funds or clients and the amount of securities to be
purchased or sold. It is recognized that it is possible that in some cases this
procedure could have a detrimental effect on the price or volume of the
security, in so far as a particular Fund is concerned. However, in other cases
it is possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to all the Funds.
The Funds are authorized, to the extent consistent with their respective
investment policies and restrictions and in compliance with applicable rules
under the 1940 Act, to acquire securities of broker/dealers.
Most foreign stock exchange transactions are executed at fixed commission rates.
Fixed commissions on foreign stock exchange transactions are generally higher
than negotiated commissions on U.S. transactions. The Managers will endeavor to
achieve the best net results in effecting portfolio transactions for Funds on
foreign stock exchanges. There is also generally less government supervision and
regulation of foreign stock exchanges and brokers than in the U.S.
Additional Information Regarding
Valuation and Redemption
of Shares of the Funds
Calculation of Net Asset Value. As noted in the Prospectus, each Fund will
generally calculate its net asset value only on days when the New York Stock
Exchange (the "Exchange") is open for trading, even though trading in the
portfolio securities of a Fund may occur on other days in other markets or
over-the-counter. As of the date of this Statement of Additional Information,
the Funds are informed that the New York Stock Exchange will be closed in
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas.
The net asset value per share of each Fund except the Money Fund is calculated
as follows: the aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by a Fund, if any,
accrued expenses and taxes and any necessary reserves, is deducted from the
total gross value of all assets, and the difference is divided by the number of
shares of that Fund outstanding at the time. For the purpose of determining the
aggregate net assets of each Fund (except the Money Fund), cash and receivables
are valued at their realizable amounts, interest is recorded as accrued, and
dividends are recorded on the ex-dividend date.
Money Market Fund
The valuation of the Fund's portfolio securities (including any securities held
in the segregated account maintained for when-issued securities) is based upon
their amortized cost, which does not take into account unrealized capital gains
or losses. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in calculation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Fund would receive if it sold the instrument. During
periods of declining interest rates, the daily yield on shares of the Fund
computed as described above may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values, and existing investors in
the Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The Fund's use of amortized cost which facilitates the maintenance of the Fund's
per share net asset value of $1.00 is permitted by a Rule adopted by the SEC,
pursuant to which the Fund must adhere to certain conditions.
The Fund must maintain a dollar-weighted average portfolio maturity of 90 days
or less, only purchase instruments having remaining maturities of 397 calendar
days or less, and invest only in those U.S. dollar-denominated instruments that
the Board of Trustees determines present minimal credit risks and which are, as
required by the federal securities laws, rated in one of the two highest rating
categories as determined by nationally recognized statistical rating agencies,
instruments deemed comparable in quality to such rated instruments, or
instruments, the issuers of which, with respect to an outstanding issue of
short-term debt that is comparable in priority and protection, have received a
rating within the two highest categories of nationally recognized statistical
rating agencies. Securities subject to floating or variable interest rates with
demand features in compliance with applicable rules of the SEC may have stated
maturities in excess of one year. The trustees have agreed to establish
procedures designed to stabilize, to the extent reasonably possible, the Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures will include review of the Fund's portfolio holdings by the
trustees, at such intervals as they may deem appropriate, to determine whether
the Fund's net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the trustees. If such deviation exceeds 1/2 of 1%,
the trustees will promptly consider what action, if any, will be initiated. In
the event the trustees determine that a deviation exists which may result in
material dilution or other unfair results to investors or existing shareholders,
they will take such corrective action as they regard as necessary and
appropriate, which may include the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends, redemptions of shares in kind, or establishing
a net asset value per share by using available market quotations.
Additional Information
Additional Information Regarding Taxation
As stated in the Prospectus, each Fund intends to be treated as a regulated
investment company under Subchapter M of the Code.
In order for a Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and no more than 30% of its annual
gross income may be derived from the sale or other disposition of securities or
certain other instruments held for less than 3 months. Foreign exchange gains,
derived by a Fund with respect to the Fund's business investing in stock or
securities, or options or futures with respect to such stock or securities
constitute income for purposes of this 90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not
directly related to a Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than 3 months are treated as derived from the
disposition of securities held less than 3 months in determining the Fund's
compliance with the 30% limitation. The Funds will limit their activities
involving foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining a Fund's compliance with the 30% limitation. The Funds will limit
their interest rate and currency swaps to the extent necessary to comply with
these requirements.
If a Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income on a portion of any "excess distribution" it receives from the PFIC or
any gain it derives from the disposition of such shares, even if such income is
distributed as a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of deferred taxes
arising from such distributions or gains. Any federal income tax paid by a Fund
as a result of its ownership on shares of a PFIC will not give rise to a
deduction or credit to the Fund or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it derives at least 75
percent of its income from "passive income" (including, but not limited to,
interest, dividends, royalties, rents and annuities), or (ii) on average, at
least 50 percent of the value (or adjusted basis, if elected) of the assets held
by the corporation produce "passive income".
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a Fund in
a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has nor received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
Miscellaneous Information. The organizational expenses of certain series of the
Trust are being amortized on a straight line basis over a period of five years
from the commencement of the offering of any such Fund's shares. Policyholders
allocating payments to shares of a Fund after the effective date of the Trust's
Registration Statement under the Securities Act of 1933 will be charges are
accrued daily against the investment income of that bearing such expenses during
the amortization period only as such Fund.
As of December 31, 1994, Allianz Life Variable Account A, Allianz Life Variable
Account B and Preferred Life Variable Account C owned .09%, 92.73%, and 7.18%,
respectively, of the issued and outstanding shares of the Trust.
Policyholders will be informed of each Fund's progress through periodic reports.
Financial statements certified by independent public auditors will be available
at least annually.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust 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 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 of which a shareholder holds shares. 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. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and the Fund itself is unable to meet
its obligations.
The Trust is registered with the SEC as a management investment company. Such
registration does not involve supervision of the management or policies of the
Funds by the SEC. The Prospectus and this Statement of Additional Information
omit certain of the information contained in the Registration Statement filed
with the SEC, copies of which may be obtained from the SEC upon payment of the
prescribed fee.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 40 Act, who are employees of Franklin Resources, Inc. Or its
subsidiaries, are permitted to engage in personal securities transactions
subject to the following general restrictions and procedures: (1) The trade must
receive advance clearance from a Compliance Officer and must be completed within
24 hours after this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
Compliance Officer; (3) In addition to items (1) and (2), access persons
involved in preparing and making investment decisions must file annual reports
of their securities holdings each January and also 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.
Financial Statements
[Current updated financial statements will be provided in a subsequent
amendment.]
FRANKLIN VALUEMARK FUNDS
File Nos. 33-23493
811-5583
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements: Current updated Financial Statements to be
provided in a subsequent amendment.
(b) Exhibits:
The following exhibits where applicable, are herewith incorporated
by reference to the filings as noted with the exception of Exhibit
5(x); 5(xi); 5(xii); 11(I); 11(ii); and 13(ii).
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated April 20, 1988
(ii) Certificate of Amendment to Agreement and Declaration of
Trust dated October 21, 1988
(2) copies of the By-Laws or instruments corresponding thereto;
(i) By-Laws
(ii) Certificate of Amendment of By-Laws dated May 17, 1995.
(3) copies of any voting trust agreement with respect to more
than five percent of any class of equity securities of the
Registrant;
Not Applicable
(4) specimens or copies of each security issued by the
Registrant, including copies of all constituent
instruments, defining the rights of the holders of such
securities, and copies of each security being registered;
Not Applicable
(5) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin
Advisers, Inc. dated January 24, 1989:
(ii) Addendum to Investment Management Agreement dated March
14, 1989
(iii)Management Agreement between Registrant, on behalf of
International Equity Fund and Pacific Growth Fund, and
Franklin Advisers, Inc. dated January 27, 1992
(iv) Subadvisory Agreement dated between Franklin Advisers,
Inc. and Templeton Investment Counsel, Inc. January 1,
1993
(v) Management Agreement between Registrant on behalf of
Franklin Rising Dividends Fund, and Franklin Advisers,
Inc. dated January 27, 1992
(vi) Investment Management Agreement between the Trust, on
behalf of the Templeton Developing Markets Equity Fund,
and Templeton Investment Management (Hong Kong) Limited
dated March 15, 1994.
(vii)Investment Management Agreement between the Trust, on
behalf of the Templeton Global Growth Fund, and
Templeton, Galbraith & Hansberger Ltd. dated March 15,
1994
(viii) Subadvisory Agreement between Franklin Advisers, Inc.
and Templeton Quantitative Advisors, Inc., on behalf of
Equity Growth Fund dated August 1, 1994
(ix) Subadvisory Agreement between Franklin Advisers, Inc.
and Templeton Investment Counsel, on behalf of Global
Income Fund dated August 1, 1994
(x) Investment Management Agreement between Registrant, on
behalf of Templeton Global Asset Allocation Fund, and
Templeton Galbraith & Hansberger, Ltd. dated April 19,
1995.
(xi) Subadvisory Agreement between Templeton Galbraight &
Hansberger, Ltd. and Templeton Investment Counsel,
Inc., on behalf of Templeton Global Asset Allocation
Fund dated April 19, 1995.
(xii)Business Management Agreement between Registrant, on
behalf of Templeton Global Asset Allocation Fund, and
Templeton Global Investors, Inc. April 19, 1995.
6) copies of each underwriting or distribution contract
between the Registrant and a principal underwriter, and
specimens or copies of all agreements between principal
underwriters and dealers;
Not Applicable
(7) copies of all bonus, profit sharing, pension or other
similar contracts or arrangements wholly or partly for
the benefit of Trustees or officers of the Registrant in
their capacity as such; any such plan that is not set
forth in a formal document, furnish a reasonably
detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository
contracts under Section 17(f) of the Investment Company
Act of 1940 (the "1940 Act"), with respect to securities
and similar investments of the Registrant, including the
schedule of renumeration;
(i) Custodian Agreement between Registrant and Bank of
America NT & SA dated September 17, 1991
(ii) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the International Equity
Fund, and Morgan Guaranty Trust Company of New York,
dated March 19, 1992
(iii)Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the Pacific Growth Fund,
and Morgan Guaranty Trust Company of New York, dated
March 19, 1992
(iv) Custody Agreement between the Trust, on behalf of the
Templeton Developing Markets Equity Fund and the
Templeton Global Growth Fund, and The Chase Manhattan
Bank, N.A. dated March 15, 1994
(v) Amendment to Custodian Agreement between Registrant and
Bank of America NT & SA, dated April 12, 1995
(vi) Amendment to Global Custody Agreement dated July 1,
1995
(9) copies of all other material contracts not made in the
ordinary course of business which are to be performed in
whole or in part at or after the date of filing the
Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will
when sold be legally issued, fully paid and nonassessable;
(i) Opinion of Counsel dated September 17, 1987
(11) Copies of any other rulings and consents to the use thereof
relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
Not Applicable
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in
consideration for providing the initial capital between
or among the Registrant, the underwriter, adviser,
promoter or initial stockholders and written assurances
from promoters or initial stockholders that their
purchases were made for investment purposes without any
present intention of redeeming or reselling;
(i) Letter of Understanding dated April 11, 1995
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant
offers its securities, any instructions thereto and any
other documents making up the model plan. Such form(s)
should disclose the costs and fees charged in connection
therewith;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to
Rule 12b-1 under the 1940 Act, which describes all
material aspects of the financing of distribution of
Registrant's shares, and any agreements with any person
relating to implementation of such plan.
Registrant's are hereby incorporated by reference Plans of
Distribution included in the management agreements which
are exhibits 5(i); 5(iii); 5(v); 5(vi); 5(vii); and 5(x).
(16) Schedule for computation of each performance quotation
provided in the registration statement in response to Item
22 (which need not be audited).
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated July 18, 1995
(ii) Certificate of Secretary dated July 18, 1995
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of June 30, 1995, there are three shareholders of record of Registrant's
shares.
Item 27 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 pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, 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 a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court or appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28 Business and Other Connections of Investment Adviser
(a)The officers and directors of the Registrant's investment adviser
also serve as officers and/or directors or trustees for (1) the corporate
parent of Franklin Advisers, Inc., ("Advisers") the investment manager of 18
of Registrant's Funds, Franklin Resources, Inc. ("Resources"), and/or (2)
other investment companies in the Franklin Group of Funds. 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.
(b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Resources, serves as sub-adviser to certain of the Funds,
furnishing to Advisers and to Templeton Galbraith and Hansberger Ltd. in that
capacity 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.
c) Templeton Galbraith and Hansberger Ltd.
Templeton Galbraith and Hansberger Ltd. ("TGH"), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Global
Growth Fund and Templeton Global Asset Allocation Fund. For additional
information please see Part B and Schedules A and D of Form ADV of TGH (SEC
File 801-42343), incorporated herein by reference, which set forth the
officers and directors of TGH and information as to any business, profession,
vocation of employment of a substantial nature engages in by those officers
and directors during the past two years.
d) Templeton Investment Management (Hong Kong) Limited.
Templeton Investment Management (Hong Kong) Limited ("TIML"), an indirect,
wholly owned subsidiary of Resources, serves as investment manager to
Templeton Developing Markets Equity Fund. For information please see Part B
and Schedules A and D of Form ADV of TIML (SEC File 801-42967), incorporated
herein by reference, which set forth the officers and directors of TIML 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.
Item 29 Principal Underwriters
Not applicable.
Item 30 Location of Accounts and Records
The accounts, books or other documents required to be maintained by Section
31 (a) of the 1940 Act are kept by the Registrant or its shareholder services
agent, Franklin/Templeton Investors Services, Inc., both of whose address is
777 Mariners Island Blvd., San Mateo, CA 94404.
Item 31 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 32 Undertakings
(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal
of any trustee or trustees when requested in writing to do so by the
record holders of not less than 10 per cent of the Registrant's
outstanding shares to assist its shareholders in the communicating
with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to file a post-effective amendment
using financial statements which need not be certified, within four
to six months from the effective date of Registrant's Registration
Statement for its new series, Templeton Global Asset Allocation Fund
(effective May 1, 1995) and Small Cap Fund (proposed effective date
November 1, 1995), under the Securities Act of 1933.
(c) 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 Post Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this post-effective amendment to the Registrant's
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 17th day of August, 1995.
FRANKLIN VALUEMARK FUNDS
(Registrant)
By: 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
Charles E. Johnson Trustee
Dated: August 17, 1995
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: August 17, 1995
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 17, 1995
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: August 17, 1995
Lowell C. Anderson Trustee
Lowell C. Anderson Dated: August 17, 1995
Harris J. Ashton* Trustee
Harris J. Ashton Dated: August 17, 1995
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: August 17, 1995
David W. Garbellano Trustee
David W. Garbellano Dated: August 17, 1995
Charles B. Johnson Trustee
Charles B. Johnson Dated: August 17, 1995
Rupert H. Johnson Trustee
Rupert H. Johnson Dated: August 17, 1995
*By /s/ Karen L. Skidmore
Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN VALUEMARK FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING
SYSTEM
EX-99.B1(i) Agreement and Declaration of Trust Attached
dated April 20, 1988
EX-99.B1(ii) Certificate of Amendment to Agreement Attached
and Declaration of Trust dated October
21, 1988
EX-99.B2(i) By-Laws Attached
EX-99.B2(ii) Certificate of Amendment of By-Laws Attached
dated May 16, 1995
EX-99.B5(i) Management Agreement between Registrant Attached
and Franklin Advisers, Inc. dated
January 24, 1989
EX-99.B5(ii) Addendum to Investment Management Attached
Agreement dated March 14, 1989
EX-99.B5(iii) Management Agreement between Registrant Attached
on behalf of International Equity Fund
and Pacific Growth Fund and Franklin
Advisers, Inc. dated January 27, 1992
EX-99.B5(iv) Subadvisory Agreement between Franklin Attached
Advisers, Inc. and Templeton Investment
Counsel, Inc. dated January 1, 1993
EX-99.B5(v) Management Agreement between Registrant Attached
on behalf of Franklin Rising Dividends
Fund and Franklin Advisers, Inc. dated
January 27, 1992
EX-99.B5(vi) Investment Management Agreement between Attached
the Trust on behalf of the Templeton
Developing Markets Equity Fund and
Templeton Investment Management (Hong
Kong) Limited dated March 15, 1994
EX-99.B5(vii) Investment Management Agreement between Attached
the Trust on behalf of the Templeton
Global Growth Fund and Templeton,
Galbraith & Hansberger Ltd. dated March
15, 1994
EX-99.B5(viii) Subadvisory Agreement between Franklin Attached
Advisers, Inc. and Templeton
Quantitative Advisers, Inc., on behalf
of Equity Growth Fund dated August 1,
1994
EX-99.B5(ix) Subadvisory Agreement between Franklin Attached
Advisers, Inc. and Templeton
Quantitative Advisers, Inc. on behalf
of Global Income Fund dated August 1,
1994
EX-99.B5(x) Investment Management Agreement between Attached
Registrant, on behalf of Templeton Global
Asset Allocation Fund, and Templeton
Galbraith & Hansberger, Ltd.
dated April 19, 1995.
EX-99.B5(xi) Subadvisory Agreement between Templeton Attached
Galbraith & Hansberger, Ltd. and
Templeton Investment Counsel, Inc., on
behalf of Templeton Global Asset
Allocation Fund dated April 19, 1995.
EX-99.B5(xii) Business Management Agreement between Attached
Registrant, on behalf of Templeton
Global Asset Allocation Fund, and
Templeton Global Investors, Inc. dated
April 19, 1995.
EX-99.B8(i) Custodian Agreement between Registrant Attached
and Bank of America NT & SA dated
September 17, 1991
EX-99.B 8(ii) Foreign Exchange Netting Agreement Attached
between Franklin Valuemark Funds, on
behalf of the International Equity Fund
and Morgan Guaranty Trust Company of
New York dated March 19, 1992
EX-99.B8(iii) Foreign Exchange Netting Agreement Attached
between Franklin Valuemark Funds, on
behalf of the Pacific Growth Fund and
Morgan Guaranty Trust Company of New
York dated March 19, 1992
EX-99.B8(iv) Custody Agreement between the Trust on Attached
behalf of the Templeton Developing
Markets Equity Fund and the Templeton
Global Growth Fund and The Chase
Manhattan Bank, N.A. dated March 15,
1994
EX-99.B8(v) Amendment to Custodian Agreement Attached
between Registrant and Bank of America
NT & SA dated April 12, 1995
EX-99.B8(vi) Amendment to Global Custody Agreement Attached
dated July 1, 1995
EX-99.B10(i) Opinion and consent of counsel dated Attached
September 16, 1987
EX-99.B13(i) Letter of Understanding dated April 11, Attached 1995.
EX-99.B17(i) Power of Attorney dated July 18, 1995 Attached
EX-99.B17(ii) Certificate of Secretary dated July 18, Attached
1995
*Incorporated by Reference
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN VALUEMARK ANNUITY FUNDS
a Massachusetts Trust
Dated: April 26, 1988
TABLE OF CONTENTS
FRANKLIN VALUEMARK ANNUITY FUNDS
AGREEMENT AND DECLARATION OF TRUST
ARTICLE I Name and Definitions
1. Name
2. Definitions
(a) Trust
(b) Trust Property
(c) Trustees
(d) Shares
(e) Shareholder
(f) Person
(g) 1940 Act
(h) Commission and Principal Underwriter
(i) Declaration of Trust
(j) By-Laws
(k) Interested Person
(l) Investment Manager
(m) Series Company
(n) Series
ARTICLE II Purpose of Trust
ARTICLE III Shares
1. Division of Beneficial Interest
2. Ownership of Shares
3. Investments in the Trust
4. Status of Shares and Limitation of Personal Liability
5. Power of Board of Trustees to Change Provisions Relating to Shares
6. Establishment and Designation of Series
(a) Assets Belonging to Series
(b) Liabilities Belonging to Series
(c) Dividends, Distributions, Redemptions, and Repurchases
(d) Voting
(e) Equality
(f) Fractions
(g) Exchange Privilege
(h) Combination of Series
(i) Elimination of Series
7. Indemnification of Shareholders
ARTICLE IV The Trustees
1. Number, Election and Tenure
2. Effect of Death, Resignation, etc. of a Trustee
3. Powers
4. Payment of Expenses by the Trust
5. Payment of Expenses by Shareholders
6. Ownership of Assets of the Trust
7. Service Contracts
ARTICLE V Shareholders' Voting Powers and Meetings
1. Voting Powers
2. Voting Power and Meetings
3. Quorum and Required Vote
4. Action by Written Consent
5. Record Dates
6. Additional Provisions
ARTICLE VI Net Asset Value, Distributions, and Redemptions
1. Determination of Net Asset Value, Net Income and Distributions
2. Redemptions and Repurchases
3. Redemptions at the Option of the Trust
ARTICLE VII Compensation and Limitation of Liability of Trustees
1. Compensation
2. Limitation of Liability
3. Indemnification
ARTICLE VIII Miscellaneous
1. Trustees, Shareholders, etc. Not Personally Liable; Notice
2. Trustee's Good Faith Action Expert Advice, No Bond or Surety
3. Liability of Third Persons Dealing with Trustees
4. Termination of Trust or Series
5. Merger and Consolidation
6. Filing of Copies, References, Headings
7. Applicable Law
8. Provisions in Conflict with Law or Regulations
10. Amendments
11. Use of the Name "Franklin"
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN VALUEMARK ANNUITY FUNDS
THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into as of
this 26th day of April, 1988 by the Trustees named hereunder.
WHEREAS the Trustees desire and have agreed to manage all property coming
into their hands as trustees of a Massachusetts business trust in accordance
with the provisions hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that this Agreement and
Declaration of Trust be filed with the Secretary of The Commonwealth of
Massachusetts and do hereby declare that they will hold all cash, securities and
other assets, which they may from time to time acquire in any manner as Trustees
hereunder, IN TRUST, and manage and dispose of the same upon the following terms
and conditions for the pro rata benefit of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as the FRANKLIN VALUEMARK
ANNUITY FUNDS and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
by the context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust established by
this Agreement and Declaration of Trust, as amended from time to time;
(b) The "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(c) "Trustees" refers to the persons who have signed this Agreement and
Declaration of Trust, so long as they continue in office in accordance with the
terms hereof, and all other persons who may from time to time be duly elected or
appointed to serve on the Board of Trustees in accordance with the provisions
hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in their capacity as trustees hereunder;
(d) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign;
(g) The "1940 Act" refers to the Investment Company Act of 1940 and the
Rules and Regulations thereunder, all as amended from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall have the
meanings given them in the 1940 Act;
(i) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust, as amended or restated from time to time;
(j) "By-Laws" shall mean the By-Laws of the Trust as amended from time
to time;
(k) The term "Interested Person" has the meaning given it in Section
2(a)(19) of the 1940 Act.
(1) "Investment Manager" means a party furnishing services to the Trust
pursuant to any contract described in Article IV, Section 7(a) hereof.
(m) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision; and
(n) "Series" refers to each Series of Shares established and designated
under or in accordance with the provisions of Article III.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a managed investment company registered under the 1940 Act through one or
more portfolios invested primarily in securities.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into an unlimited number of Shares, with a
par value of $ .01 per Share. The Trustees may authorize the division of Shares
into separate Series, and the different Series shall be established and
designated, and the variations in the relative rights and preferences as between
the different Series shall be fixed and determined, by the Trustees.
Subject to the provisions of Section 6 of this Article III, each Share
shall have voting rights as provided in Article V hereof, and holders of the
Shares of any Series shall be entitled to receive dividends, when and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions upon termination of
the Trust or of such Series made pursuant to Article VIII, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular Series from the assets belonging to such Series according to the
number of Shares of such Series held of record by such Shareholder on the record
date for any dividend or distribution or on the date of termination, as the case
may be. Shareholders shall have no preemptive or other right to subscribe to any
additional Shares or other securities issued by the Trust or any Series. The
Trustees may from time to time divide or combine the Shares of any particular
Series into a greater or lesser number of Shares of that Series without thereby
changing the proportionate beneficial interest of the Shares of that Series in
the assets belonging to that Series or in any way affecting the rights of Shares
of any other Series
Section 2. Ownership of Shares. The ownership of Shares shall be recorded
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series. No
certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the transfer of Shares of each
Series and similar matters. The record books of the Trust as kept by the Trust
or any transfer or similar agent, as the case may be, shall be conclusive as to
who are the Shareholders of each Series and as to the number of Shares of each
Series held from time to time by each.
Section 3. Investments in the Trust. The Trustees may accept investments
in the Trust from such Persons, at such times, on such terms, and for such
consideration as they from time to time authorize.
Section 4. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto. The death of a Shareholder during the existence of the
Trust shall not operate to terminate the Trust, nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders as partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any
Shareholders, nor, except as specifically provided herein, to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
Section 5. Power of Board of Trustees to Change Provisions Relating to
Shares. Notwithstanding any other provision of this Declaration of Trust and
without limiting the power of the Board of Trustees to amend the Declaration of
Trust as provided elsewhere herein, the Board of Trustees shall have the power
to amend this Declaration of Trust, at any time and from time to time, in such
manner as the Board of Trustees may determine in their sole discretion, without
the need for Shareholder action, so as to add to, delete, replace or otherwise
modify any provisions relating to the Shares contained in this Declaration of
Trust, provided that before adopting any such amendment without Shareholder
approval the Board of Trustees shall determine that it is consistent with the
fair and equitable treatment of all Shareholders or that Shareholder approval is
not otherwise required by the 1940 Act or other applicable law.
Without limiting the generality of the foregoing, the Board of Trustees
may, for the above-stated purposes, amend the Declaration of Trust to amend any
of the provisions set forth in paragraphs (a) through (i) of Section 6 of this
Article III.
Section 6. Establishment and Designation of Series. The establishment and
designation of any Series of Shares shall be effective upon the resolution by a
majority of the then Trustees, setting forth such establishment and designation
and the relative rights and preferences of such Series, or as otherwise provided
in such resolution.
Shares of each Series established pursuant to this Section 6, unless
otherwise provided in the resolution establishing such Series, shall have the
following relative rights and preferences:
(a) Assets Belonging to Series. All consideration received by the Trust
for the issue or sale of Shares of a particular Series, together with all assets
in which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall irrevocably belong to that Series for
all purposes, subject only to the rights of creditors, and shall be so recorded
upon the books of account of the Trust. Such consideration, assets, income,
earnings, profits and proceeds thereof, from whatever source derived, including,
without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
belonging to" that Series. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular Series (collectively "General
Assets"), the Trustees shall allocate such General Assets to, between or among
any one or more of the Series in such manner and on such basis as they, in their
sole discretion, deem fair and equitable, and any General Asset so allocated to
a particular Series shall belong to that Series. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of all Series for
all purposes.
(b) Liabilities Belonging to Series. The assets belonging to each
particular Series shall be charged with the liabilities of the Trust in respect
to that Series and all expenses, costs, charges and reserves attributable to
that Series, and any general liabilities of the Trust which are not readily
identifiable as belonging to any particular Series shall be allocated and
charged by the Trustees to and among any one or more of the Series in such
manner and on such basis as the Trustees in their sole discretion deem fair and
equitable. The liabilities, expenses, costs, charges, and reserves so charged to
a Series are herein referred to as "liabilities belonging to" that Series. Each
allocation of liabilities, expenses, costs, charges and reserves by the Trustees
shall be conclusive and binding upon the holders of all Series for all purposes.
Under no circumstances shall the assets allocated or belonging to any particular
Series be charged with liabilities attributable to any other Series. All Persons
who have extended credit which has been allocated to a particular Series, or who
have a claim or contract which has been allocated to any particular Series,
shall look only to the assets of that particular Series for payment of such
credit, claim, or contract.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution (including, without
limitation, any distribution paid upon termination of the Trust or of any
Series) with respect to, nor any redemption or repurchase of, the Shares of any
Series shall be effected by the Trust other than from the assets belonging to
such Series, nor, except as specifically provided in Section 7 of this Article
III, shall any Shareholder of any particular Series otherwise have any right or
claim against the assets belonging to any other Series except to the extent that
such Shareholder has such a right or claim hereunder as a Shareholder of such
other Series. The Trustees shall have full discretion, to the extent not
inconsistent with the 1940 Act, to determine which items shall be treated as
income and which items as capital; and each such determination and allocation
shall be conclusive and binding upon the Shareholders.
(d) Voting. All Shares of the Trust entitled to vote on a matter shall
vote separately by Series. That is, the Shareholders of each Series shall have
the right to approve or disapprove matters affecting the Trust and each
respective Series as if the Series were separate companies. There are, however,
two exceptions to voting by separate Series. First, if the 1940 Act requires all
Shares of the Trust to be voted in the aggregate without differentiation between
the separate Series, then all the Trust's Shares shall be entitled to vote on a
one-vote-per-Share basis. Second, if any matter affects only the interests of
some but not all Series, then only the Shareholders of such affected Series
shall be entitled to vote on the matter.
(e) Equality. All the Shares of each particular Series shall represent an
equal proportionate interest in the assets belonging to that Series (subject to
the liabilities belonging to that Series), and each Share of any particular
Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority to provide
that the holders of Shares of any Series shall have the right to exchange said
Shares for Shares of one or more other Series of Shares in accordance with such
requirements and procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the authority, without
the approval of the Shareholders of any Series unless otherwise required by
applicable law, to combine the assets and liabilities belonging to any two or
more Series into assets and liabilities belonging to a single Series.
(i) Elimination of Series. At any time that there are no Shares
outstanding of any particular Series previously established and designated, the
Trustees may by resolution of a majority of the then Trustees abolish that
Series and rescind the establishment and designation thereof.
Section 7. Indemnification of Shareholders. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of his
or her being or having been a Shareholder and not because of his or her acts or
omissions or for some other reason, the Shareholder or former Shareholder (or
his or her heirs, executors, administrators, or other legal representatives or
in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets of the Trust to be held harmless
from and indemnified against all loss and expense arising from such liability.
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a written
instrument signed or by resolution approved at a duly constituted meeting by a
majority of the Board of Trustees, provided, however, that the number of
Trustees shall in no event be less than one nor more than 15. The Board of
Trustees, by action of a majority of the then Trustees at a duly constituted
meeting, may fill vacancies in the Board of Trustees or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he dies, resigns, is declared bankrupt or incompetent by a court of
appropriate jurisdiction, or is removed, or, if sooner, until the next meeting
of Shareholders called for the purpose of electing Trustees and until the
election and qualification of his successor. Any Trustee may resign at any time
by written instrument signed by him and delivered to any officer of the Trust or
to a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee resigning
and no Trustee removed shall have any right to any compensation for any period
following his resignation or removal, or any right to damages on account of such
removal. The Shareholders may fix the number of Trustees and elect Trustees at
any meeting of Shareholders called by the Trustees for that purpose.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination, resignation, retirement, removal, or incapacity of one or more
Trustees, or all of them, shall not operate to annul the Trust or to revoke any
existing agency created pursuant to the terms of this Declaration of Trust.
Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is
filled as provided in Article IV, Section 1, the Trustees in office, regardless
of their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration of Trust.
As conclusive evidence of such vacancy, a written instrument certifying the
existence of such vacancy may be executed by an officer of the Trust or by a
majority of the Board of Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to fill vacancies, the Trust's
investment adviser or investment advisers jointly, if there is more than one,
are empowered to appoint new Trustees subject to the provisions of Section 16(a)
of the 1940 Act.
Section 3. Powers. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Board of Trustees, and such
Board shall have all powers necessary or convenient to carry out that
responsibility including the power to engage in securities transactions of all
kinds on behalf of the Trust. Without limiting the foregoing, the Trustees may:
adopt By-Laws not inconsistent with this Declaration of Trust providing for the
regulation and management of the affairs of the Trust and may amend and repeal
them to the extent that such By-Laws do not reserve that right to the
Shareholders; fill vacancies in or remove from their number, and may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate; appoint from their own number and establish and terminate one or
more committees consisting of two or more Trustees which may exercise the powers
and authority of the Board of Trustees to the extent that the Trustees
determine; employ one or more custodians of the assets of the Trust and may
authorize such custodians to employ subcustodians and to deposit all or any part
of such assets in a system or systems for the central handling of securities or
with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing
agent, or both; provide for the issuance and distribution of Shares by the Trust
directly or through one or more Principal Underwriters or otherwise; redeem,
repurchase and transfer Shares pursuant to applicable law; set record dates for
the determination of Shareholders with respect to various matters; declare and
pay dividends and distributions to Shareholders of each Series from the assets
of such Series; and in general delegate such authority as they consider
desirable to any officer of the Trust, to any committee of the Trustees and to
any agent or employee of the Trust or to any such custodian, transfer or
shareholder servicing agent, or Principal Underwriter. Any determination as to
what is in the interests of the Trust made by the Trustees in good faith shall
be conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees.
Without limiting the foregoing, the Board of Trustees shall have power and
authority:
(a) To invest and reinvest cash, to hold cash uninvested, and to subscribe
for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge,
sell, assign, transfer, exchange, distribute, write options on, lend or
otherwise deal in or dispose of contracts for the future acquisition or delivery
of fixed income or other securities, and securities of every nature and kind,
including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or
write options with respect to or otherwise deal in any property rights relating
to any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in
any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in its own name or
in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and
any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other obligations
of any Person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(1) To purchase and pay for entirely out of Trust Property such insurance
as they may deem necessary or appropriate for the conduct of the business,
including, without limitation, insurance policies insuring the assets of the
Trust or payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, principal underwriters, or independent contractors
of the Trust, individually against all claims and liabilities of every nature
arising by reason of holding, being or having held any such office or position,
or by reason of any action alleged to have been taken or omitted by any such
Person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust would
have the power to indemnify such Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust or one or more of its Series. The
Trustees shall not in any way be bound or limited by any present or future law
or custom in regard to investment by fiduciaries. The Trustees shall not be
required to obtain any court order to deal with any assets of the Trust or take
any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are authorized
to pay or cause to be paid out of the principal or income of the Trust, or
partly out of the principal and partly out of income, as they deem fair, all
expenses, fees, charges, taxes and liabilities incurred or arising in connection
with the Trust, or in connection with the management thereof, including, but not
limited to, the Trustees' compensation and such expenses and charges for the
services of the trust's officers, employees, investment adviser or manager,
principal underwriter, auditors, counsel, custodian, transfer agent, Shareholder
servicing agent, and such other agents or independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, Shareholder servicing
or similar agent, an amount fixed from time to time by the Trustees, by setting
off such charges due from such Shareholder from declared but unpaid dividends
owed such Shareholder and/or by reducing the number of shares in the account of
such Shareholder by that number of full and/or fractional Shares which
represents the outstanding amount of such charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trustees as joint
tenants except that the Trustees shall have power to cause legal title to any
Trust Property to be held by or in the name of one or more of the Trustees, or
in the name of the Trust, or in the name of any other Person as nominee, on such
terms as the Trustees may determine. The right, title and interest of the
Trustees in the Trust Property shall vest automatically in each Person who may
hereafter become a Trustee. Upon the resignation, removal or death of a Trustee
he shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be set forth in
the By-Laws, the Trustees may, at any time and from time to time, contract for
exclusive or nonexclusive advisory, management and/or administrative services
for the Trust or for any Series with any corporation, trust, association or
other organization; and any such contract may contain such other terms as the
Trustees may determine, including without limitation, authority for the
Investment Manager, Investment Adviser or Administrator to determine from time
to time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
(b) The Trustees may also, at any time and from time to time, contract
with any corporation, trust, association or other organization, appointing it
exclusive or nonexclusive distributor or Principal Underwriter for the Shares of
one or more of the Series. Every such contract shall comply with such
requirements and restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to time, to
contract with any corporations, trusts, associations or other organizations,
appointing it or them the custodian, transfer agent and/or shareholder servicing
agent for the Trust or one or more of its Series. Every such contract shall
comply with such requirements and restrictions as may be set forth in the
By-Laws or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from time to time,
to contract with any entity to provide such other services to the Trust or one
or more of the Series, as the Trustees determine to be in the best interests of
the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter, distributor, or affiliate or agent of or
for any corporation, trust, association, or other organization, or for any
parent or affiliate of any organization with which an advisory, management
or administration contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other type of service
contract may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a Shareholder or has
an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with
which an advisory, management or administration contract or principal
underwriter's or distributor's contract, or transfer, shareholder
servicing or other type of service contract may have been or may hereafter
be made also has an advisory, management or administration contract, or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other service contract with one or more other
corporations, trust, associations, or other organizations, or has other
business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article III,
Section 6(d), the Shareholders shall have power to vote only (i) for the
election of Trustees as provided in Article IV, Section 1, (ii) to the same
extent as the stockholders of a Massachusetts business corporation as to whether
or not a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or the
Shareholders, (iii) with respect to the termination of the Trust or any Series
to the extent and as provided in Article VIII, Section 4, and (iv) with respect
to such additional matters relating to the Trust as may be required by this
Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. At any time when no Shares of a
Series are outstanding, the Trustees may exercise all rights of Shareholders of
that Series with respect to matters affecting that Series, take any action
required by law, this Declaration of Trust or the By-Laws, to be taken by the
Shareholders.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven (7) days
before such meeting, postage prepaid, stating the time and place of the meeting,
to each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust or the By-Laws, a written waiver thereof,
executed before or after the meeting by such Shareholder or his attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series is to vote as a single
class separate from any other Shares which are to vote on the same matters as a
separate class or classes, forty percent (40%) of the Shares of each such Series
entitled to vote shall constitute a quorum at a Shareholder's meeting of that
Series. Any meeting of Shareholders may be adjourned from time to time by a
majority of the votes properly cast upon the question of adjourning a meeting to
another date and time, whether or not a quorum is present, and the meeting may
be held as adjourned within a reasonable time after the date set for the
original meeting without further notice. Subject to the provisions of Article
III, Section 6(d), when a quorum is present at any meeting, a majority of the
Shares voted shall decide any questions and a plurality shall elect a Trustee,
except when a larger vote is required by any provision of this Declaration of
Trust or the By-Laws or by applicable law.
Section 4. Action by Written Consent. Any action taken by Shareholders may
be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series entitled to vote separately on the matter consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the Shareholders
of any Series who are entitled to vote or act at any meeting or any adjournment
thereof, the Trustees may from time to time fix a time, which shall be not more
than ninety (90) days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series having the right to
notice of and to vote at such meeting and any adjournment thereof, and in such
case only Shareholders of record on such record date shall have such right,
notwithstanding any transfer of shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders of any Series who
are entitled to receive payment of any dividend or of any other distribution,
the Trustees may from time to time fix a date, which shall be before the date
for the payment of such dividend or such other payment, as the record date for
determining the Shareholders of such Series having the right to receive such
dividend or distribution. Without fixing a record date the Trustees may for
voting and/or distribution purposes close the register or transfer books for one
or more Series for all or any part of the period between a record date and a
meeting of Shareholders or the payment of a distribution. Nothing in this
Section shall be construed as precluding the Trustees from setting different
record dates for different Series.
Section 6. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their
absolute discretion, may prescribe and shall set forth in the By-Laws or in a
duly adopted vote of the Trustees such bases and time for determining the per
Share or net asset value of the Shares of any Series or net income attributable
to the Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.
Section 2. Redemptions and Repurchases. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the presentation
of a proper instrument of transfer together with a request directed to the Trust
or a Person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, in accordance with the By-Laws and applicable law. Payment for said
Shares shall be made by the Trust to the Shareholder within seven days after the
date on which the request is made in proper form. The obligation set forth in
this Section 2 is subject to the provision that in the event that any time the
New York Stock Exchange is closed for other than weekends or holidays, or if
permitted by the Rules of the Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Trust to dispose of the investments of the applicable Series or to determine
fairly the value of the net assets belonging to such Series or during any other
period permitted by order of the Commission for the protection of investors,
such obligations may be suspended or postponed by the Trustees.
The redemption price may in any case or cases be paid wholly or partly in
kind if the Trustees determine that such payment is advisable in the interest of
the remaining Shareholders of the Series for which the Shares are being
redeemed. Subject to the foregoing, the fair value, selection and quantity of
securities or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the Trustees. In no
case shall the Trust be liable for any delay of any corporation or other Person
in transferring securities selected for delivery as all or part of any payment
in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have
the right at its option and at any time to redeem Shares of any Shareholder at
the net asset value thereof as described in Section 1 of this Article VI: (i) if
at such time such Shareholder owns Shares of any Series having an aggregate net
asset value of less than an amount determined from time to time by the Trustees
prior to the acquisition of said Shares; or (ii) to the extent that such
Shareholder owns Shares of a particular Series equal to or in excess of a
percentage of the outstanding Shares of that Series determined from time to time
by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal
to or in excess of a percentage, determined from time to time by the Trustees,
of the outstanding Shares of the Trust or of any Series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Limitation of Liability. The Trustees shall not be responsible
or liable in any event for any neglect or wrong-doing of any officer, agent,
employee, manager or Principal Underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability to which he would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
Section 3. Indemnification. The Trustees shall be entitled and empowered
to the fullest extent permitted by law to purchase with Trust assets insurance
for and to provide by resolution or in the By-Laws for indemnification out of
Trust assets for liability and for all expenses reasonably incurred or paid or
expected to be paid by a Trustee or officer in connection with any claim,
action, suit or proceeding in which he becomes involved by virtue of his
capacity or former capacity with the Trust. The provisions, including any
exceptions and limitations concerning indemnification, may be set forth in
detail in the By-Laws or in a resolution of the Board of Trustees.
ARTICLE VIII
Miscellaneous
Section 1. Trustees, Shareholders, etc. Not Personally Liable; Notice. All
Persons extending credit to, contracting with or having any claim against the
Trust or any Series shall look only to the assets of the Trust, or, to the
extent that the liability of the Trust may have been expressly limited by
contract to the assets of a particular Series, only to the assets belonging to
the relevant Series, for payment under such credit, contract or claim; and
neither the Shareholders nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, shall be personally liable
therefor. Nothing in this Declaration of Trust shall protect any Trustee against
any liability to which such Trustee would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued on behalf of the Trust by the Board of Trustees, by any officers or
officer or otherwise may include a notice that this Declaration of Trust is on
file with the Secretary of The Commonwealth of Massachusetts and may recite that
the note, bond, contract, instrument, certificate, or undertaking was executed
or made by or on behalf of the Trust or by them as Trustee or Trustees or as
officers or officer or otherwise and not individually and that the obligations
of such instrument are not binding upon any of them or the Shareholders
individually but are binding only upon the assets and property of the Trust or
upon the assets belonging to the Series for the benefit of which the Trustees
have caused the note, bond, contract, instrument, certificate or undertaking to
be made or issued, and may contain such further recital as he or they may deem
appropriate, but the omission of any such recital shall not operate to bind any
Trustee or Trustees or officer or officers or Shareholders or any other person
individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable solely for his own
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and shall not be liable
for errors of judgment or mistakes of fact or law. The Trustees may take advice
of counsel or other experts with respect to the meaning and operation of this
Declaration of Trust, and shall be under no liability for any act or omission in
accordance with such advice nor for failing to follow such advice. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
required.
Section 3. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 4. Termination of Trust or Series. Unless terminated as provided
herein, the Trust shall continue without limitation of time. The Trust may be
terminated at any time by vote of at least two-thirds (66-2/3%) of the Shares of
each Series entitled to vote, voting separately by Series, or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of at least two-thirds (66-2/3%) of the Shares of that Series or by the
Trustees by written notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may be), after
paying or otherwise providing for all charges, taxes, expenses and liabilities
belonging, severally, to each Series (or the applicable Series, as the case may
be), whether due or accrued or anticipated as may be determined by the Trustees,
the Trust shall, in accordance with such procedures as the Trustees consider
appropriate, reduce the remaining assets belonging, severally, to each Series
(or the applicable Series, as the case may be), to distributable form in cash or
shares or other securities, or any combination thereof, and distribute the
proceeds belonging to each Series (or the applicable Series, as the case may
be), to the Shareholders of that Series, as a Series, ratably according to the
number of Shares of that Series held by the several Shareholders on the date of
termination.
Section 5. Merger and Consolidation. The Trustees may cause the Trust or
one or more of its Series to be merged into or consolidated with another Trust
or company or the Shares exchanged under or pursuant to any state or Federal
statute, if any, or otherwise to the extent permitted by law. Such merger or
consolidation or Share exchange must be authorized by vote of a majority of the
outstanding Shares of the Trust, as a whole, or any affected Series, as may be
applicable; provided that in all respects not governed by statute or applicable
law, the Trustees shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or consolidation.
Section 6. Filing of Copies, References, Headings. The original or a copy
of this instrument and of each amendment hereto shall be kept at the office of
the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of The Commonwealth of Massachusetts and with any other governmental
office where such filing may from time to time be required. Anyone dealing with
the Trust may rely on a certificate by an officer of the Trust as to whether or
not any such amendments have been made and as to any matters in connection with
the Trust hereunder; and, with the same effect as if it were the original, may
rely on a copy certified by an officer of the Trust to be a copy of this
instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein,"
hereof" and "hereunder", shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for convenience
of reference only and shall not be taken as a part hereof or control or affect
the meaning, construction or effect of this instrument. Whenever the singular
number is used herein, the same shall include the plural; and the neuter,
masculine and feminine genders shall include each other, as applicable. This
instrument may be executed in any number of counterparts each of which shall be
deemed an original.
Section 7. Applicable Law. This Agreement and Declaration of Trust is
created under and is to be governed by and construed and administered according
to the laws of The Commonwealth of Massachusetts. The Trust shall be of the type
commonly called a Massachusetts business trust, and without limiting the
provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Section 8. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of the Declaration of Trust; provided, however, that such determination
shall not affect any of the remaining provisions of the Declaration of Trust or
render invalid or improper any action taken or omitted prior to such
determination.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 9. Amendments. This Declaration of Trust may be amended at any
time by an instrument in writing signed by a majority of the then Trustees.
Section 10. Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment, or any form of legal relationship other than a trust.
Nothing in this Agreement and Declaration of Trust shall be construed to make
the Shareholders, either by themselves or with the Trustees, partners or members
of a joint stock association.
Section 11. Use of the Name "Franklin." Franklin Advisers, Inc., as the
proposed Manager of the Trust's assets, has consented to the use by the Trust of
the identifying word "Franklin" as part of the name of the Trust and in the name
of any Series of Shares. Such consent is conditioned upon the employment of the
Manager, or an affiliate of said Company, as Manager of the Trust and said
Series. The name or identifying words "Franklin" or any variation thereof may be
used from time to time in other connections and for other purposes by the
Manager or affiliated entities. The Manager has the right to require the Trust
to cease using "Franklin" in the name of the Trust and in the names of its
Series if the Trust and said Series cease to employ, for any reason, the
Manager, or an affiliate of said Company, as the Manager or adviser of the Trust
or such Series. Future names adopted by the Trust for itself and its Series
shall be the property of the Manager and its affiliates, and the use of such
names shall be subject to the same conditions set forth in this Section insofar
as such name or identifying words require the consent of the Manager.
IN WITNESS WHEREOF, the Trustees named below do hereby set their hands as
of the 26th day of April, 1988.
/s/ Frank H. Abbott, III /s/ Robert S. James
Frank H. Abbott, III Robert S. James
/s/ Harris J. Ashton /s/ Henry L. Jamieson
Harris J. Ashton Henry L. Jamieson
/s/ Jeremiah J. Bresnahan, Jr. /s/ Charles B. Johnson
Jeremiah J. Bresnahan, Jr. Charles B. Johnson
/s/ Zadoc W. Brown /s/ Charles E. Johnson
Zadoc W. Brown Charles E. Johnson
/s/ David W. Garbellano /s/ Rupert H. Johnson
David W. Garbellano Rupert H. Johnson
/s/ Samuel G. Hanson /s/ Frank W.T. LaHaye
Samuel G. Hanson Frank W.T. LaHaye
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN VALUEMARK ANNUITY FUNDS
The undersigned certify that:
1. They constitute a majority of the Board of Trustees.
2. They hereby adopt the following amendment to the Agreement and
Declaration of Trust of this Trust.
Article I, Section 1 is amended to delete the word "Annuity" from the name
of the Trust and to read as follows:
Section 1. Name. This Trust shall be known as the FRANKLIN VALUEMARK FUNDS
and the Trustees shall conduct the business of the Trust under that name
or any other name as they may from time to time determine.
3. It is the determination of the Trustees that approval of the shareholders
of the Trust is not required by the Investment Company Act of 1940, as
amended, or other applicable law. This amendment is made pursuant to
Article VIII, Section 9 of the Agreement and Declaration of Trust.
Pursuant to Article VIII, Section 6, this Certificate of Amendment may be
executed in counterparts.
IN WITNESS WHEREOF, the Trustees named below have signed their names hereto this
21st day of October, 1988.
/s/ Frank H. Abbott, III /s/ David W. Garbellano
Frank H. Abbott, III, Trustee David W. Garbellano, Trustee
/s/ Harris J. Ashton /s/ Samuel G. Hanson
Harris J. Ashton, Trustee Samuel G. Hanson
/s/ Zadoc W. Brown /s/ Robert S. James
Zadoc W. Brown, Trustee Robert S. James, Trustee
/s/ Henry L. Jamieson /s/ Charles E. Johnson
Henry L. Jamieson, Trustee Charles E. Johnson, Trustee
/s/ Charles B. Johnson /s/ Rupert H. Johnson, Jr.
Charles B. Johnson, Trustee Rupert H. Johnson, Jr., Trustee
/s/ Frank W. T. LaHaye
Frank W. T. LaHaye, Trustee
BY-LAWS
OF
FRANKLIN VALUEMARK ANNUITY FUNDS
A Massachusetts Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from
time to time, may change the location of the principal executive office of the
Trust at any place within or outside The Commonwealth of Massachusetts.
Section 2. OTHER OFFICES. The Board of Trustees may at any time
establish branch or subordinate offices at any place or places where the
Trust intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside The Commonwealth of Massachusetts designated by the
Board of Trustees. In the absence of any such designation, shareholders'
meetings shall be held at the principal executive office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called
at any time by the Board of Trustees or by the chairman of the Board or by
the president.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which trustees are to be elected also
shall include the name of any nominee or nominees whom at the time of the notice
are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a trustee has a direct or indirect financial
interest, (ii) an amendment of the Declaration of Trust, (iii) a reorganization
of the Trust, or (iv) a voluntary dissolution of the Trust, the notice shall
also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the shareholder on written demand of the
shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting, whether
or not a quorum is present, may be adjourned from time to time by the vote of
the majority of the shares represented at that meeting, either in person or by
proxy.
When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 3 and 4 of this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Declaration of Trust, as in effect at such time. The shareholders' vote may be
by voice vote or by ballot, provided, however, that any election for trustees
must be by ballot if demanded by any shareholder before the voting has begun. On
any matter other than elections of trustees, any shareholder may vote part of
the shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal, but if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
the total shares that the shareholder is entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of shareholders may be taken without a
meeting and without prior notice if a consent in writing setting forth the
action so taken is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. All such consents shall be filed with the Secretary of
the Trust and shall be maintained in the Trust's records. Any shareholder giving
a written consent or the shareholder's proxy holders or a transferee of the
shares or a personal representative of the shareholder or their respective proxy
holders may revoke the consent by a writing received by the Secretary of the
Trust before written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS.
For purposes of determining the shareholders entitled to notice of any meeting
or to vote or entitled to give consent to action without a meeting, the Board of
Trustees may fix in advance a record date which shall not be more than ninety
(90) days nor less than seven (7) days before the date of any such meeting as
provided in the Declaration of Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to action in writing without a meeting, (i) when no prior action by the Board of
Trustees has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the Board of Trustees has been taken, shall
be at the close of business on the day on which the Board of Trustees adopt the
resolution relating to that action or the seventy-fifth day before the date of
such other action, whichever is later.
Section 10. PROXIES. Every person entitled to vote for trustees or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the Trust. A proxy shall be deemed signed if the shareholder's name
is placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by a writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise
provided in the proxy. The revocability of a proxy that states on its face that
it is irrevocable shall be governed by the provisions of the General Corporation
Law of the State of California.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders, the
Board of Trustees may appoint any persons other than nominees for office to act
as inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy shall, appoint inspectors of election
at the meeting. The number of inspectors shall be either one (1) or three (3).
If inspectors are appointed at a meeting on the request of one or more
shareholders or proxies, the holders of a majority of shares or their proxies
present at the meeting shall determine whether one (1) or three (3) inspectors
are to be appointed. If any person appointed as inspector fails to appear or
fails or refuses to act, the chairman of the meeting may and on the request of
any shareholder or a shareholder's proxy, shall appoint a person to fill the
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close; (f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. POWERS. Subject to the applicable provisions of the Declaration
of Trust and these By-Laws relating to action required to be approved by the
shareholders or by the outstanding shares, the business and affairs of the Trust
shall be managed and all powers shall be exercised by or under the direction of
the Board of Trustees.
Section 2. NUMBER AND QUALIFICATION OF TRUSTEES. The exact number of
trustees within the limits specified in the Agreement and Declaration of Trust
shall be nine (9), until changed by a duly adopted amendment to the Declaration
of Trust and these By-Laws.
Section 3. VACANCIES. Vacancies in the Board of Trustees may be filled by
a majority of the remaining trustees, though less than a quorum, or by a sole
remaining trustee, unless the Board of Trustees calls a meeting of shareholders
for the purposes of electing trustees. In the event that at any time less than a
majority of the trustees holding office at that time were so elected by the
holders of the outstanding voting securities of the Trust, the Board of Trustees
shall forthwith cause to be held as promptly as possible, and in any event
within sixty (60) days, a meeting of such holders for the purpose of electing
trustees to fill any existing vacancies in the Board of Trustees, unless such
period is extended by order of the United States Securities and Exchange
Commission.
Notwithstanding the above, whenever and for so long as the Trust is a
participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested trustees.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings
of the Board of Trustees may be held at any place within or outside The
Commonwealth of Massachusetts that has been designated from time to time by
resolution of the Board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the Trust. Any meeting,
regular or special, may be held by conference telephone or similar communication
equipment, so long as all trustees participating in the meeting can hear one
another and all such trustees shall be deemed to be present in person at the
meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Trustees
for any purpose or purposes may be called at any time by the chairman of the
board or the president or any vice president or the secretary or any two (2)
trustees.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each trustee or sent by first-class mail or
telegram, charges prepaid, addressed to each trustee at that trustee's address
as it is shown on the records of the Trust. In case the notice is mailed, it
shall be deposited in the United States mail at least seven (7) days before the
time of the holding of the meeting. In case the notice is delivered personally,
by telephone, to the telegraph company, or by express mail or similar service,
it shall be given at least forty-eight (48) hours before the time of the holding
of the meeting. Any oral notice given personally or by telephone may be
communicated either to the trustee or to a person at the office of the trustee
who the person giving the notice has reason to believe will promptly communicate
it to the trustee. The notice need not specify the purpose of the meeting or the
place if the meeting is to be held at the principal executive office of the
Trust.
Section 7. QUORUM. A majority of the authorized number of trustees shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Declaration of Trust. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
trustees if any action taken is approved by a least a majority of the required
quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to
any trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that trustee.
Section 9. ADJOURNMENT. A majority of the trustees present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given unless the meeting is adjourned for more
than forty-eight (48) hours, in which case notice of the time and place shall be
given before the time of the adjourned meeting in the manner specified in
Section 7 of this Article III to the trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board of Trustees may be taken without a meeting if a majority
of the members of the Board of Trustees shall individually or collectively
consent in writing to that action. Such action by written consent shall have the
same force and effect as a majority vote of the Board of Trustees. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Trustees. This Section 12 shall not be construed to preclude any
trustee from serving the Trust in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation for those services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
fewer than two (2) Trustees personally exercise the powers granted to the
Trustees under this Declaration of Trust except as otherwise expressly provided
herein or by resolution of the Board of Trustees.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by resolution
adopted by a majority of the authorized number of trustees designate one or more
committees, each consisting of two (2) or more trustees, to serve at the
pleasure of the Board. The Board may designate one or more trustees as alternate
members of any committee who may replace any absent member at any meeting of the
committee. Any committee to the extent provided in the resolution of the Board,
shall have the authority of the Board, except with respect to:
(a) the approval of any action which under applicable law also requires
shareholders' approval or approval of the outstanding shares, or requires
approval by a majority of the entire Board or certain members of said Board;
(b) the filling of vacancies on the Board of Trustees or in any
committee;
(c) the fixing of compensation of the trustees for serving on the Board
of Trustees or on any committee;
(d) the amendment or repeal of the Declaration of Trust or of the
By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the Board of Trustees
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the Trust, except at a rate
or in a periodic amount or within a designated range determined by the Board
of Trustees; or
(g) the appointment of any other committees of the Board of Trustees or
the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular meetings of
committees may be determined either by resolution of the Board of Trustees or by
resolution of the committee. Special meetings of committees may also be called
by resolution of the Board of Trustees, and notice of special meetings of
committees shall also be given to all alternate members who shall have the right
to attend all meetings of the committee. The Board of Trustees may adopt rules
for the government of any committee not inconsistent with the provisions of
these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a president, a
secretary, and a treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with the provisions of Section 3 or
Section 5 of this Article V, shall be chosen by the Board of Trustees, and each
shall serve at the pleasure of the Board of Trustees, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and may
empower the president to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Trustees at any regular or special
meeting of the Board of Trustees or except in the case of an officer upon whom
such power of removal may be conferred by the Board of Trustees.
Any officer may resign at any time by giving written notice to the Trust.
Any resignation shall take effect at the date of the receipt of that notice or
at any later time specified in that notice; and unless otherwise specified in
that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Trust under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death,
resignation, removal, disqualification or other cause shall be filled in the
manner prescribed in these By-Laws for regular appointment to that office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer is elected, shall if present preside at meetings of the Board of
Trustees and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Trustees or prescribed by the
By-Laws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the Board of Trustees to the chairman of the board, if there be such
an officer, the president shall be the chief executive officer of the Trust and
shall, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the officers of the
Trust. He shall preside at all meetings of the shareholders and in the absence
of the chairman of the board or if there be none, at all meetings of the Board
of Trustees. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the Board of Trustees or these
By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the Board of
Trustees or if not ranked, a vice president designated by the Board of Trustees,
shall perform all the duties of the president and when so acting shall have all
powers of and be subject to all the restrictions upon the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board of Trustees or
by these By-Laws and the president or the chairman of the board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept at the
principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of trustees,
committees of trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at trustees' meetings or committee meetings, the
number of shares present or represented at shareholders' meetings, and the
proceedings.
The secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
as determined by resolution of the Board of Trustees, a share register or a
duplicate share register showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of
the shareholders and of the Board of Trustees required by these By-Laws or by
applicable law to be given and shall have such other powers and perform such
other duties as may be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief financial officer
of the Trust and shall keep and maintain or cause to be kept and maintained
adequate and correct books and records of accounts of the properties and
business transactions of the Trust, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any trustee.
The treasurer shall deposit all monies and other valuables in the name and
to the credit of the Trust with such depositaries as may be designated by the
Board of Trustees. He shall disburse the funds of the Trust as may be ordered by
the Board of Trustees, shall render to the president and trustees, whenever they
request it, an account of all of his transactions as chief financial officer and
of the financial condition of the Trust and shall have other powers and perform
such other duties as may be prescribed by the Board of Trustees or these
By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in the best interests of this Trust
and in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of that person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not act
in good faith and in a manner which the person reasonably believed to be in the
best interests of this Trust or that the person had reasonable cause to believe
that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of this Trust to procure a judgment in
its favor by reason of the fact that that person is or was an agent of this
Trust, against expenses actually and reasonably incurred by that person in
connection with the defense or settlement of that action if that person acted in
good faith, in a manner that person believed to be in the best interests of this
Trust and with such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to
the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue or matter as to which that person shall
have been adjudged to be liable in the performance of that person's duty to this
Trust, unless and only to the extent that the court in which that action was
brought shall determine upon application that in view of all the circumstances
of the case, that person was not liable by reason of the disabling conduct set
forth in the preceding paragraph and is fairly and reasonably entitled to
indemnity for the expenses which the court shall determine; or
(b) In respect of any claim, issue, or matter as to which that person
shall have been adjudged to be liable on the basis that personal benefit was
improperly received by him, whether or not the benefit resulted from an action
taken in the person's official capacity; or
(c) Of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval, or of expenses incurred in
defending a threatened or pending action which is settled or otherwise disposed
of without court approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party trustees, also
determines that based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of trustees who are not parties
to the proceeding and are not interested persons of the Trust (as defined in the
Investment Company Act of 1940); or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding on receipt of an undertaking by or on behalf of the agent to repay
the amount of the advance unless it shall be determined ultimately that the
agent is entitled to be indemnified as authorized in this Article, provided the
agent provides a security for his undertaking, or a majority of a quorum of the
disinterested, non-party trustees, or an independent legal counsel in a written
opinion, determine that based on a review of readily available facts, there is
reason to believe that said agent ultimately will be found entitled to
indemnification.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any
circumstances where it appears:
(a) That it would be inconsistent with a provision of the Declaration of
Trust, a resolution of the shareholders, or an agreement in effect at the time
of accrual of the alleged cause of action asserted in the proceeding in which
the expenses were incurred or other amounts were paid which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust shall
keep at its principal executive office or at the office of its transfer agent or
registrar, if either be appointed and as determined by resolution of the Board
of Trustees, a record of its shareholders, giving the names and addresses of all
shareholders and the number and series of shares held by each shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep at
its principal executive office the original or a copy of these By-Laws as
amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the Board of Trustees and any committee or committees of the Board of Trustees
shall be kept at such place or places designated by the Board of Trustees or in
the absence of such designation, at the principal executive office of the Trust.
The minutes shall be kept in written form and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall
be open to inspection upon the written demand of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours for
a purpose reasonably related to the holder's interests as a shareholder or as
the holder of a voting trust certificate. The inspection may be made in person
or by an agent or attorney and shall include the right to copy and make
extracts.
Section 4. INSPECTION BY TRUSTEES. Every trustee shall have the absolute
right at any reasonable time to inspect all books, records, and documents of
every kind and the physical properties of the Trust. This inspection by a
trustee may be made in person or by an agent or attorney and the right of
inspection includes the right to copy and make extracts of documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and
any income statement of the Trust for each quarterly period of each fiscal year
and accompanying balance sheet of the Trust as of the end of each such period
that has been prepared by the Trust shall be kept on file in the principal
executive office of the Trust for at least twelve (12) months and each such
statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts,
or other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed by
such person or persons and in such manner as from time to time shall be
determined by resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Trustees,
except as otherwise provided in these By-Laws, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the Trust and this authority may be general or
confined to specific instances; and unless so authorized or ratified by the
Board of Trustees or within the agency power of an officer, no officer, agent,
or employee shall have any power or authority to bind the Trust by any contract
or engagement or to pledge its credit or to render it liable for any purpose or
for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon his request when such shares are fully paid. All certificates
shall be signed in the name of the Trust by the chairman of the board or the
president or vice president and by the treasurer or an assistant treasurer or
the secretary or any assistant secretary, certifying the number of shares and
the series of shares owned by the shareholders. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent, or registrar
before that certificate is issued, it may be issued by the Trust with the same
effect as if that person were an officer, transfer agent or registrar at the
date of issue. Notwithstanding the foregoing, the Trust may adopt and use a
system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the Trust and cancelled at the same time. The Board of
Trustees may in case any share certificate or certificate for any other security
is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board of Trustees may require,
including a provision for indemnification of the Trust secured by a bond or
other adequate security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The
chairman of the board, the president or any vice president or any other person
authorized by resolution of the Board of Trustees or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trusts, or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees. The fiscal
year of the Trust shall be the taxable year of each Series of the Trust.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority of the
outstanding shares entitled to vote, except as otherwise provided by applicable
law or by the Declaration of Trust or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of shareholders as
provided in Section 1 of this Article to adopt, amend or repeal By-Laws, and
except as otherwise provided by applicable law or by the Declaration of Trust,
these By-Laws may be adopted, amended, or repealed by the Board of Trustees.
CERTIFICATE OF AMENDMENT
OF
BY-LAWS
FRANKLIN VALUEMARK FUNDS
The undersigned certify that:
1. They constitute a majority of the Trustees of Franklin Valuemark Funds,
a Massachusetts business trust.
2. They hereby adopt the following amendment to the By-Laws of this Trust:
Article III, Section 2, is amended to read as follows:
Section 2. NUMBER OF TRUSTEES. The number of Trustees constituting
the Board of Trustees shall, within the limits specified in the
Agreement and Declaration of Trust, be fixed from time to time by
resolution of the Board of Trustees.
We declare under penalty of perjury that the matters set forth in this
certificate are true and correct to the best of our own knowledge.
May 16, 1995
Frank H. Abbott, III Lowell C. Anderson
/s/ Harris J. Ashton /s/ S. Joseph Fortunato
Harris J. Ashton S. Joseph Fortunato
/s/ David W. Garbellano /s/ Charles B. Johnson
David W. Garbellano Charles B. Johnson
/s/ Rupert H. Johnson, Jr.
Charles E. Johnson Rupert H. Johnson
/s/ Frank W.T. LaHaye /s/ Gordon S. Macklin
Frank W.T. LaHaye Gordon S. Macklin
FRANKLIN VALUEMARK FUNDS
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUEMARK FUNDS, a
Massachusetts Business Trust, hereinafter called the "Trust", and FRANKLIN
ADVISERS, INC., a California corporation, hereinafter called the "Manager."
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"Act") for the purpose of investing and reinvesting its assets in securities, as
set forth in its Agreement and Declaration of Trust, its By-Laws and its
Registration Statements under the Act and the Securities Act of 1933, all as
heretofore and hereafter amended and supplemented; and the Trust desires to
avail itself of the services, information, advice, assistance and facilities of
an investment manager and to have an investment manager perform various
management, statistical, research, investment advisory and other services for
each of the Funds currently or hereafter organized as separate series of the
Trust (the "Funds"); and,
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counselling and supervisory services to
investment companies and other investment counselling clients, and desires to
provide these services to the Funds.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of each Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Funds in any way or otherwise be deemed an agent of the Funds or the Trust.
2. Obligations of and Services to be Provided by the Manager. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. Administrative Services. The Manager shall furnish to each of the
Funds adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, (ii)
office furnishings, facilities and equipment as may be reasonably required for
managing the affairs and conducting the business of the Funds, including
conducting correspondence and other communications with the shareholders of or
contractholders investing in the Funds, maintaining all internal bookkeeping,
accounting and auditing services and records in connection with the Funds'
investment and business activities. The Manager shall employ or provide and
compensate the executive, secretarial and clerical personnel necessary to
provide such services. The Manager shall also compensate all officers and
employees of the Trust who are officers or employees of the Manager or its
affiliates.
B. Investment Management Services.
(a) The Manager shall manage the Funds' assets subject to
and in accordance with the respective investment objectives and policies of each
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Funds' assets and the
purchase and sale of their investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Funds' investment
securities shall be exercised. The Manager shall render regular reports to the
Trust, at regular meetings of its Board of Trustees and at such other times as
may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions which it has made with respect to the investment of the Funds' assets
and the purchase and sale of their investment securities, (ii) the reasons for
such decisions and (iii) the extent to which those decisions have been
implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Funds, orders for the execution of the Funds'
securities transactions. When placing such orders the Manager shall seek to
obtain the best net price and execution for the Funds, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set forth
in this section have been satisfied. The parties recognize that there are likely
to be many cases in which different brokers are equally able to provide such
best price and execution and that, in selecting among such brokers with respect
to particular trades, it is desirable to choose those brokers who furnish
research, statistical, quotations and other information to the Funds and the
Manager in accord with the standards set forth below. Moreover, to the extent
that it continues to be lawful to do so and so long as the Board of Trustees
determines that the Funds will benefit, directly or indirectly, by doing so, the
Manager may place orders with a broker who charges a commission for that
transaction which is in excess of the amount of commission that another broker
would have charged for effecting that transaction, provided that the excess
commission is reasonable in relation to the value of "brokerage and research
services" (as defined in Section 28(e) (3) of the Securities Exchange Act of
1934) provided by that broker.
Accordingly, the Trust and the Manager agree that the Manager shall select
brokers for the execution of the Funds' transactions from among:
(i) Those brokers and dealers who provide quotations
and other services to the Funds, specifically
including the quotations necessary to determine the
Funds' net assets, in such amount of total brokerage
as may reasonably be required in light of such
services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Funds, or
which place the Manager in a better position to make
decisions in connection with the management of the
Funds' assets and securities, whether or not such
data may also be useful to the Manager and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required.
(c) When the Manager has determined that any of the Funds
should tender securities pursuant to a "tender offer solicitation," the Manager
shall designate Franklin Distributors, Inc. ("Distributors") as the "tendering
dealer" so long as it is legally permissible for the Manager to do so, and act
in such capacity under the Federal securities laws and rules thereunder and the
rules of any securities exchange or association of which Distributors may be a
member. Distributors shall not be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the applicable Fund shall enter into an
agreement with the Manager and/or Distributors to reimburse them for all such
expenses connected with attempting to collect such fees, including legal fees
and expenses and that portion of the compensation due to their employees which
is attributable to the time involved in attempting to collect such fees.
(d) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager with brokers falling into each of the categories
referred to above and the manner in which the allocation has been accomplished.
(e) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for each of the Funds.
C. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Funds in the preparation of registration
statements, reports and other documents required by Federal and state securities
laws and with such information as the Funds may reasonably request for use in
the preparation of such documents or of other materials necessary or helpful for
the offering of the Funds' shares.
D. Other Obligations and Services. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Funds and their investment activities.
3. Expenses of the Portfolios. It is understood that each Fund will pay
all of its own expenses other than those expressly assumed by the Manager
herein, which expenses payable by the Funds shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of their shares;
D. Expenses of obtaining quotations for calculating the value of
each Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Manager
or its affiliates;
F. Taxes levied against the Funds;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for each Fund;.
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of Board of Trustees and
shareholders of each Fund, reports to each Fund's shareholders or
contractholders investing in the Fund, the filing of reports with regulatory
bodies and the maintenance of each Fund's and the Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of each Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Funds and their shares under Federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders or contractholders investing in the Funds;
M. Trade association dues; and
N. The Funds' pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums.
4. Compensation of the Manager. Each Fund shall pay a management fee in
cash to the Manager based upon a percentage of the value of the respective
Fund's net assets, calculated as set forth below, as compensation for the
services rendered and obligations assumed by the Manager, payable monthly at the
request of the Manager.
A. For purposes of calculating such fee, the value of the net assets
of each Fund shall be determined in the same manner as that Fund uses to compute
the value of its net assets in connection with the determination of the net
asset value of its shares, all as set forth more fully in the Trust's current
prospectus and statement of additional information. The rate of the management
fee payable by each of the Funds shall be calculated daily at the following
annual rates:
.625 of 1% of the value of net assets up to and including
$100,000,000; plus
.50 of 1% of the value of net assets over $100,000,000 up
to and including $250,000,000; plus
.45 of 1% of the value of net assets over $250,000,000 up
to and including $10,000,000,000; plus
.44 of 1% of the value of net assets over $10,000,000,000
up to and including $12,500,000,000; plus
.42 of 1% of the value of net assets over $12,500,000,000
up to and including $15,000,000,000; plus
.40 of 1% of the value of net assets over $15,000,000,000.
B. The Management fee payable by each Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith as set forth in paragraph 2.B.(c) of this Agreement. The
Manager may, from time to time, voluntarily reduce or waive any management fee
due to it hereunder.
5. Activities of the Manager. The services of the Manager to the Funds
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the Act, it is understood that trustees, officers, agents
and shareholders of the Trust are or may be interested in the Manager or its
affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Funds as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the Act.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or
any of the Funds or to any shareholder of the Funds for any act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by any of
the Funds.
B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Manager or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Manager or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its affiliates
or any of their officers, directors, employees or stockholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder or
policyholder investing in the Fund seeking to recover all or a portion of the
proceeds derived by any stockholder of the Manager or any of its affiliates from
the sale of his shares of the Manager, or similar matters. So long as this
Agreement is in effect, the Manager shall pay to the Trust the amount due for
expenses subject to this Subparagraph 6(B) within 30 days after a bill or
statement has been received by the Manager therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against the
Manager or others for costs, expenses or damages heretofore incurred by the
Trust or for costs, expenses or damages the Trust may hereafter incur which are
not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Manager, from liability in violation of Sections 17(h) and (i) of the Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written below
and shall continue in effect for one (1) year thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter as to
each Fund for periods not exceeding one (1) year so long as such continuation is
approved at least annually (i) by a vote of a majority of the outstanding voting
securities of each Fund or by a vote of the Board of Trustees of the Trust, and
(ii) by a vote of a majority of the Trustees of the Trust who are not parties to
the Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated with respect to any of the
Funds without the payment of any penalty either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Fund seeking to terminate the Agreement, on 60 days' written notice to the
Manager;
(ii) shall immediately terminate with respect to all of
the Funds in the event of its assignment; and
(iii) may be terminated by the Manager with respect to any of
the Funds on 60 days' written notice to the applicable Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.
8. Distribution Plan.
A. The provisions set forth in this paragraph 8 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Trustees"), cast in person at a meeting called
for the purpose of voting on such Plan. The Board of Trustees concluded that the
rate of compensation to be paid to the Manager by each Fund was fair and not
excessive, but that due solely to the uncertainty that may exist from time to
time with respect to whether payments made by the Funds to the Manager or to
other firms may nevertheless be deemed to constitute distribution expenses, it
was determined that adoption of the Plan would be prudent and in the best
interests of the Funds and their shareholders or policyholders having an
interest in the Funds. The Trustees' approval included a determination that in
the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Funds and their shareholders or policyholders investing in the Funds.
B. No additional payments are to be made by any of the Funds as a
result of the Plan other than the payments the Funds are otherwise obligated to
make (i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to their
Transfer and Dividend Paying Agents or Custodian, pursuant to their respective
Agreements as in effect at any time, and (iii) in payment of any expenses by the
Funds in the ordinary course of their respective businesses that may be deemed
primarily intended to result in the sale of shares issued by such Fund. However,
to the extent any of such other payments by the Funds, to or by the Manager, or
to the Funds' Agents, are nevertheless deemed to be payments for the financing
of any activity primarily intended to result in the sale of shares issued by the
Funds within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan as set forth herein. The costs
and activities, the payment of which are intended to be within the scope of the
Plan, shall include, but not necessarily be limited to, the following:
(a) the costs of the preparation, printing and mailing
of all required reports and notices to shareholders or
policyholders investing in the Funds;
(b) the costs of the preparation, printing and mailing
of all prospectuses and statements of additional
information;
(c) the costs of preparation, printing and mailing of
any proxy statements and proxies;
(d) all legal and accounting fees relating to the
preparation of any such reports, prospectuses, proxies
and proxy statements;
(e) all fees and expenses relating to the
qualification of the Fund and/or its shares under the
securities or "Blue Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act,
including fees in connection with any application for
exemption relating to or directed toward the sale of the
Funds' shares;
(g) all fees and assessments of the Investment Company
Institute or any successor organization, irrespective of
whether some of its activities are designed to provide sales
assistance;
(h) all costs of the preparation and mailing of
confirmations of shares sold or redeemed, and reports of
share balances;
(i) all costs of responding to telephone or mail
inquiries of investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers,
or other firms, any one of whom may receive monies in
respect of the Funds' shares held in accounts for
policyholders for whom such firm is the dealer of record or
holder of record, or with whom such firm has a servicing
relationship. Servicing may include, among other things: (i)
answering client inquiries regarding the Funds; (ii)
assisting clients in changing account designations and
addresses; (iii) performing sub-accounting; (iv)
establishing and maintaining shareholder or policyholder
accounts and. records; (v) processing purchase and
redemption transactions; (vi) providing periodic statements
showing a client's account balance and integrating such
statements with those of other transactions and balances in
the client's other accounts serviced by such firm; (vii)
arranging for bank wires; and (viii) such other services as
the Funds may request, to the extent such are permitted by
applicable statute, rule or regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the
Trust at least quarterly on payments for any of the activities in subparagraph B
of this paragraph 8, and shall furnish the Board of Trustees of the Trust with
such other information as the Board may reasonably request in connection with
such payments in order to enable the Board to make an informed determination of
whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more
than one year from the date written below only so long as such continuance is
specifically approved at least annually (from the date below) by the Trust's
Board of Trustees, including the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to any of the
Funds at any time by vote of a majority of non-interested Trustees or by vote of
a majority of such Fund's outstanding voting securities on not more than sixty
(60) days' written notice to any other party to the Plan, and the Plan shall
terminate automatically with respect to all of the Funds in the event of any act
that constitutes an assignment of this Management Agreement.
(d) The Plan may not be amended to increase materially the
amount deemed to be spent for distribution without approval by a majority of the
Fund's outstanding shares (as defined by the Act and all material amendments to
the Plan shall be approved by the non-interested Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested Trustees shall be committed to the
discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this
Management Agreement or affect the validity of any of the provisions of this
Agreement other than this paragraph 8.
9. Severability. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
11. Limitation of Liability. The Manager acknowledges that it has
received notice of and accepts the limitations of the Trust's liability as set
forth in Article VIII of its Agreement and Declaration of Trust. The Manager
agrees that the Trust's obligations hereunder shall be limited to the assets of
each Fund, and that the Manager shall not seek satisfaction of any such
obligation from any shareholders of the Funds nor from any trustee, officer,
employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 24th day of January, 1989.
FRANKLIN VALUEMARK FUNDS
By: /s/ Deborah R. Gatzek
Secretary
FRANKLIN ADVISERS, INC.
By: /s/ Harmon E. Burns
Vice President
ADDENDUM TO THE INVESTMENT MANAGEMENT AGREEMENT
BY AND BETWEEN FRANKLIN VALUEMARK FUNDS AND
FRANKLIN ADVISERS INC. ON BEHALF OF U.S. GOVERNMENT
SECURITIES FUND, ZERO COUPON FUND 1995,
ZERO COUPON FUND 2000, ZERO COUPON FUND 2005,
AND ZERO COUPON FUND 2010
Franklin Valuemark Funds, on behalf of U.S. Government Securities
Fund, Zero Coupon Fund 1995, Zero Coupon Fund 2000, Zero Coupon 2005 and Zero
Coupon Fund 2010 does hereby adopt and agree to be bound under the terms and
conditions of the Investment Management Agreement dated January 24, 1989, to
which this Addendum is attached this 14th day of March 1989.
FRANKLIN VALUEMARK FUNDS ON
BEHALF OF U.S. GOVERNMENT
SECURITIES FUND, ZERO COUPON
FUND 1995, ZERO COUPON FUND 2005,
ZERO COUPON 2005
AND ZERO COUPON FUND 2010
By: /s/ Deborah R. Gatzek
FRANKLIN ADVISERS INC.
By: /s/ Harmon E. Burns
MANAGEMENT AGREEMENT
FRANKLIN VALUEMARK FUNDS
(on behalf of the International Equity Fund and the Pacific Growth Fund)
THIS MANAGEMENT AGREEMENT (the "Agreement") made between FRANKLIN
VALUEMARK FUNDS, a Massachusetts business trust, hereinafter called the "Trust",
on behalf of the International Equity Fund and Pacific Growth Fund, separate
series of the Trust (the "Funds"), and FRANKLIN ADVISERS, INC., a California
corporation, hereinafter called the "Manager."
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and
WHEREAS, the Funds desire to avail themselves of the services,
information, advice, assistance and facilities of an investment manager and to
have an investment manager perform various management, statistical, research,
investment advisory and other service; and,
WHEREAS, the Manager currently serves as investment adviser to every
other existing series of the Trust; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
management, investment advisory, counselling and supervisory services to
investment companies and other investment counselling clients, and desires to
provide these services to the Funds.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
l. Employment of the Manager. The Trust hereby employs the Manager to
manage the investment and reinvestment of each Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Manager
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Funds in any way or otherwise be deemed an agent of the Funds or the Trust.
2. Obligations of and Services to be Provided by the Manager. The
Manager undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. Administrative Services. The Manager shall furnish to each of the
Funds adequate (i) office space, which may be space within the offices of the
Manager or in such other place as may be agreed upon from time to time, (ii)
office furnishings, facilities and equipment as may be reasonably required for
managing the affairs and conducting the business of the Funds, including
conducting correspondence and other communications with the shareholders of the
Funds, maintaining all internal bookkeeping, accounting and auditing services
and records in connection with the Funds' investment and business activities.
The Manager shall employ or provide and compensate the executive, secretarial
and clerical personnel necessary to provide such services. The Manager shall
also compensate all officers and employees of the Trust who are officers or
employees of the Manager or its affiliates.
B. Investment Management Services.
(a) The Manager shall manage the Funds' assets subject to
and in accordance with the respective investment objectives and policies of each
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Manager shall make all
determinations with respect to the investment of the Funds' assets and the
purchase and sale of their investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Funds' investment
securities shall be exercised. The Manager shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Funds'
assets and the purchase and sale of their investment securities, (ii) the
reasons for such decisions and (iii) the extent to which those decisions have
been implemented.
(b) The Manager, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Funds, orders for the execution of the Funds'
securities transactions. When placing such orders the Manager shall seek to
obtain the best net price and execution for the Funds, but this requirement
shall not be deemed to obligate the Manager to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set forth
in this section have been satisfied. The parties recognize that there are likely
to be many cases in which different brokers are equally able to provide such
best price and execution and that, in selecting among such brokers with respect
to particular trades, it is desirable to choose those brokers who furnish
research, statistical, quotations and other information to the Funds and the
Manager in accord with the standards set forth below. Moreover, to the extent
that it continues to be lawful to do so and so long as the Board of Trustees
determines that the Funds will benefit, directly or indirectly, by doing so, the
Manager may place orders with a broker who charges a commission for that
transaction which is in excess of the amount of commission that another broker
would have charged for effecting that transaction, provided that the excess
commission is reasonable in relation to the value of "brokerage and research
services" (as defined in Section 28(e) (3) of the Securities Exchange Act of
1934) provided by that broker.
Accordingly, the Trust and the Manager agree that the Manager shall select
brokers for the execution of the Funds' transactions from among:
(i) Those brokers and dealers who provide quotations
and other services to the Funds, specifically
including the quotations necessary to determine the
Funds' net assets, in such amount of total brokerage
as may reasonably be required in light of such
services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Manager or its
affiliates which the Manager or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Funds, or
which place the Manager in a better position to make
decisions in connection with the management of the
Funds' assets and securities, whether or not such
data may also be useful to the Manager and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required. Provided that the Trust's
officers are satisfied that the best execution is
obtained, the sale of shares of the Funds may also be
considered as a factor in the selection of
broker-dealers to execute the Funds' portfolio
transactions.
(c) It is acknowledged that the Manager may contract with
one or more firms to undertake some or all of the Manager's investment
management services as set forth herein pursuant to an agreement which is
subject to substantially the same provisions as contained in paragraphs 6, 7 and
11 herein.
(d) When the Manager has determined that any of the Funds
should tender securities pursuant to a "tender offer solicitation," Franklin
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Manager nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Manager or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the applicable Fund shall enter into an
agreement with the Manager and/or Distributors to reimburse them for all such
expenses connected with attempting to collect such fees, including legal fees
and expenses and that portion of the compensation due to their employees which
is attributable to the time involved in attempting to collect such fees.
(e) The Manager shall render regular reports to the Trust,
not more frequently than quarterly, of how much total brokerage business has
been placed by the Manager with brokers falling into each of the categories
referred to above and the manner in which the allocation has been accomplished.
(f) The Manager agrees that no investment decision will be
made or influenced by a desire to provide brokerage for allocation in accordance
with the foregoing, and that the right to make such allocation of brokerage
shall not interfere with the Manager's paramount duty to obtain the best net
price and execution for each of the Funds.
C. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials. The Manager, its
officers and employees will make available and provide accounting and
statistical information required by the Funds in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Funds may reasonably request for use in
the preparation of such documents or of other materials necessary or helpful for
the underwriting and distribution of the Funds' shares.
D. Other Obligations and Services. The Manager shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Funds and their investment activities.
3. Expenses of the Funds. It is understood that each Fund will pay all of
its own expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Funds shall include:
A. Fees and expenses paid to the Manager as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of their shares;
D. Expenses of obtaining quotations for calculating the value of each
Fund's net assets;
E. Salaries and other compensations of executive officers of the Trust
who are not officers, directors, stockholders or employees of the Manager or its
affiliates;
F. Taxes levied against the Funds;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for each Fund;.
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of Board of Trustees and
shareholders of each Fund, reports to each Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of each Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of each Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Manager or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Funds and their shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to their
shareholders;
M. Trade association dues; and
N. Each Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officers liability insurance premiums.
4. Compensation of the Manager. Each Fund shall pay a monthly management
fee in cash to the Manager based upon a percentage of the value of the
respective Fund's net assets, calculated as set forth below, as compensation for
the services rendered and obligations assumed by the Manager, during the
preceding month, on the first business day of the month in each year. The
initial management fee under this Agreement shall be payable on the first
business day of the first month following the effective date of this Agreement,
and shall be reduced by the amount of any advance payments made by the Funds
relating to the previous month.
A. For purposes of calculating such fee, the value of the net assets
of each Fund shall be the average daily net assets of each Fund during the
month, determined in the same manner as that Fund uses to compute the value of
its net assets in connection with the determination of the net asset value of
its shares, all as set forth more fully in the Trust's current prospectus and
statement of additional information. The monthly management fee payable by each
of the Funds shall be calculated at the following annual rates:
1.0% of the value of its average daily net assets up to
and including $100,000,000;
0.90% of the value of its average daily net assets over
$100,000,000 up to and including $250,000,000;
0.80% of the value of its average daily net assets over
$250,000,000 up to and including $500,000,000; and
0.75% of the value of its average daily net assets over
$500,000,000.
B. The management fee payable by each Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith as set forth in paragraph 2.B.(c) of this Agreement. The
Manager may, from time to time, voluntarily reduce or waive any management fee
due to it hereunder.
C. If this Agreement is terminated prior to the end of any month,
the monthly management fee shall be prorated for the portion of any month in
which this Agreement is in effect which is not a complete month according to the
proportion which the number of calendar days in the fiscal quarter during which
the Agreement is in effect bears to the number of calendar days in the month,
and shall be payable within 10 days after the date of termination.
5. Activities of the Manager. The services of the Manager to the Funds
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Manager or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Manager or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Manager or its affiliates may be interested in the Funds as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Manager, the Manager shall not be subject to liability to the Trust or
any of the Funds or to any shareholder of the Funds for any act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by any of
the Funds.
B. Notwithstanding the foregoing, the Manager agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Manager or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Manager or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Manager or any of its affiliates
or any of their officers, directors, employees or stockholders. The Manager
shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Manager or any of its affiliates from the sale of his interest in the
Manager, or similar matters. So long as this Agreement is in effect, the Manager
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6(B) within 30 days after a bill or statement has been received by the Manager
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Manager or others for costs, expenses
or damages heretofore incurred by the Trust or for costs, expenses or damages
the Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or director or officer of the Manager, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written below
and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter as to
each Fund for periods not exceeding one (1) year so long as such continuation is
approved at least annually (i) by a vote of a majority of the outstanding voting
securities of each Fund or by a vote of the Board of Trustees of the Trust, and
(ii) by a vote of a majority of the Trustees of the Trust who are not parties to
the Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated with respect to any of the
Funds without the payment of any penalty either by vote of the Board of Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Fund seeking to terminate the Agreement, on 60 days' written notice to the
Manager;
(ii) shall immediately terminate with respect to each
of the Funds in the event of its assignment; and
(iii) may be terminated by the Manager with respect to each of
the Funds on 60 days' written notice to the applicable Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.
8. Distribution Plan.
A. The provisions set forth in this paragraph 8 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Trustees"), cast in person at a meeting called
for the purpose of voting on such Plan. The Board of Trustees concluded that the
rate of compensation to be paid to the Manager by each Fund was fair and not
excessive, but that due solely to the uncertainty that may exist from time to
time with respect to whether payments made by the Funds to the Manager or to
other firms may nevertheless be deemed to constitute distribution expenses, it
was determined that adoption of the Plan would be prudent and in the best
interests of the Funds and their shareholders or policyholders having an
interest in the Funds. The Trustees' approval included a determination that in
the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Funds and their shareholders or policyholders investing in the Funds.
B. No additional payments are to be made by any of the Funds as a
result of the Plan other than the payments the Funds are otherwise obligated to
make (i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to their
Transfer and Dividend Paying Agents or Custodian, pursuant to their respective
Agreements as in effect at any time, and (iii) in payment of any expenses by the
Funds in the ordinary course of their respective businesses that may be deemed
primarily intended to result in the sale of shares issued by such Fund. However,
to the extent any of such other payments by the Funds, to or by the Manager, or
to the Funds' Agents, are nevertheless deemed to be payments for the financing
of any activity primarily intended to result in the sale of shares issued by the
Funds within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan as set forth herein. The costs
and activities, the payment of which are intended to be within the scope of the
Plan, shall include, but not necessarily be limited to, the following:
(a) the costs of the preparation, printing and mailing
of all required reports and notices to shareholders or
policyholders investing in the Funds;
(b) the costs of the preparation, printing and mailing
of all prospectuses and statements of additional
information;
(c) the costs of preparation, printing and mailing of
any proxy statements and proxies;
(d) all legal and accounting fees relating to the
preparation of any such reports, prospectuses, proxies
and proxy statements;
(e) all fees and expenses relating to the qualification of
the Funds and/or their shares under the securities or "Blue
Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act,
including fees in connection with any application for
exemption relating to or directed toward the sale of the
Funds' shares;
(g) all fees and assessments of the Investment Company
Institute or any successor organization, irrespective of
whether some of its activities are designed to provide sales
assistance;
(h) all costs of the preparation and mailing of
confirmations of shares sold or redeemed, and reports of
share balances;
(i) all costs of responding to telephone or mail
inquiries of investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers,
or other firms, any one of whom may receive monies in
respect of the Funds' shares held in accounts for
policyholders for whom such firm is the dealer of record or
holder of record, or with whom such firm has a servicing
relationship. Servicing may include, among other things: (i)
answering client inquiries regarding the Funds; (ii)
assisting clients in changing account designations and
addresses; (iii) performing sub-accounting; (iv)
establishing and maintaining shareholder or policyholder
accounts and. records; (v) processing purchase and
redemption transactions; (vi) providing periodic statements
showing a client's account balance and integrating such
statements with those of other transactions and balances in
the client's other accounts serviced by such firm; (vii)
arranging for bank wires; and (viii) such other services as
the Funds may request, to the extent such are permitted by
applicable statute, rule or regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the
Trust at least quarterly on payments for any of the activities in subparagraph B
of this paragraph 8, and shall furnish the Board of Trustees of the Trust with
such other information as the Board may reasonably request in connection with
such payments in order to enable the Board to make an informed determination of
whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more
than one year from the date written below only so long as such continuance is
specifically approved at least annually (from the date below) by the Trust's
Board of Trustees, including the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to any of the
Funds at any time by vote of a majority of non-interested Trustees or by vote of
a majority of such Funds' outstanding voting securities on not more than sixty
(60) days' written notice to any other party to the Plan, and the Plan shall
terminate automatically with respect to each of the Funds in the event of any
act that constitutes an assignment of this Management Agreement.
(d) The Plan may not be amended to increase materially the
amount deemed to be spent for distribution without approval by a majority of the
Fund's outstanding shares (as defined by the Act) and all material amendments to
the Plan shall be approved by the non-interested Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested Trustees shall be committed to the
discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this
Management Agreement or affect the validity of any of the provisions of this
Agreement other than this paragraph 8.
9. Severability. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
11. Limitation of Liability. The Manager acknowledges that it has
received notice of and accepts the limitations of the Trust's liability as set
forth in Article VII of its Agreement and Declaration of Trust. The Manager
agrees that the Trust's obligations hereunder shall be limited to the assets of
the Funds, and that the Manager shall not seek satisfaction of any such
obligation from any shareholders of the Funds nor from any trustee, officer,
employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 27th day of January 1992.
FRANKLIN VALUEMARK FUNDS
on behalf of the International Equity
Fund and the Pacific Growth Fund
By: /s/ Charles B. Johnson
FRANKLIN ADVISERS, INC.
By: /s/ Rupert H. Johnson, Jr.
SUBADVISORY AGREEMENT
FRANKLIN VALUEMARK FUNDS
THIS SUBADVISORY AGREEMENT made as of the 1st day of January 1993, by and
between FRANKLIN ADVISERS, INC., a corporation organized and existing under the
laws of the State of California (hereinafter called "FAI"), and TEMPLETON
INVESTMENT COUNSEL, INC., a Florida corporation (hereinafter called "TICI").
W I T N E S S E T H
WHEREAS, FAI is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and is engaged in the business of
supplying investment advice, and investment management services, as an
independent contractor; and
WHEREAS, FAI has been retained to render investment management services to
International Equity Fund and Pacific Growth Fund (the "Funds"), and such
subsequent series of Franklin Valuemark Funds (the "Trust"), an investment
management company registered with the U.S. Securities and Exchange Commission
(the "SEC"), as the parties hereto may determine from time-to-time; and
WHEREAS, FAI desires to retain TICI to render investment advisory,
research and related services to the Funds pursuant to the terms and provisions
of this Agreement, and TICI is interested in furnishing said services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. FAI hereby retains TICI and TICI hereby accepts such engagement, to
furnish certain investment advisory services with respect to the assets of the
Funds, as more fully set forth herein.
(a) Subject to the overall policies, control, direction and review
of the Trust's Board of Trustees (the "Board") and to the instructions and
supervision of FAI, TICI will provide a continuous investment program for the
Funds, including allocation of the Funds' assets among the various securities
markets of the world and, investment research and advice with respect to
securities and investments and cash equivalents in the Funds. So long as the
Board and FAI determine, on no less frequently than an annual basis, to grant
the necessary delegated authority to TICI, and subject to paragraph (b) below,
TICI will determine what securities and other investments will be purchased,
retained or sold by the Funds, and will place all purchase and sale orders on
behalf of the Funds except that orders regarding U.S. domiciled securities and
money market instruments may also be placed on behalf of the Funds by FAI.
(b) In performing these services, TICI shall adhere to the Funds'
investment objectives, policies and restrictions as contained in their
Prospectus and Statement of Additional Information, and in the Trust's
Declaration of Trust, and to the investment guidelines most recently established
by FAI and shall comply with the provisions of the Investment Company Act of
1940 (the "1940 Act") and the rules and regulations of the SEC thereunder in all
material respects and with the provisions of the United States Internal Revenue
Code of 1986, as amended, which are applicable to regulated investment
companies.
(c) Unless otherwise instructed by FAI or the Board, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by FAI or by the Board, TICI shall report daily all
transactions effected by TICI on behalf of the Funds to FAI and to other
entities as reasonably directed by FAI or the Board.
(d) TICI shall provide the Board at least quarterly, in advance of
the regular meetings of the Board, a report of its activities hereunder on
behalf of the Funds and its proposed strategy for the next quarter, all in such
form and detail as requested by the Board. TICI shall also make an investment
officer available to attend such meetings of the Board as the Board may
reasonably request.
(e) In carrying out its duties hereunder, TICI shall comply with all
reasonable instructions of the Funds or FAI in connection therewith. Such
instructions may be given by letter, telex, telefax or telephone confirmed by
telex, by the Board or by any other person authorized by a resolution of the
Board, provided a certified copy of such resolution has been supplied to TICI.
2. In performing the services described above, TICI shall use its best
efforts to obtain for the Funds the most favorable price and execution
available. Subject to prior authorization of appropriate policies and procedures
by the Board, TICI may, to the extent authorized by law and in accordance with
the terms of the Funds' Prospectus and Statement of Additional Information,
cause the Funds to pay a broker who provides brokerage and research services an
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker would have charged for effecting that
transaction, in recognition of the brokerage and research services provided by
the broker. To the extent authorized by applicable law, TICI shall not be deemed
to have acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of such action.
3. (a) TICI shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent FAI or the Funds in any
way, or in any way be deemed an agent for FAI or the Funds.
(b) It is understood that the services provided by TICI are not to
be deemed exclusive. FAI acknowledges that TICI may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act, ("Clients") which may invest in
the same type of securities as the Funds. FAI agrees that TICI may give advice
or exercise investment responsibility and take such other action with respect to
such Clients which may differ from advice given or the timing or nature of
action taken with respect to the Funds.
4. TICI agrees to use its best efforts in performing the services to be
provided by it pursuant to this Agreement.
5. FAI has furnished or will furnish to TICI as soon as available copies
properly certified or authenticated of each of the following documents:
(a) the Trust's Declaration of Trust, as filed with the Secretary of
State of the State of Delaware on March 22, 1991, and any other organizational
documents and all amendments thereto or restatements thereof;
(b) resolutions of the Trust's Board of Trustees authorizing
the appointment of TICI and approving this Agreement;
(c) the Trust's original Notification of Registration on Form N-8A
under the 1940 Act as filed with the SEC and all amendments thereto;
(d) the Trust's current Registration Statement on Form N-1A under
the Securities Act of 1933, as amended and under the 1940 Act as filed with the
SEC, and all amendments thereto, as it relates to the Funds;
(e) the Funds' most recent Prospectus and Statement of
Additional Information; and
(f) the Investment Management Agreement between the Funds and
FAI.
FAI will furnish TICI with copies of all amendments of or supplements to the
foregoing documents.
6. TICI will treat confidentially and as proprietary information of the
Funds all records and other information relative to the Funds and prior, present
or potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Funds, which
approval shall not be unreasonably withheld and may not be withheld where TICI
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities, or
when so requested by the Funds.
7. FAI shall pay a monthly fee in cash to TICI based upon a percentage of
the value of each Fund's net assets, calculated as set forth below, on the first
business day of each month in each year as compensation for the services
rendered and obligations assumed by TICI during the preceding month. The
advisory fee under this Agreement shall be payable on the first business day of
the first month following the effective date of this Agreement, and shall be
reduced by the amount of any advance payments made by FAI relating to the
previous month.
(a) For purposes of calculating such fee, the value of the net
assets of each Fund shall be the average daily net assets of each Fund during
each month, determined in the same manner as the Funds use to compute the value
of their net assets in connection with the determination of the net asset value
of their shares, all as set forth more fully in the Funds' current Prospectus.
The rate of the monthly fee payable to TICI shall be based upon the following
annual rates:
.50% of the value of its average daily net assets up to and
including $100,000,000;
.40% of the value of its average daily net assets over
$100,000,000 up to and including $250,000,000;
.30% of the value of its average daily net assets over
$250,000,000 up to and including $500,000,000; and
.25% of the value of its average daily net assets over
$500,000,000.
(b) FAI and TICI shall share equally in any voluntary reduction or
waiver by FAI of the management fee due FAI under the Management Agreement
between FAI and the Funds.
(c) If this Agreement is terminated prior to the end of any month,
the monthly fee shall be prorated for the portion of any month in which this
Agreement is in effect which is not a complete month according to the proportion
which the number of calendar days in the month during which the Agreement is in
effect bears to the total number of calendar days in the month, and shall be
payable within 10 days after the date of termination.
8. Nothing herein contained shall be deemed to relieve or deprive the
Board of its responsibility for and control of the conduct of the affairs of the
Funds.
9. (a) In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations or duties hereunder on the part of
TICI, neither TICI nor any of its directors, officers, employees or affiliates
shall be subject to liability to FAI or the Funds or to any shareholder of the
Funds for any error of judgment or mistake of law or any other act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security by
the Funds.
(b) Notwithstanding paragraph 9(a), to the extent that FAI is found
by a court of competent jurisdiction, or the SEC or any other regulatory agency
to be liable to the Funds or any shareholder (a "liability"), for any acts
undertaken by TICI pursuant to authority delegated as described in Paragraph
1(a), TICI shall indemnify and save FAI and each of its affiliates, officers,
directors and employees (each a "Franklin Indemnified Party") harmless from,
against, for and in respect of all losses, damages, costs and expenses incurred
by a Franklin Indemnified Party with respect to such liability, together with
all legal and other expenses reasonably incurred by any such Franklin
Indemnified Party, in connection with such liability.
(c) No provision of this Agreement shall be construed to protect any
director or officer of FAI or TICI, from liability in violation of Sections
17(h) or (i), respectively, of the 1940 Act.
10. During the term of this Agreement, TICI will pay all expenses incurred
by it in connection with its activities under this Agreement other than the cost
of securities (including brokerage commissions, if any) purchased for the Funds.
The Funds and FAI will be responsible for all of their respective expenses and
liabilities.
11. This Agreement shall be effective as of January 1, 1993 and shall
continue in effect for two years. It is renewable annually thereafter for
successive periods not to exceed one year each (i) by a vote of the Board or by
the vote of a majority of the outstanding voting securities of the Funds, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons thereof, cast in person at a meeting
called for the purpose of voting on such approval.
12. This Agreement may be terminated at any time, without payment of any
penalty, by the Board or by vote of a majority of the outstanding voting
securities of the Funds, upon sixty (60) days' written notice to FAI and TICI,
and by FAI or TICI upon sixty (60) days' written notice to the other party.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act, and in the event of
any act or event that terminates the Management Agreement between FAI and the
Funds.
14. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
TICI hereby agrees that all records which it maintains for the Funds are the
property of the Funds and further agrees to surrender promptly to a Fund, or to
any third party at the Fund's direction, any of such records upon the Fund's
request. TICI further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.
15. This Agreement may not be materially amended, transferred, assigned,
sold or in any manner hypothecated or pledged without the affirmative vote or
written consent of the holders of a majority of the outstanding voting
securities of the Funds and may not be amended without the written consent of
FAI and TICI.
16. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. The terms "majority of the outstanding voting securities" of the Funds
and "interested persons" shall have the meanings as set forth in the 1940 Act.
18. This Agreement shall be interpreted in accordance with and governed by
the laws of the State of California of the United States of America.
19. Limitation of Liability. TICI acknowledges that it has received notice
of and accepts the limitations of the Trust's liability as set forth in Article
VII of its Agreement and Declaration of Trust. TICI agrees that the Trust's
obligations hereunder shall be limited to the assets of the Funds, and that TICI
shall not seek satisfaction of any such obligation from any shareholders of the
Funds nor from any trustee, officer, employee or agent of the Trust.
(the remainder of this page intentionally left blank)
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
Harmon E. Burns
Title: Senior Vice President
TEMPLETON INVESTMENT COUNSEL, INC.
By /s/ Gregory E. McGowan
Gregory E. McGowan
Title: Senior Vice President
International Equity Fund and Pacific Growth Fund, and such subsequent series as
the parties hereto may determine from time-to-time, hereby acknowledge and agree
to the provisions of paragraphs 9(a) and 10 of this Agreement.
FRANKLIN VALUEMARK FUNDS
on behalf of the
INTERNATIONAL EQUITY FUND
AND THE PACIFIC GROWTH FUND
By /s/ Deborah R. Gatzek
Deborah R. Gatzek
Title: Secretary
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") made as of the 27th day of
January 1992, by and between the FRANKLIN RISING DIVIDENDS FUND (hereinafter
called the "Fund") a series of the Franklin Valuemark Funds, a Massachusetts
business trust (hereinafter called the "Trust"), and FRANKLIN ADVISERS, INC., a
corporation organized and existing under the laws of the State of California
(hereinafter called the "Manager").
W I T N E S S E T H
WHEREAS, the Trust is an open-end management investment company, registered
as such under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, and is engaged in the business of supplying
investment advice, investment management and administrative services, as an
independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render advice and
services to the Fund pursuant to the terms and provisions of this Agreement, and
the Manager is interested in furnishing said advice and services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
l. The Trust hereby employs the Manager and the Manager hereby accepts such
employment, to render investment advice and investment management services with
respect to the assets of the Fund, subject to the supervision and direction of
the Trust's Board of Trustees. The Manager shall, except as otherwise provided
for herein, render or make available all administrative services needed for the
management and operation of the Fund, and shall, as part of its duties
hereunder, (i) furnish the Fund with advice and recommendations with respect to
the investment of the Fund's assets and the purchase and sale of its portfolio
securities, including the taking of such other steps as may be necessary to
implement such advice and recommendations, (ii) furnish the Fund with reports,
statements and other data on securities, economic conditions and other pertinent
subjects which the Trust's Board of Trustees may request, (iii) furnish such
office space and personnel as is needed by the Fund, and (iv) in general super
intend and manage the investments of the Fund, subject to the ultimate
supervision and direction of the Trust's Board of Trustees.
2. The Manager shall use its best judgment and efforts in rendering the
advice and services to the Fund as contemplated by this Agreement.
3. The Manager shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent the Fund in any way, or in
any way be deemed an agent for the Fund. It is expressly understood and agreed
that the services to be rendered by the Manager to the Fund under the provisions
of this Agreement are not to be deemed exclusive, and the Manager shall be free
to render similar or different services to others so long as its ability to
render the services provided for in this Agreement shall not be impaired
thereby.
4. The Manager agrees to use its best efforts in the furnishing of such
advice and recommendations to the Fund, in the preparation of reports and
information, and in the management of the Fund's assets, all pursuant to this
Agreement, and for this purpose the Manager shall, at its own expense, maintain
such staff and employ or retain such personnel and consult with such other
persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Manager shall be
deemed to include persons employed or retained by the Manager to furnish
statistical, research, and other factual information, advice regarding economic
factors and trends, information with respect to technical and scientific
developments, and such other information, advice and assistance as the Manager
may desire and request.
5. The Fund will from time to time furnish to the Manager detailed
statements of the investments and assets of the Fund and information as to its
investment objectives and needs, and will make available to the Manager such
financial reports, proxy statements, legal and other information relating to its
investments as may be in the possession of the Fund or available to it and such
other information as the Manager may reasonably request.
6. The Manager shall bear and pay the costs of rendering the services
to be performed by it under this Agreement including the fees and costs of any
sub-adviser with which the Manager has contracted. The Fund shall bear and pay
for all other expenses of its operation, including, but not limited to, expenses
incurred in connection with the issuance, registration and transfer of its
shares; fees of its custodian, transfer and shareholder servicing agent; costs
and expenses of pricing and calculating its daily net asset value and of
maintaining its books of account required by the 1940 Act; expenditures in
connection with meetings of the Fund's Shareholders and Board of Trustees,
except those called solely to accommodate the Manager; salaries of officers and
fees and expenses of Board of Trustees or members of any advisory board or
committee of the Fund who are not members of, affiliated with or interested
persons of the Manager; salaries of personnel (who may be employed by the
Manager) involved in placing orders for the execution of the Fund's portfolio
transactions or in maintaining registration of its shares under applicable
securities laws; insurance premiums on property or personnel of the Fund which
inure to its benefit; the cost of preparing and printing reports, proxy
statements, prospectuses and statements of additional information of the Fund or
other communications for distribution to its shareholders; expenses incurred in
the distribution of the Fund's shares pursuant to the Rule l2b-l Distribution
Plan as set forth in section 15 below; legal, auditing and accounting fees;
trade association dues; fees and expenses of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; and all other charges and costs of its operation plus
any extraordinary and non-recurring expenses, except as herein otherwise
prescribed.
7. (a) The Fund agrees to pay to the Manager, and the Manager agrees to
accept, as full compensation for all administrative and investment management
services furnished or provided to the Fund and as full reimbursement for all
expenses assumed by the Manager, a management fee computed at the rate of 0.75%
per annum on the first $500 million of the average daily net assets of the Fund,
0. 625% per annum on the next $500 million of the average daily net assets of
the Fund, and 0.50% per annum on the average daily net assets of the Fund in
excess of $1 billion.
(b) The management fee shall be accrued daily by the Fund and paid to
the Manager on the first business day of the succeeding month. The initial
monthly fee under this Agreement shall be payable on the first business day of
the first month following the effective date of this Agreement. The fee to the
Manager shall be prorated for the portion of any month in which this Agreement
is in effect which is not a complete month according to the proportion which the
number of calendar days in the month during which the Agreement is in effect
bears to the number of calendar days in the month. If this Agreement is
terminated prior to the end of any month, the fee to the Manager shall be
payable within ten (l0) days after the date of termination.
(c) To the extent that the gross operating costs and expenses of the
Fund (excluding any interest, taxes, brokerage commissions, amortization of
organization expense, and, with the prior written approval of any state
securities commission requiring same, any extraordinary expenses, such as
litigation), exceed the most stringent expense limitation requirements of the
states in which shares of the Fund are qualified for sale, the Manager shall
reimburse the Fund for the amount of such excess.
(d) The Manager may waive any portion of the compensation or
reimbursement of expenses due to it pursuant to this Agreement. Any such waiver
shall be applicable only with respect to the specific items waived and shall not
constitute a waiver of any future compensation or reimbursement due to the
Manager hereunder.
8. The Manager agrees that neither it nor any of its officers or employees
shall take any short position in the shares of the Fund. This prohibition shall
not prevent the purchase of such shares by any of the officers and directors or
bona fide employees of the Manager or any trust, pension, profit sharing or
other benefit plan for such persons or affiliates thereof, at a price not less
than the net asset value thereof at the time of purchase, as allowed pursuant to
rules promulgated under the 1940 Act.
9. Nothing herein contained shall be deemed to require the Fund to take any
action contrary to its Declaration of Trust or By-Laws or any applicable statute
or regulation, or to relieve or deprive the Board of Trustees of the Trust of
its responsibility for and control of the conduct of the affairs of the Fund.
10. (a) In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on the part of the
Manager, the Manager shall not be subject to liability to the Fund or to any
shareholder of the Fund for any act or omission in the course of, or connected
with, rendering services hereunder or for any losses that may be sustained in
the purchase, holding or sale of any security by the Fund.
(b) Notwithstanding the foregoing, the Manager agrees to reimburse the
Fund for any and all costs, expenses, and counsel fees reasonably incurred by
the Fund in the preparation, printing and distribution of proxy statements,
amendments to its Registra- tion Statement, the holding of meetings of the
shareholders, or Board of Trustees, the conduct of factual investigations, any
legal or administrative proceedings (including any applications for exemptions
or determinations by the Securities and Exchange Commission) which the Fund
incurs as the result of action or inaction of the Manager or any of its
shareholders where the action or inaction necessitating such expenditures (i) is
directly or indirectly related to any transactions or proposed transaction in
the shares or control of the Manager or its affiliates (or litigation related to
any pending or proposed future transaction in such shares or control) which
shall have been undertaken without the prior, express approval of the Trust's
Board of Trustees; or (ii) is within the sole control of the Manager or any of
its affiliates or any of their officers, directors, employees or shareholders.
The Manager shall not be obligated pursuant to the provisions of this
Subparagraph 10(b), to reimburse the Fund for any expenditures related to the
institution of an administrative proceeding or civil litigation by the Fund or a
Fund shareholder seeking to recover all or a portion of the proceeds derived by
any shareholder of the Manager or any of its affiliates from the sale of his
shares of the Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Fund the amount due for expenses subject to
this Subparagraph 10(b) within thirty (30) days after a bill or statement has
been received by the Fund therefor. This provision shall not be deemed to be a
waiver of any claim the Fund may have or may assert against the Manager or
others for costs, expenses, or damages heretofore incurred by the Fund or for
costs, expenses, or damages the Fund may hereafter incur which are not
reimbursable to it hereunder.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or officer, director or employee of the
Manager, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
11. This Agreement shall remain in effect for a period of two years from its
effective date, unless sooner terminated as hereinafter provided, and shall
continue in effect thereafter for periods not exceeding one year so long as such
continuation is approved at least annually by (i) the Board of Trustees of the
Trust or by the vote of a majority of the outstanding voting securities of the
Trust, and (ii) the vote of a majority of the Trustees of the Trust who are not
parties to this Agreement or interested persons thereof, cast in person at a
meeting called for the purpose of voting on such approval.
12. This Agreement may be terminated at any time, without payment of any
penalty, by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Fund, upon sixty (60) days' written notice
to the Manager, and by the Manager upon sixty (60) days' written notice to the
Trust.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act.
14. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged without the affirmative vote or written consent of the
holders of a majority of the outstanding voting securities of the Fund.
15. The provisions set forth in this section number 15 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
1940 Act, by the Trust, having been approved by a majority of the Trust's Board
of Trustees, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested Trustees"), cast in person at a
meeting called for the purpose of voting on such Plan. The Board of Trustees
concluded that the rate of compensation to be paid to the Manager by the Fund
was fair and not excessive, but that due solely to the uncertainty that may
exist from time to time with respect to whether payments made by the Fund to the
Manager or to other firms may nevertheless be deemed to constitute distribution
expenses, it was determined that adoption of the Plan would be prudent and in
the best interests of the Fund and its shareholders or policyholders having an
interest in the Fund. The Trustees' approval included a determination that in
the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders or policyholders investing in the Fund.
No additional payments are to be made by the Fund as a result of the
Plan other than the payments the Fund is otherwise obligated to make (i) to the
Manager pursuant to section 7 of this Agreement, (ii) to its Transfer and
Dividend Paying Agents or Custodian, pursuant to the Agreements with each such
party as in effect at any time, and (iii) in payment of any expenses of the Fund
in the ordinary course of business that may be deemed primarily intended to
result in the sale of shares issued by the Fund. However, to the extent any of
such other payments by the Fund, to or by the Manager, or to the Fund's Agents,
are nevertheless deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within the
context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to
have been made pursuant to the Plan as set forth herein. The costs and
activities, the payment of which are intended to be within the scope of the
Plan, shall include, but not necessarily be limited to, the following:
(a) the costs of the preparation, printing and mailing
of all required reports and notices to shareholders or
policyholders investing in the Fund;
(b) the costs of the preparation, printing and mailing
of all prospectuses and statements of additional
information;
(c) the costs of preparation, printing and mailing of
any proxy statements and proxies;
(d) all legal and accounting fees relating to the
preparation of any such reports, prospectuses, proxies
and proxy statements;
(e) all fees and expenses relating to the
qualification of the Fund and/or its shares under the
securities or "Blue Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and the 1940
Act, including fees in connection with any application for
exemption relating to or directed toward the sale of the
Fund's shares;
(g) all fees and assessments of the Investment Company
Institute or any successor organization, irrespective of
whether some of its activities are designed to provide sales
assistance;
(h) all costs of the preparation and mailing of
confirmations of shares sold or redeemed, and reports of
share balances;
(i) all costs of responding to telephone or mail
inquiries of investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers,
or other firms, any one of whom may receive monies in
respect of the Fund's shares held in accounts for
policyholders for whom such firm is the dealer of record or
holder of record, or with whom such firm has a servicing
relationship. Servicing may include, among other things: (i)
answering client inquiries regarding the Fund; (ii)
assisting clients in changing account designations and
addresses; (iii) performing sub-accounting; (iv)
establishing and maintaining shareholder or policyholder
accounts and records; (v) processing purchase and redemption
transactions; (vi) providing periodic statements showing a
client's account balance and integrating such statements
with those of other transactions and balances in the
client's other accounts serviced by such firm; (vii)
arranging for bank wires; and (viii) such other services as
the Fund may request, to the extent such are permitted by
applicable statute, rule or regulation.
The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the
Trust at least quarterly on payments for any of the activities in the second
subparagraph of this section number 15, and shall furnish the Board of Trustees
of the Trust with such other information as the Board may reasonably request in
connection with such payments in order to enable the Board to make an informed
determination of whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more
than one year from the date of this Agreement only so long as such continuance
is specifically approved at least annually (from the date of this Agreement) by
the Trust's Board of Trustees, including the non-interested Trustees, cast in
person at a meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the Fund at
any time by vote of a majority of non-interested Trustees or by vote of a
majority of the Fund's outstanding voting securities on not more than sixty (60)
days written notice to any other party to the Plan, and the Plan shall terminate
automatically with respect to the Fund in the event of any act that constitutes
an assignment of this Management Agreement.
(d) The Plan may not be amended to increase materially the
amount deemed to be spent for distribution without approval by a majority of the
Fund's outstanding shares (as defined by the 1940 Act) and all material
amendments to the Plan shall be approved by the non-interested Trustees cast in
person at a meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested Trustees shall be committed to the
discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this
Management Agreement or affect the validity of any of the provisions of this
Agreement other than this section 15.
16. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
17. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
18. The term "majority of the outstanding voting securities" of the Fund
shall have the meaning as set forth in the 1940 Act.
19. In consideration of the execution of this Agreement, the Manager hereby
grants to the Fund and to the Trust the right to use the name "Franklin" as part
of their names. The Trust agrees that in the event this Agreement is terminated,
the Fund shall immediately take such steps as are necessary to remove the
reference to "Franklin" from its name.
20. The Manager acknowledges that it has received notice of and accepts the
limitations of liability set forth in the Declaration of Trust of the Trust, and
it agrees that the Fund's obligations hereunder shall be limited to the Fund and
the assets of the Fund, and no party shall seek satisfaction of any such
obligation from any shareholder, Trustee, officer, employee or agent of the
Trust.
21. This Agreement shall take effect on the date first written above.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their duly authorized officers, all on the day and year first above
written.
FRANKLIN VALUEMARK FUNDS
on behalf of the
RISING DIVIDENDS FUND
By: /s/ Charles B. Johnson
President
FRANKLIN ADVISERS, INC.
By: /s/ Rupert H. Johnson, Jr.
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 15th day of March, 1994, between FRANKLIN
VALUEMARK FUNDS, a business trust organized under the laws of the Commonwealth
of Massachusetts (the "Trust"), on behalf of the Templeton Developing Markets
Equity Fund series (the "Fund"), and TEMPLETON INVESTMENT MANAGEMENT (HONG KONG)
LTD., a company organized under the laws of Hong Kong (the "Investment
Manager").
In consideration of the mutual agreements herein made, the Trust and
the Investment Manager understand and agree as follows:
(1) The Investment Manager agrees, during the life of this
Agreement, to furnish the Fund with investment research and advice and
continuously to furnish the Fund with an investment program for the assets of
the Fund consistent with the provisions of the Declaration of Trust of the Fund
and the investment policies adopted and declared by the Fund's Board of
Trustees. It is understood that all acts of the Investment Manager in performing
this Agreement are performed by it outside the United States.
(2) The Investment Manager agrees, during the life of this Agreement, to
be responsible for:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) paying compensation of the Trust's officers for services
rendered as such;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine
correspondence and other communications with individual
Shareholders;
(e) daily pricing of the Fund's investment portfolio and preparing
and supervising publication of daily quotations of the prices
of the Fund's Shares, earnings reports and other financial
data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
(g) providing trading desk facilities for the Fund;
(h) supervising compliance by the Fund with recordkeeping
requirements under the Investment Company Act of 1940 (the
"1940 Act") and the rules and regulations thereunder, with
state regulatory requirements, maintenance of books and
records for the Fund (other than those maintained by the
custodian and transfer agent), preparing and filing of tax
reports other than the Fund's income tax returns;
(i) monitoring the qualifications of tax deferred retirement
plans for the Fund; and
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policy and,
when applicable, the negotiation of commissions in connection therewith.
All decisions and placements shall be made in accordance with the
following principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as able to
achieve "best execution" of such orders. "Best execution" shall mean
prompt and reliable execution at the most favorable securities
price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid),
the efficiency with which the transaction is executed, the ability
to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength and
stability of the broker. Such considerations are judgmental and are
weighed by the Investment Manager in determining the overall
reasonableness of brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Manager exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Manager determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Manager's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Manager will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Manager
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Manager in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commission known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Manager are useful to the Investment
Manager in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Manager under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment
Manager for any of its accounts, and not all such research may be
used by the Investment Manager for the Fund. When execution of
portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of
various services provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Manager, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include
also Shares of other registered investment companies which have
either the same adviser or an investment adviser affiliated with the
Fund's Investment Manager) by a broker are one factor among others
to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers)
for the account of the Fund to that broker; provided that the broker
shall furnish "best execution," as defined in subparagraph A above,
and that such allocation shall be within the scope of the Fund's
policies as stated above; provided further, that in every allocation
made to a broker in which the sale of Fund Shares is taken into
account, there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set forth in
subparagraph C above, on the basis of best execution alone or best
execution plus research services, without taking account of or
placing any value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Manager as compensation
for such services a monthly fee equal on an annual basis to 1.25% of the average
daily net assets of the Fund during the month preceding each payment.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Manager's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
5. The provisions set forth in this paragraph 5 (hereinafter referred to
as the "Plan") have been adopted pursuant to Rule 12b-1 under the Act by the
Trust, having been approved by a majority of the Trust's Board of Trustees,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Trustees"), cast in person at a meeting called for the
purpose of voting on such Plan. The Board of Trustees concluded that the rate of
compensation to be paid to the Manager by the Fund was fair and not excessive,
but that due solely to the uncertainty that may exist from time to time with
respect to whether payments made by the Fund to the Manager or to other firms
may nevertheless be deemed to constitute distribution expenses, it was
determined that adoption of the Plan would be prudent and in the best interests
of the Fund and its shareholders or policyholders having an interest in the
Fund. The Trustees' approval included a determination that in the exercise of
their reasonable business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders or policyholders investing in the Fund.
B. No additional payments are to be made by the Fund as a result of
the Plan other than the payments the Fund are otherwise obligated to make
(i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to
their Transfer and Dividend Paying Agents or Custodian, pursuant to their
respective Agreements as in effect at any time, and (iii) in payment of
any expenses by the Fund in the ordinary course of their respective
businesses that may be deemed primarily intended to result in the sale of
shares issued by such Fund. However, to the extent any of such other
payments by the Fund, to or by the Manager, or to the Fund' Agents, are
nevertheless deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan as set forth herein. The
costs and activities, the payment of which are intended to be within the
scope of the Plan, shall include, but not necessarily be limited to, the
following:
(a) the costs of the preparation, printing and mailing of all
required reports and notices to shareholders or policyholders
investing in the Fund;
(b) the costs of the preparation, printing and mailing of all
prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing of any proxy
statements and proxies;
(d) all legal and accounting fees relating to the preparation
of any such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the qualification of the
Fund and/or its shares under the securities or "Blue Sky" laws of
any jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act, including
fees in connection with any application for exemption relating to or
directed toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment Company Institute or
any successor organization, irrespective of whether some of its
activities are designed to provide sales assistance;
(h) all costs of the preparation and mailing of confirmations
of shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail inquiries of
investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers, or other
firms, any one of whom may receive monies in respect of the Fund's
shares held in accounts for policyholders for whom such firm is the
dealer of record or holder of record, or with whom such firm has a
servicing relationship. Servicing may include, among other things:
(i) answering client inquiries regarding the Fund; (ii) assisting
clients in changing account designations and addresses; (iii)
performing sub-accounting; (iv) establishing and maintaining
shareholder or policyholder accounts and. records; (v) processing
purchase and redemption transactions; (vi) providing periodic
statements showing a client's account balance and integrating such
statements with those of other transactions and balances in the
client's other accounts serviced by such firm; (vii) arranging for
bank wires; and (viii) such other services as the Fund may request,
to the extent such are permitted by applicable statute, rule or
regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the
Trust at least quarterly on payments for any of the activities
in subparagraph B of this paragraph 8, and shall furnish the
Board of Trustees of the Trust with such other information as
the Board may reasonably request in connection with such
payments in order to enable the Board to make an informed
determination of whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more
than one year from the date written below only so long as such
continuance is specifically approved at least annually (from
the date below) by the Trust's Board of Trustees, including
the non-interested Trustees, cast in person at a meeting
called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the Fund at any
time by vote of a majority of non-interested Trustees or by
vote of a majority of the Fund's outstanding voting securities
on not more than sixty (60) days' written notice to any other
party to the Plan, and the Plan shall terminate automatically
in the event of any act that constitutes an assignment of this
Management Agreement.
(d) The Plan may not be amended to increase materially the
amount deemed to be spent for distribution without approval by
a majority of the Fund's outstanding shares (as defined by the
Act and all material amendments to the Plan shall be approved
by the non-interested Trustees cast in person at a meeting
called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested Trustees shall be
committed to the discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this
Management Agreement or affect the validity of any of the
provisions of this Agreement other than this paragraph 8.
(6) This Agreement shall become effective on the date written above
and shall continue in effect for one (1) year thereafter. If not sooner
terminated, this Agreement shall continue in effect for successive periods of 12
months each thereafter, provided that each such continuance shall be
specifically approved annually by the vote of a majority of the Trust's Board of
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval and either the vote of (a) a majority
of the outstanding voting securities of the Fund, as defined in the 1940 Act, or
(b) a majority of the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Investment
Manager no longer acts as Investment Manager to the Fund, the Investment Manager
reserves the right to withdraw from the Fund the use of the name "Templeton" or
any name misleadingly implying a continuing relationship between the Fund and
the Investment Manager or any of its affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither
the Investment Manager nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Manager of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Manager's part or by reason of reckless
disregard of the Investment Manager's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Manager are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Manager will not always be profitable or prove to have been
correct.
(11) It is understood that the services of the Investment Manager are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Manager, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. When the Investment Manager
determines to buy or sell the same security for the Fund that the Investment
Manager or one or more of its affiliates has selected for clients of the
Investment Manager or its affiliates, the orders for all such security
transactions shall be placed for execution by methods determined by the
Investment Manager, with approval by the Fund's Board of Trustees, to be
impartial and fair.
(12) This Agreement shall be construed in accordance with the laws of
the Commonwealth of Massachusetts, provided that nothing herein shall be
construed as being inconsistent with applicable Federal and state securities
laws and any rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Manager an agent of the Fund.
(15) It is understood and expressly stipulated that neither the
holders of Shares of the Fund nor any Trustee, officer, agent or employee of the
Trust shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers.
FRANKLIN VALUEMARK FUNDS
By: /s/ Karen L. Skidmore
Title: Assistant Vice President
TEMPLETON INVESTMENT
MANAGEMENT (HONG KONG) LTD.
By: Martin L. Flanagan
Title: Director
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made as of the 15th day of March, 1994, between FRANKLIN
VALUEMARK FUNDS, a business trust organized under the laws of the Commonwealth
of Massachusetts (the "Trust"), on behalf of the Templeton Global Growth Fund
series (the "Fund"), and TEMPLETON, GALBRAITH & HANSBERGER LTD., a corporation
organized under the laws of the Bahamas (the "Investment Manager").
In consideration of the mutual agreements herein made, the Trust and
the Investment Manager understand and agree as follows:
(1) The Investment Manager agrees, during the life of this
Agreement, to furnish the Fund with investment research and advice and
continuously to furnish the Fund with an investment program for the assets of
the Fund consistent with the provisions of the Declaration of Trust of the Fund
and the investment policies adopted and declared by the Fund's Board of
Trustees. It is understood that all acts of the Investment Manager in performing
this Agreement are performed by it outside the United States.
(2) The Investment Manager agrees, during the life of this Agreement, to
be responsible for:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) paying compensation of the Trust's officers for services
rendered as such;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine
correspondence and other communications with individual
Shareholders;
(e) daily pricing of the Fund's investment portfolio and preparing
and supervising publication of daily quotations of the prices
of the Fund's Shares, earnings reports and other financial
data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
(g) providing trading desk facilities for the Fund;
(h) supervising compliance by the Fund with recordkeeping
requirements under the Investment Company Act of 1940 (the
"1940 Act") and the rules and regulations thereunder, with
state regulatory requirements, maintenance of books and
records for the Fund (other than those maintained by the
custodian and transfer agent), preparing and filing of tax
reports other than the Fund's income tax returns;
(i) monitoring the qualifications of tax deferred retirement
plans for the Fund; and
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policy and,
when applicable, the negotiation of commissions in connection therewith.
All decisions and placements shall be made in accordance with the
following principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as able to
achieve "best execution" of such orders. "Best execution" shall mean
prompt and reliable execution at the most favorable securities
price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid),
the efficiency with which the transaction is executed, the ability
to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength and
stability of the broker. Such considerations are judgmental and are
weighed by the Investment Manager in determining the overall
reasonableness of brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and research
services, as such services are defined in Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act") for the Fund and/or
other accounts, if any, for which the Investment Manager exercises
investment discretion (as defined in Section 3(a)(35) of the 1934
Act) and, as to transactions for which fixed minimum commission
rates are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another
broker would have charged for effecting that transaction, if the
Investment Manager determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of
either that particular transaction or the Investment Manager's
overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In
reaching such determination, the Investment Manager will not be
required to place or attempt to place a specific dollar value on the
research or execution services of a broker or on the portion of any
commission reflecting either of said services. In demonstrating that
such determinations were made in good faith, the Investment Manager
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy; that
the research services provide lawful and appropriate assistance to
the Investment Manager in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commission known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Manager are useful to the Investment
Manager in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Manager are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Manager under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment
Manager for any of its accounts, and not all such research may be
used by the Investment Manager for the Fund. When execution of
portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of
various services provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Manager, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include
also Shares of other registered investment companies which have
either the same adviser or an investment adviser affiliated with the
Fund's Investment Manager) by a broker are one factor among others
to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers)
for the account of the Fund to that broker; provided that the broker
shall furnish "best execution," as defined in subparagraph A above,
and that such allocation shall be within the scope of the Fund's
policies as stated above; provided further, that in every allocation
made to a broker in which the sale of Fund Shares is taken into
account, there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set forth in
subparagraph C above, on the basis of best execution alone or best
execution plus research services, without taking account of or
placing any value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Manager as compensation
for such services a monthly fee equal on an annual basis to 1.0% of the first
$100,000,000 of the average daily net assets of the Fund during the month
preceding each payment, reduced to a fee equal on an annual basis to 0.90% of
such average net assets in excess of $100,000,000 up to and including
$250,000,000, further reduced to a fee equal on an annual basis of 0.80% of such
average net assets in excess of $250,000,000 up to and including $500,000,000,
and further reduced to a fee equal on an annual basis of 0.75% of such average
net assets in excess of $500,000,000.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Manager's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
5. The provisions set forth in this paragraph 5 (hereinafter referred to
as the "Plan") have been adopted pursuant to Rule 12b-1 under the Act by the
Trust, having been approved by a majority of the Trust's Board of Trustees,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Trustees"), cast in person at a meeting called for the
purpose of voting on such Plan. The Board of Trustees concluded that the rate of
compensation to be paid to the Manager by the Fund was fair and not excessive,
but that due solely to the uncertainty that may exist from time to time with
respect to whether payments made by the Fund to the Manager or to other firms
may nevertheless be deemed to constitute distribution expenses, it was
determined that adoption of the Plan would be prudent and in the best interests
of the Fund and its shareholders or policyholders having an interest in the
Fund. The Trustees' approval included a determination that in the exercise of
their reasonable business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders or policyholders investing in the Fund.
B. No additional payments are to be made by the Fund as a result of
the Plan other than the payments the Fund are otherwise obligated to make
(i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to
their Transfer and Dividend Paying Agents or Custodian, pursuant to their
respective Agreements as in effect at any time, and (iii) in payment of
any expenses by the Fund in the ordinary course of their respective
businesses that may be deemed primarily intended to result in the sale of
shares issued by such Fund. However, to the extent any of such other
payments by the Fund, to or by the Manager, or to the Fund' Agents, are
nevertheless deemed to be payments for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan as set forth herein. The
costs and activities, the payment of which are intended to be within the
scope of the Plan, shall include, but not necessarily be limited to, the
following:
(a) the costs of the preparation, printing and mailing of all
required reports and notices to shareholders or policyholders
investing in the Fund;
(b) the costs of the preparation, printing and mailing of all
prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing of any proxy
statements and proxies;
(d) all legal and accounting fees relating to the preparation
of any such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the qualification of the
Fund and/or its shares under the securities or "Blue Sky" laws of
any jurisdiction;
(f) all fees under the Securities Act of 1933 and the Act, including
fees in connection with any application for exemption relating to or
directed toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment Company Institute or
any successor organization, irrespective of whether some of its
activities are designed to provide sales assistance;
(h) all costs of the preparation and mailing of confirmations
of shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail inquiries of
investors or prospective investors; and
(j) payments to dealers, financial institutions, advisers, or other
firms, any one of whom may receive monies in respect of the Fund's
shares held in accounts for policyholders for whom such firm is the
dealer of record or holder of record, or with whom such firm has a
servicing relationship. Servicing may include, among other things:
(i) answering client inquiries regarding the Fund; (ii) assisting
clients in changing account designations and addresses; (iii)
performing sub-accounting; (iv) establishing and maintaining
shareholder or policyholder accounts and. records; (v) processing
purchase and redemption transactions; (vi) providing periodic
statements showing a client's account balance and integrating such
statements with those of other transactions and balances in the
client's other accounts serviced by such firm; (vii) arranging for
bank wires; and (viii) such other services as the Fund may request,
to the extent such are permitted by applicable statute, rule or
regulation.
C. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of Trustees of the
Trust at least quarterly on payments for any of the activities
in subparagraph B of this paragraph 8, and shall furnish the
Board of Trustees of the Trust with such other information as
the Board may reasonably request in connection with such
payments in order to enable the Board to make an informed
determination of whether the Plan should be continued.
(b) The Plan shall continue in effect for a period of more
than one year from the date written below only so long as such
continuance is specifically approved at least annually (from
the date below) by the Trust's Board of Trustees, including
the non-interested Trustees, cast in person at a meeting
called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the Fund at any
time by vote of a majority of non-interested Trustees or by
vote of a majority of the Fund's outstanding voting securities
on not more than sixty (60) days' written notice to any other
party to the Plan, and the Plan shall terminate automatically
in the event of any act that constitutes an assignment of this
Management Agreement.
(d) The Plan may not be amended to increase materially the
amount deemed to be spent for distribution without approval by
a majority of the Fund's outstanding shares (as defined by the
Act and all material amendments to the Plan shall be approved
by the non-interested Trustees cast in person at a meeting
called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection and
nomination of the Trust's non-interested Trustees shall be
committed to the discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate this
Management Agreement or affect the validity of any of the
provisions of this Agreement other than this paragraph 8.
(6) This Agreement shall become effective on the date written above
and shall continue in effect for one (1) year thereafter. If not sooner
terminated, this Agreement shall continue in effect for successive periods of 12
months each thereafter, provided that each such continuance shall be
specifically approved annually by the vote of a majority of the Trust's Board of
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval and either the vote of (a) a majority
of the outstanding voting securities of the Fund, as defined in the 1940 Act, or
(b) a majority of the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Investment
Manager no longer acts as Investment Manager to the Fund, the Investment Manager
reserves the right to withdraw from the Fund the use of the name "Templeton" or
any name misleadingly implying a continuing relationship between the Fund and
the Investment Manager or any of its affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither
the Investment Manager nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Manager of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Manager's part or by reason of reckless
disregard of the Investment Manager's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Manager are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Manager will not always be profitable or prove to have been
correct.
(11) It is understood that the services of the Investment Manager are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Manager, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. When the Investment Manager
determines to buy or sell the same security for the Fund that the Investment
Manager or one or more of its affiliates has selected for clients of the
Investment Manager or its affiliates, the orders for all such security
transactions shall be placed for execution by methods determined by the
Investment Manager, with approval by the Fund's Board of Trustees, to be
impartial and fair.
(12) This Agreement shall be construed in accordance with the laws of
the Commonwealth of Massachusetts, provided that nothing herein shall be
construed as being inconsistent with applicable Federal and state securities
laws and any rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Manager an agent of the Fund.
(15) It is understood and expressly stipulated that neither the
holders of Shares of the Fund nor any Trustee, officer, agent or employee of the
Trust shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers.
FRANKLIN VALUEMARK FUNDS
By: /s/ Karen L. Skidmore
Title: Assistant Vice President
TEMPLETON, GALBRAITH &
HANSBERGER LTD.
By: Martin L. Flanagan
Title: Executive Vice President
SUBADVISORY AGREEMENT
FRANKLIN VALUEMARK FUNDS
on behalf of
EQUITY GROWTH FUND
THIS SUBADVISORY AGREEMENT made as of the 1st day of August, 1994, by and
between FRANKLIN ADVISERS, INC., a corporation organized and existing under the
laws of the State of California (hereinafter called "FAI"), and TEMPLETON
QUANTITATIVE ADVISORS, INC., a Delaware corporation (hereinafter called "TQA").
W I T N E S S E T H
WHEREAS, FAI is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and is engaged in the business of
supplying investment advice, and investment management services, as an
independent contractor; and
WHEREAS, FAI has been retained to render investment management services to
Equity Growth Fund (the "Fund"), a series of Franklin Valuemark Funds (the
"Trust"), an investment management company registered with the U.S. Securities
and Exchange Commission (the "SEC") pursuant to the Investment Company Act of
1940 (the "1940 Act"); and
WHEREAS, FAI desires to retain TQA to render investment advisory, research
and related services to the Fund pursuant to the terms and provisions of this
Agreement, and TQA is interested in furnishing said services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. FAI hereby retains TQA and TQA hereby accepts such engagement, to
furnish certain investment advisory services with respect to the assets of the
Fund, as more fully set forth herein.
(a) Subject to the overall policies, control, direction and review
of the Trust's Board of Trustees (the "Board") and to the instructions and
supervision of FAI, TQA will provide a continuous investment program for the
Fund, investment research and advice with respect to securities and investments
and cash equivalents in the Fund. So long as the Board and FAI determine, on no
less frequently than an annual basis, to grant the necessary delegated authority
to TQA, and subject to paragraph (b) below, TQA will determine what securities
and other investments will be purchased, retained or sold by the Fund, and will
place all purchase and sale orders on behalf of the Fund except that orders
regarding U.S. domiciled securities and money market instruments may also be
placed on behalf of the Fund by FAI.
(b) In performing these services, TQA shall adhere to the Fund's
investment objectives, policies and restrictions as contained in its Prospectus
and Statement of Additional Information, and in the Trust's Declaration of
Trust, and to the investment guidelines most recently established by FAI and
shall comply with the provisions of the 1940 Act and the rules and regulations
of the SEC thereunder in all material respects and with the provisions of the
United States Internal Revenue Code of 1986, as amended, which are applicable to
regulated investment companies.
(c) Unless otherwise instructed by FAI or the Board, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by FAI or by the Board, TQA shall report daily all
transactions effected by TQA on behalf of the Fund to FAI and to other entities
as reasonably directed by FAI or the Board.
(d) TQA shall provide the Board at least quarterly, in advance of
the regular meetings of the Board, a report of its activities hereunder on
behalf of the Fund and its proposed strategy for the next quarter, all in such
form and detail as requested by the Board. TQA shall also make an investment
officer available to attend such meetings of the Board as the Board may
reasonably request.
(e) In carrying out its duties hereunder, TQA shall comply with all
reasonable instructions of the Fund or FAI in connection therewith. Such
instructions may be given by letter, telex, telefax, or other electronic
communication form, or telephone confirmed by telex, by the Board or by any
other person authorized by a resolution of the Board, provided a certified copy
of such resolution has been supplied to TQA.
2. In performing the services described above, TQA shall use its best
efforts to obtain for the Fund the most favorable price and execution available.
Subject to prior authorization of appropriate policies and procedures by the
Board, TQA may, to the extent authorized by law and in accordance with the terms
of the Fund's Prospectus and Statement of Additional Information, cause the Fund
to pay a broker who provides brokerage and research services an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, in recognition of the brokerage and research services provided by
the broker. To the extent authorized by applicable law, TQA shall not be deemed
to have acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of such action.
3. (a) TQA shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent FAI or the Fund in any
way, or in any way be deemed an agent for FAI or the Fund.
(b) It is understood that the services provided by TQA are not to be
deemed exclusive. FAI acknowledges that TQA may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities including other investment
companies registered pursuant to the 1940 Act ("Clients") which may invest in
the same type of securities as the Fund. FAI agrees that TQA may give advice or
exercise investment responsibility and take such other action with respect to
such Clients which may differ from advice given or the timing or nature of
action taken with respect to the Fund.
4. TQA agrees to use its best efforts in performing the services to be
provided by it pursuant to this Agreement.
5. FAI has furnished or will furnish to TQA as soon as available copies
properly certified or authenticated of each of the following documents:
(a) the Trust's Declaration of Trust, as filed with the Secretary of
State of the State of Delaware on April 26, 1988, and any other organizational
documents and all amendments thereto or restatements thereof;
(b) resolutions of the Trust's Board of Trustees authorizing
the appointment of TQA and approving this Agreement;
(c) the Trust's original Notification of Registration on Form N-8A
under the 1940 Act as filed with the SEC and all amendments thereto;
(d) the Trust's current Registration Statement on Form N-1A under
the Securities Act of 1933, as amended and under the 1940 Act as filed with the
SEC, and all amendments thereto, as it relates to the Fund;
(e) the Fund's most recent Prospectus and Statement of
Additional Information; and
(f) the Management Agreement between the Fund and FAI.
FAI will furnish TQA with copies of all amendments of, or supplements to, the
foregoing documents.
6. TQA will treat confidentially and as proprietary information of the
Fund, all records and other information relative to the Fund and prior, present
or potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where TQA
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities, or
when so requested by the Fund.
7. FAI shall pay a monthly fee in cash to TQA based upon a percentage of
the value of the Fund's net assets, calculated as set forth below, on the first
business day of each month in each year as compensation for the services
rendered and obligations assumed by TQA during the preceding month. The advisory
fee under this Agreement shall accrue daily and be payable on the first business
day of the first month following the effective date of this Agreement, and shall
be reduced by the amount of any advance payments made by FAI relating to the
previous month.
(a) For purposes of calculating such fee, the value of the net
assets of the Fund shall be the average daily net assets of the Fund during each
month, determined in the same manner as the Fund uses to compute the value of
its net assets in connection with the determination of the net asset value of
its shares, all as set forth more fully in the Fund's current Prospectus. The
rate of the monthly fee payable to TQA shall be based upon the following annual
rates:
0.3125% of the value of the average daily net assets up to
and including $100 million;
0.2500% of the value of the average daily net assets over
$100 million up to and including $250 million;
0.2250% of the value of the average daily net assets over
$250 million up to and including $10 billion;
0.2200% of the value of the average daily net assets over
$10 billion up to and including $12.5 billion;
0.2100% of the value of the average daily net assets over
$12.5 billion up to and including $15 billion; and
0.2000% of the value of the average daily net assets over
$15 billion.
(b) FAI and TQA shall share equally in any voluntary reduction or
waiver by FAI of the management fee due FAI under the Management Agreement
between FAI and the Fund.
(c) If this Agreement is terminated prior to the end of any month,
the accrued fee shall be paid to the date of termination.
8. Nothing herein contained shall be deemed to relieve or deprive the
Board of its responsibility for and control of the conduct of the affairs of the
Fund.
9. (a) In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations or duties hereunder on the part of TQA,
neither TQA nor any of its directors, officers, employees or affiliates shall be
subject to liability to FAI or the Fund or to any shareholder of the Fund for
any error of judgment or mistake of law or any other act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Fund.
(b) Notwithstanding paragraph 9(a), to the extent that FAI is found
by a court of competent jurisdiction, or the SEC or any other regulatory agency
to be liable to the Fund or any shareholder (a "liability"), for any acts
undertaken by TQA pursuant to authority delegated as described in Paragraph
1(a), TQA shall indemnify and save FAI and each of its affiliates, officers,
directors and employees (each a "Franklin Indemnified Party") harmless from,
against, for and in respect of all losses, damages, costs and expenses incurred
by a Franklin Indemnified Party with respect to such liability, together with
all legal and other expenses reasonably incurred by any such Franklin
Indemnified Party, in connection with such liability.
(c) No provision of this Agreement shall be construed to protect any
director or officer of FAI or TQA, from liability in violation of Sections 17(h)
or (i), respectively, of the 1940 Act.
10. During the term of this Agreement, TQA will pay all expenses incurred
by it in connection with its activities under this Agreement other than the cost
of securities (including brokerage commissions, if any) purchased for the Fund.
The Fund and FAI will be responsible for all of their respective expenses and
liabilities.
11. This Agreement shall be effective as of the date in the preamble, and
shall continue in effect for two years. It is renewable annually thereafter for
successive periods not to exceed one year each (i) by a vote of the Board or by
the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons thereof, cast in person at a meeting
called for the purpose of voting on such approval.
12. This Agreement may be terminated at any time, without payment of any
penalty, by the Board or by vote of a majority of the outstanding voting
securities of the Fund, upon sixty (60) days' written notice to FAI and TQA, and
by FAI or TQA upon sixty (60) days' written notice to the other party.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act, and in the event of
any act or event that terminates the Management Agreement between FAI and the
Fund.
14. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
TQA hereby agrees that all records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund, or to
any third party at the Fund's direction, any of such records upon the Fund's
request. TQA further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
15. This Agreement may not be materially amended, transferred, assigned,
sold or in any manner hypothecated or pledged without the affirmative vote or
written consent of the holders of a majority of the outstanding voting
securities of the Fund and may not be amended without the written consent of FAI
and TQA.
16. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. The terms "majority of the outstanding voting securities" of the Fund
and "interested persons" shall have the meanings as set forth in the 1940 Act.
18. This Agreement shall be interpreted in accordance with and governed by
the laws of the State of California of the United States of America.
19. TQA acknowledges that it has received notice of, and accepts the
limitations of, the Trust's liability as set forth in Article VII of its
Agreement and Declaration of Trust. TQA agrees that the Trust's obligations
hereunder shall be limited to the assets of the Funds, and that TQA shall not
seek satisfaction of any such obligation from any shareholders of the Funds nor
from any trustee, officer, employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers.
TEMPLETON QUANTITATIVE
ADVISORS, INC.
By /s/ Robert E. Butman
Title: Vice President
FRANKLIN ADVISERS, INC.
By /s/ Deborah R. Gatzek
Title: Vice President
Equity Growth Fund hereby acknowledges and agrees to the provisions of
paragraphs 9(a) and 10 of this Agreement.
FRANKLIN VALUEMARK FUNDS on behalf of
EQUITY GROWTH FUND
By: /s/ Karen L. Skidmore
Title: Assistant Vice President
SUBADVISORY AGREEMENT
FRANKLIN VALUEMARK FUNDS on behalf of
GLOBAL INCOME FUND
THIS SUBADVISORY AGREEMENT made as of the 1st day of August, 1994, by and
between FRANKLIN ADVISERS, INC., a corporation organized and existing under the
laws of the State of California (hereinafter called "FAI"), and TEMPLETON
INVESTMENT COUNSEL, INC., a Florida corporation (hereinafter called "TICI").
W I T N E S S E T H
WHEREAS, FAI is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and is engaged in the business of
supplying investment advice, and investment management services, as an
independent contractor; and
WHEREAS, FAI has been retained to render investment management services to
Global Income Fund (the "Fund"), a series of Franklin Valuemark Funds (the
"Trust"), an investment management company registered with the United States
Securities and Exchange Commission (the "SEC") pursuant to the Investment
Company Act of 1940 (the "1940 Act"); and
WHEREAS, FAI desires to retain TICI to render investment advisory,
research and related services to the Fund pursuant to the terms and provisions
of this Agreement, and TICI is interested in furnishing said services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. FAI hereby retains TICI and TICI hereby accepts such engagement, to
furnish certain investment advisory services with respect to the assets of the
Fund, as more fully set forth herein.
(a) Subject to the overall policies, control, direction and review
of the Trust's Board of Trustees (the "Board") and to the instructions and
supervision of FAI, TICI will provide a continuous investment program for the
Fund, including allocation of the Fund's assets among the various securities
markets of the world and, investment research and advice with respect to
securities and investments and cash equivalents in the Fund. So long as the
Board and FAI determine, on no less frequently than an annual basis, to grant
the necessary delegated authority to TICI, and subject to paragraph (b) below,
TICI will determine what securities and other investments will be purchased,
retained or sold by the Fund, and will place all purchase and sale orders on
behalf of the Fund except that orders regarding United States domiciled
securities and money market instruments may also be placed on behalf of the Fund
by FAI.
(b) In performing these services, TICI shall adhere to the Fund's
investment objectives, policies and restrictions as contained in its Prospectus
and Statement of Additional Information, and in the Trust's Declaration of
Trust, and to the investment guidelines most recently established by FAI and
shall comply with the provisions of the 1940 Act and the rules and regulations
of the SEC thereunder in all material respects and with the provisions of the
United States Internal Revenue Code of 1986, as amended, which are applicable to
regulated investment companies.
(c) Unless otherwise instructed by FAI or the Board, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by FAI or by the Board, TICI shall report daily all
transactions effected by TICI on behalf of the Fund to FAI and to other entities
as reasonably directed by FAI or the Board.
(d) TICI shall provide the Board at least quarterly, in advance of
the regular meetings of the Board, a report of its activities hereunder on
behalf of the Fund and its proposed strategy for the next quarter, all in such
form and detail as requested by the Board. TICI shall also make an investment
officer available to attend such meetings of the Board as the Board may
reasonably request.
(e) In carrying out its duties hereunder, TICI shall comply with all
reasonable instructions of the Fund or FAI in connection therewith. Such
instructions may be given by letter, telex, telefax, or other electronic
communication form, or telephone confirmed by telex, by the Board or by any
other person authorized by a resolution of the Board, provided a certified copy
of such resolution has been supplied to TICI.
2. In performing the services described above, TICI shall use its best
efforts to obtain for the Fund the most favorable price and execution available.
Subject to prior authorization of appropriate policies and procedures by the
Board, TICI may, to the extent authorized by law and in accordance with the
terms of the Fund's Prospectus and Statement of Additional Information, cause
the Fund to pay a broker who provides brokerage and research services an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, in recognition of the brokerage and research services provided by
the broker. To the extent authorized by applicable law, TICI shall not be deemed
to have acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of such action.
3. (a) TICI shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent FAI or the Fund in any
way, or in any way be deemed an agent for FAI or the Fund.
(b) It is understood that the services provided by TICI are not to
be deemed exclusive. FAI acknowledges that TICI may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act, ("Clients") which may invest in
the same type of securities as the Fund. FAI agrees that TICI may give advice or
exercise investment responsibility and take such other action with respect to
such Clients which may differ from advice given or the timing or nature of
action taken with respect to the Fund.
4. TICI agrees to use its best efforts in performing the services to
be provided by it pursuant to this Agreement.
5. FAI has furnished or will furnish to TICI as soon as available copies
properly certified or authenticated of each of the following documents:
(a) the Trust's Declaration of Trust, as filed with the Secretary of
State of the Commonwealth of Massachusetts on April 26, 1988, and any other
organizational documents and all amendments thereto or restatements thereof;
(b) resolutions of the Trust's Board of Trustees authorizing
the appointment of TICI and approving this Agreement;
(c) the Trust's original Notification of Registration on Form N-8A
under the 1940 Act as filed with the SEC and all amendments thereto;
(d) the Trust's current Registration Statement on Form N-1A under
the Securities Act of 1933, as amended and under the 1940 Act as filed with the
SEC, and all amendments thereto, as it relates to the Fund;
(e) the Fund's most recent Prospectus and Statement of
Additional Information; and
(f) the Management Agreement between the Fund and FAI.
FAI will furnish TICI with copies of all amendments of, or supplements to, the
foregoing documents.
6. TICI will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund and prior, present
or potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where TICI
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities, or
when so requested by the Fund.
7. FAI shall pay a fee in cash to TICI based upon a percentage of the
value of the Fund's net assets, calculated as set forth below, as compensation
for the services rendered and obligations assumed by TICI, payable monthly. The
advisory fee under this Agreement shall be payable on the first business day of
the first month following the effective date of this Agreement, and shall be
reduced by the amount of any advance payments made by FAI relating to the
previous month.
(a) For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as the Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Trust's
current Prospectus. The management fee payable by the Fund shall be calculated
daily at the following annual rates:
0.35% of the value of net assets up to and including $100
million;
0.25% of the value of net assets over $100 million up to
and including $250 million; and
0.20% of the value of net assets over $250 million.
(b) FAI and TICI shall share equally in any voluntary reduction or
waiver by FAI of the management fee due FAI under the Management Agreement
between FAI and the Fund.
(c) If this Agreement is terminated prior to the end of any month,
the accrued management fee shall be paid to the date of termination.
8. Nothing herein contained shall be deemed to relieve or deprive the
Board of its responsibility for and control of the conduct of the affairs of the
Fund.
9. (a) In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of its obligations or duties hereunder on the part of
TICI, neither TICI nor any of its directors, officers, employees or affiliates
shall be subject to liability to FAI or the Fund or to any shareholder of the
Fund for any error of judgment or mistake of law or any other act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Fund.
(b) Notwithstanding paragraph 9(a), to the extent that FAI is found
by a court of competent jurisdiction, or the SEC or any other regulatory agency
to be liable to the Fund or any shareholder (a "liability"), for any acts
undertaken by TICI pursuant to authority delegated as described in Paragraph
1(a), TICI shall indemnify and save FAI and each of its affiliates, officers,
directors and employees (each a "Franklin Indemnified Party") harmless from,
against, for and in respect of all losses, damages, costs and expenses incurred
by a Franklin Indemnified Party with respect to such liability, together with
all legal and other expenses reasonably incurred by any such Franklin
Indemnified Party, in connection with such liability.
(c) No provision of this Agreement shall be construed to protect any
director or officer of FAI or TICI, from liability in violation of Sections
17(h) or (i), respectively, of the 1940 Act.
10. During the term of this Agreement, TICI will pay all expenses incurred
by it in connection with its activities under this Agreement other than the cost
of securities (including brokerage commissions, if any) purchased for the Fund.
The Fund and FAI will be responsible for all of their respective expenses and
liabilities.
11. This Agreement shall be effective as of the date in the preamble, and
shall continue in effect for two years. It is renewable annually thereafter for
successive periods not to exceed one year each (i) by a vote of the Board or by
the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons thereof, cast in person at a meeting
called for the purpose of voting on such approval.
12. This Agreement may be terminated at any time, without payment of any
penalty, by the Board or by vote of a majority of the outstanding voting
securities of the Fund, upon sixty (60) days' written notice to FAI and TICI,
and by FAI or TICI upon sixty (60) days' written notice to the other party.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act, and in the event of
any act or event that terminates the Management Agreement between FAI and the
Fund.
14. In compliance with the requirements of Rule 31a-3 under the 1940 Act,
TICI hereby agrees that all records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund, or to
any third party at the Fund's direction, any of such records upon the Fund's
request. TICI further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.
15. This Agreement may not be materially amended, transferred, assigned,
sold or in any manner hypothecated or pledged without the affirmative vote or
written consent of the holders of a majority of the outstanding voting
securities of the Fund and may not be amended without the written consent of FAI
and TICI.
16. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. The terms "majority of the outstanding voting securities" of the Fund
and "interested persons" shall have the meanings as set forth in the 1940 Act.
18. This Agreement shall be interpreted in accordance with and governed by
the laws of the State of California of the United States of America.
19. TICI acknowledges that it has received notice of, and accepts the
limitations of, the Trust's liability as set forth in Article VII of its
Agreement and Declaration of Trust. TICI agrees that the Trust's obligations
hereunder shall be limited to the assets of the Funds, and that TICI shall not
seek satisfaction of any such obligation from any shareholders of the Funds nor
from any trustee, officer, employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/ Deborah R. Gatzek
Title: Vice President
TEMPLETON INVESTMENT COUNSEL, INC.
By /s/ Elizabeth M. Knoblock
Title: VP, GC, Secretary
Global Income Fund hereby acknowledges and agrees to the provisions of
paragraphs 9(a) and 10 of this Agreement.
FRANKLIN VALUEMARK FUNDS on behalf of the
GLOBAL INCOME FUND
By Karen L. Skidmore
Title: Assistant Vice President
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT dated as of April 19, 1995, between Franklin Valuemark
Funds, a Massachusetts business trust (the "Trust"), on behalf of the Templeton
Global Asset Allocation Fund (the "Fund"), a separate series of the Trust, and
Templeton, Galbraith & Hansberger, Ltd. ("Investment Manager").
In consideration of the mutual agreements herein made, the Trust and
the Investment Manager understand and agree as follows:
(1) The Investment Manager shall manage the investment and
reinvestment of the Fund's assets consistent with the provisions of the Trust
Instrument of the Trust and the Fund's investment policies adopted and declared
by the Trust's Board of Trustees. In pursuance of the foregoing, the Investment
Manager shall make all determinations with respect to the investment of the
Fund's assets and the purchase and sale of its investment securities, and shall
take such steps as may be necessary to implement those determinations. Such
determinations and services shall include determining the manner in which any
voting rights, rights to consent to corporate action and any other rights
pertaining to the Fund's investment securities shall be exercised, subject to
guidelines adopted by the Board of Trustees.
(2) The Investment Manager is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio.
(3) The Investment Manager shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policies and,
when applicable, the negotiation of commissions in connection therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Manager as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and reliable
execution at the most favorable security price, taking into account the other
provisions hereinafter set forth. The determination of what may constitute best
execution and price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation, the overall
direct net economic result to the Fund (involving both price paid or received
and any commissions and other costs paid), the efficiency with which the
transaction is effected, the ability to effect the transaction at all where a
large block is involved, availability of the broker to stand ready to execute
possibly difficult transactions in the future, and the financial strength and
stability of the broker. Such considerations are judgmental and are weighed by
the Investment Manager in determining the overall reasonableness of brokerage
commissions.
B. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past experience as to brokers
qualified to achieve "best execution," including brokers who specialize in any
foreign securities held by the Fund.
C. The Investment Manager is authorized to allocate brokerage
business to brokers who have provided brokerage and research services, as such
services are defined in Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), for the Fund and/or other accounts, if any, for which the
Investment Manager exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions for which fixed minimum
commission rates are not applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the amount another broker would
have charged for effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or the Investment
Manager's overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In reaching
such determination, the Investment Manager will not be required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith, the
Investment Manager shall be prepared to show that all commissions were allocated
and paid for purposes contemplated by the Fund's brokerage policy; that the
research services provide lawful and appropriate assistance to the Investment
Manager in the performance of its investment decision-making responsibilities;
and that the commissions paid were within a reasonable range. Whether
commissions were within a reasonable range shall be based on any available
information as to the level of commission known to be charged by other brokers
on comparable transactions, but there shall be taken into account the Fund's
policies that (i) obtaining a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that usually it is more
beneficial to the Fund to obtain a favorable price than to pay the lowest
commission; and (ii) the quality, comprehensiveness and frequency of research
studies that are provided for the Investment Manager are useful to the
Investment Manager in performing its advisory services under this Agreement.
Research services provided by brokers to the Investment Manager are considered
to be in addition to, and not in lieu of, services required to be performed by
the Investment Manager under this Agreement. Research furnished by brokers
through which the Fund effects securities transactions may be used by the
Investment Manager for any of its accounts, and not all research may be used by
the Investment Manager for the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed with primary
market makers acting as principal, except where, in the judgment of the
Investment Manager, better prices and execution may be obtained on a commission
basis or from other sources.
E. Sales of Franklin Valuemark contracts, or of shares of
other registered investment companies which have either the same adviser or an
investment adviser affiliated with the Investment Manager, by a broker are one
factor among others to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal transactions, purchases
in underwritings or tenders in response to tender offers) for the account of the
Fund to that broker; provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation shall be within the
scope of the Fund's policies as stated above; provided further, that in every
allocation made to a broker in which the broker's sale of Franklin Valuemark
contracts or of mutual fund shares is taken into account, there shall be no
increase in the amount of the commissions or other compensation paid to such
broker beyond a reasonable commission or other compensation determined, as set
forth in subparagraph C above, on the basis of best execution alone or best
execution plus research services, without taking account of or placing any value
upon such sale of Franklin Valuemark contracts or mutual fund shares.
(4) The Trust agrees to pay to the Investment Manager a monthly fee
in dollars based on a percentage of the Fund's average daily net assets, payable
at the end of each calendar month. This fee shall be calculated daily at the
following annual rates:
0.65% of the value of the Fund's net assets up to and including
$200 million;
0.585% of the value of the Fund's net assets over $200 million up
to and including $1.3 billion;
0.52% of the value of the Fund's net assets over $1.3 billion.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Manager) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Manager shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Manager's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
(5) The provisions set forth in this paragraph 5 (hereinafter
referred to as the "Plan") have been adopted pursuant to Rule 12b-1 under the
Act by the Trust, having been approved by a majority of the Trust's Board of
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plan (the "non-interested Trustees"), cast in person at a meeting called
for the purpose of voting on such Plan. The Board of Trustees concluded that the
rate of compensation to be paid to the Manager by the Fund was fair and not
excessive, but that due solely to the uncertainty that may exist from time to
time with respect to whether payments made by the Fund to the Manager or to
other firms may nevertheless be deemed to constitute distribution expenses, it
was determined that adoption of the Plan would be prudent and in the best
interests of the Fund and its shareholders or policyholders having an interest
in the Fund. The Trustees' approval included a determination that in the
exercise of their reasonable business judgment and in light of their fiduciary
duties, there is a reasonable likelihood that the Plan will benefit the Fund and
its shareholders or policyholders investing in the Fund.
A. No additional payments are to be made by the Fund as a
result of the Plan other than the payments the Fund is otherwise obligated to
make (i) to the Manager pursuant to paragraph 4 of this Agreement, (ii) to their
Transfer and Dividend Paying Agents or Custodian, pursuant to their respective
Agreements as in effect at any time, and (iii) in payment of any expenses by the
Fund in the ordinary course of their respective businesses that may be deemed
primarily intended to result in the sale of shares issued by such Fund. However,
to the extent any of such other payments by the Fund, to or by the Manager, or
to the Fund' Agents, are nevertheless deemed to be payments for the financing of
any activity primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1 under the Act, then such payments shall be
deemed to have been made pursuant to the Plan as set forth herein. The costs and
activities, the payment of which are intended to be within the scope of the
Plan, shall include, but not necessarily be limited to, the following:
(a) the costs of the preparation, printing and
mailing of all required reports and notices to shareholders or policyholders
investing in the Fund;
(b) the costs of the preparation, printing and
mailing of all prospectuses and statements of additional information;
(c) the costs of preparation, printing and mailing
of any proxy statements and proxies;
(d) all legal and accounting fees relating to the
preparation of any such reports, prospectuses, proxies and proxy statements;
(e) all fees and expenses relating to the
qualification of the Fund and/or its shares under the securities or "Blue
Sky" laws of any jurisdiction;
(f) all fees under the Securities Act of 1933 and
the Act, including fees in connection with any application for exemption
relating to or directed toward the sale of the Fund's shares;
(g) all fees and assessments of the Investment
Company Institute or any successor organization, irrespective of whether some of
its activities are designed to provide sales assistance;
(h) all costs of the preparation and mailing of
confirmations of shares sold or redeemed, and reports of share balances;
(i) all costs of responding to telephone or mail
inquiries of investors or prospective investors; and
(j) payments to dealers, financial institutions,
advisers, or other firms, any one of whom may receive monies in respect of the
Fund's shares held in accounts for policyholders for whom such firm is the
dealer of record or holder of record, or with whom such firm has a servicing
relationship. Servicing may include, among other things: (i) answering client
inquiries regarding the Fund; (ii) assisting clients in changing account
designations and addresses; (iii) performing sub-accounting; (iv) establishing
and maintaining shareholder or policyholder accounts and. records; (v)
processing purchase and redemption transactions; (vi) providing periodic
statements showing a client's account balance and integrating such statements
with those of other transactions and balances in the client's other accounts
serviced by such firm; (vii) arranging for bank wires; and (viii) such other
services as the Fund may request, to the extent such are permitted by applicable
statute, rule or regulation.
B. The terms and provisions of the Plan are as follows:
(a) The Manager shall report to the Board of
Trustees of the Trust at least quarterly on payments for any of the activities
in subparagraph A of this paragraph 5, and shall furnish the Board of Trustees
of the Trust with such other information as the Board may reasonably request in
connection with such payments in order to enable the Board to make an informed
determination of whether the Plan should be continued.
(b) The Plan shall continue in effect for a period
of more than one year from the date written below only so long as such
continuance is specifically approved at least annually (from the date below) by
the Trust's Board of Trustees, including the non-interested Trustees, cast in
person at a meeting called for the purpose of voting on the Plan.
(c) The Plan may be terminated with respect to the
Fund at any time by vote of a majority of non-interested Trustees or by vote of
a majority of the Fund's outstanding voting securities on not more than sixty
(60) days' written notice to any other party to the Plan, and the Plan shall
terminate automatically in the event of any act that constitutes an assignment
of this Management Agreement.
(d) The Plan may not be amended to increase
materially the amount deemed to be spent for distribution without approval by a
majority of the Fund's outstanding shares (as defined by the Act and all
material amendments to the Plan shall be approved by the non-interested Trustees
cast in person at a meeting called for the purpose of voting on such amendment.
(e) So long as the Plan is in effect, the selection
and nomination of the Trust's non-interested Trustees shall be committed to the
discretion of such non-interested Trustees.
(f) Any termination of the Plan shall not terminate
this Management Agreement or affect the validity of any of the provisions of
this Agreement other than this paragraph 5.
(6) This Agreement shall become effective on April 19, 1995 and
shall continue in effect until April 30, 1996. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in Investment
Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the vote of
(a) a majority of the outstanding voting securities of the Fund, as defined in
the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Investment
Manager no longer acts as Investment Manager to the Fund, the Investment Manager
reserves the right to withdraw from the Fund the use of the name "Templeton" or
any name misleadingly implying a continuing relationship between the Fund and
the Investment Manager or any of its affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither
the Investment Manager nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Manager of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Manager's part or by reason of reckless
disregard of the Investment Manager's duties under this Agreement. It is hereby
understood and acknowledged by the Trust that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Manager. It is further understood and acknowledged by the Trust that
investment decisions made on behalf of the Fund by the Investment Manager are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Manager will not always be profitable or prove to have been
correct.
(11) It is understood that the services of the Investment Manager are
not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Manager, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. When the Investment Manager
determines to buy or sell the same security for the Fund that the Investment
Manager or one or more of its affiliates has selected for clients of the
Investment Manager or its affiliates, the orders for all such security
transactions shall be placed for execution by methods determined by the
Investment Manager, with approval by the Trust's Board of Trustees, to be
impartial and fair.
(12) This Agreement shall be construed in accordance with the laws of
the State of California of the United States of America, provided that nothing
herein shall be construed as being inconsistent with applicable Federal and
state securities laws and any rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Manager an agent of the Trust or of the Fund.
(15) It is understood and expressly stipulated that neither the
holders of shares of the Fund nor any Trustee, officer, agent or employee of the
Trust shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
FRANKLIN VALUEMARK FUNDS
By: /s/ Harmon E. Burns
TEMPLETON GALBRAITH & HANSBERGER, LTD.
By:/s/ Martin L. Flanagan
SUBADVISORY AGREEMENT
On Behalf Of
Templeton Global Asset Allocation Fund
SUBADVISORY AGREEMENT dated as of April 19, 1995, between
Templeton, Galbraith & Hansberger, Ltd. ("TGH") and Templeton Investment
Counsel, Inc. ("TICI").
In consideration of the mutual agreements herein made, the parties
understand and agree as follows:
I. Prime Contract.
This Subadvisory Agreement is made in order to assist the TGH in fulfilling its
obligations under the Investment Management Agreement, as it may be amended in
the future ("Management Agreement"), between the TGH and FRANKLIN VALUEMARK
FUNDS, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Trust"), on behalf of the Templeton Global Asset Allocation
Fund series (the "Fund"). This Subadvisory Agreement is subject to the terms of
the Management Agreement, which is incorporated herein by reference.
II. Subadvisory Provisions.
(1) TICI shall manage the investment and reinvestment of the Fund's
assets, subject to the instructions and supervision of TGH, and consistent with
the provisions of the Trust Instrument of the Trust and the Fund's investment
policies adopted and declared by the Trust's Board of Trustees. In pursuance of
the foregoing, TICI shall make determinations with respect to the investment of
the Fund's assets and the purchase and sale of its investment securities, and
shall take such steps as may be necessary to implement those determinations.
Such determinations and services shall include determining the manner in which
voting rights, rights to consent to corporate action and any other rights
pertaining to the Fund's investment securities shall be exercised, subject to
guidelines adopted by the Board of Trustees.
(2) TICI is not required to furnish any personnel, overhead items or
facilities for the Fund, including trading desk facilities or daily pricing of
the Fund's portfolio.
(3) Subject to the instructions and supervision of TGH, TICI shall
be responsible for selecting members of securities exchanges, brokers and
dealers (such members, brokers and dealers being hereinafter referred to as
"brokers") for the execution of the Fund's portfolio transactions consistent
with the Fund's brokerage policies and, when applicable, the negotiation of
commissions in connection therewith.
All decisions and placements shall be made in accordance with the
following principles:
A. Purchase and sale orders will usually be placed with
brokers which are selected by TICI as able to achieve "best execution" of such
orders. "Best execution" shall mean prompt and reliable execution at the most
favorable security price, taking into account the other provisions hereinafter
set forth. The determination of what may constitute best execution and price in
the execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by TICI in
determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, TICI shall
take into account its past experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign securities held by
the Fund.
C. TICI is authorized to allocate brokerage business to
brokers who have provided brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934
Act"), for the Fund and/or other accounts, if any, for which TICI exercises
investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as
to transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if TICI determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or TICI's overall responsibilities with respect to the Fund and the other
accounts, if any, as to which it exercises investment discretion. In reaching
such determination, TICI will not be required to place or attempt to place a
specific dollar value on the research or execution services of a broker or on
the portion of any commission reflecting either of said services. In
demonstrating that such determinations were made in good faith, TICI shall be
prepared to show that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the research services provide
lawful and appropriate assistance to TICI in the performance of its investment
decision-making responsibilities; and that the commissions paid were within a
reasonable range. Whether commissions were within a reasonable range shall be
based on any available information as to the level of commission known to be
charged by other brokers on comparable transactions, but there shall be taken
into account the Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is recognized that
usually it is more beneficial to the Fund to obtain a favorable price than to
pay the lowest commission; and (ii) the quality, comprehensiveness and frequency
of research studies that are provided for TICI are useful to TICI in performing
its advisory services under this Subadvisory Agreement. Research services
provided by brokers to TICI are considered to be in addition to, and not in lieu
of, services required to be performed by TICI under this Subadvisory Agreement.
Research furnished by brokers through which the Fund effects securities
transactions may be used by TICI for any of its accounts, and not all research
may be used by TICI for the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage commission rates,
account may be taken of various services provided by the broker.
D. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed with primary
market makers acting as principal, except where, in the judgment of TICI, better
prices and execution may be obtained on a commission basis or from other
sources.
E. Sales of Franklin Valuemark contracts, or of shares of
other registered investment companies which have either the same adviser or an
investment adviser affiliated with TICI or TGH, by a broker are one factor among
others to be taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the account of the
Fund to that broker; provided that the broker shall furnish "best execution," as
defined in subparagraph A above, and that such allocation shall be within the
scope of the Fund's policies as stated above; provided further, that in every
allocation made to a broker in which the broker's sale of Franklin Valuemark
contracts or of mutual fund shares is taken into account, there shall be no
increase in the amount of the commissions or other compensation paid to such
broker beyond a reasonable commission or other compensation determined, as set
forth in subparagraph C above, on the basis of best execution alone or best
execution plus research services, without taking account of or placing any value
upon such sale of Franklin Valuemark contracts or mutual fund shares.
(4) TGH agrees to pay to TICI a monthly fee in dollars based on a
percentage of all of the Fund's average daily net assets, payable at the end of
each calendar month. This fee shall be calculated daily at the following annual
rates:
0.25% of the value of the Fund's net assets up to and including
$200 million;
0.225% of the value of the Fund's net assets over $200 million up
to and including $1.3 billion;
0.20% of the value of the Fund's net assets over $1.3 billion.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the primary management fee to TGH) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law and TGH is
required to reimburse the Fund for such excess in the manner and to the extent
required by applicable State law, then TICI's fee for such fiscal year shall be
reduced so that TICI shall receive the same percentage of its fee under this
contract as TGH shall have received under the primary Management Agreement. The
term "total expenses," as used in this paragraph, does not include interest,
taxes, litigation expenses, distribution expenses, brokerage commissions or
other costs of acquiring or disposing of any of the Fund's portfolio securities
or any costs or expenses incurred or arising other than in the ordinary and
necessary course of the Fund's business. When the accrued amount of such
expenses exceeds this limit, the monthly payment of TICI's fee will be reduced
by the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below the
limit.
(5) This Subadvisory Agreement shall become effective on April 19,
1995 and shall continue in effect until April 30, 1996. If not sooner
terminated, this Subadvisory Agreement shall continue in effect for successive
periods of 12 months each thereafter, provided that each such continuance shall
be specifically approved annually by the vote of a majority of the Trust's Board
of Trustees who are not parties to this Subadvisory Agreement or "interested
persons" (as defined in Investment Company Act of 1940 (the "1940 Act")) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Trust's Board of Trustees as a whole.
(6) Notwithstanding the foregoing, this Subadvisory Agreement may be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party, provided that termination by
the Trust is approved by vote of a majority of the Trust's Board of Trustees in
office at the time or by vote of a majority of the outstanding voting securities
of the Fund (as defined by the 1940 Act).
(7) This Subadvisory Agreement will terminate automatically and
immediately in the event of its assignment (as defined in the 1940 Act), and in
the event of any act which terminates the Management Agreement between TGH and
the Trust.
(8) In the event this Subadvisory Agreement is terminated and TICI
no longer acts as Investment Manager to the Fund, TICI reserves the right to
withdraw from the Fund the use of the name "Templeton" or any name misleadingly
implying a continuing relationship between the Fund and TICI or any of its
affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither
TICI nor its officers, directors, employees or agents shall be subject to any
liability for any error of judgment, mistake of law, or any loss arising out of
any investment or other act or omission in the performance by TICI of its duties
under the Subadvisory Agreement or for any loss or damage resulting from the
imposition by any government of exchange control restrictions which might affect
the liquidity of the Fund's assets, or from acts or omissions of custodians, or
securities depositories, or from any war or political act of any foreign
government to which such assets might be exposed, or for failure, on the part of
the custodian or otherwise, timely to collect payments, except for any
liability, loss or damage resulting from willful misfeasance, bad faith or gross
negligence on TICI's part or by reason of reckless disregard of TICI's duties
under this Subadvisory Agreement. It is hereby understood and acknowledged by
TGH that the value of the investments made for the Fund may increase as well as
decrease and are not guaranteed by TICI. It is further understood and
acknowledged by TGH that investment decisions made on behalf of the Fund by TICI
are subject to a variety of factors which may affect the values and income
generated by the Fund's portfolio securities, including general economic
conditions, market factors and currency exchange rates, and that investment
decisions made by TICI will not always be profitable or prove to have been
correct.
(10) It is understood that the services of TICI are not deemed to be
exclusive, and nothing in this Subadvisory Agreement shall prevent TICI, or any
affiliate thereof, from providing similar services to other investment companies
and other clients, including clients which may invest in the same types of
securities as the Fund, or, in providing such services, from using information
furnished by others. When TICI determines to buy or sell the same security for
the Fund that TICI or one or more of its affiliates has selected for clients of
TICI or its affiliates, the orders for all such security transactions shall be
placed for execution by methods determined by TICI, with approval by the Trust's
Board of Trustees, to be impartial and fair.
(11) This Subadvisory Agreement shall be construed in accordance with
the laws of the State of California of the United States of America, provided
that nothing herein shall be construed as being inconsistent with applicable
Federal and state securities laws and any rules, regulations and orders
thereunder.
(12) If any provision of this Subadvisory Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Subadvisory Agreement shall not be affected thereby and, to this extent,
the provisions of this Subadvisory Agreement shall be deemed to be severable.
(13) Nothing herein shall be construed as constituting TICI an agent
of TGH, the Trust or of the Fund.
(14) It is understood and expressly stipulated that neither TGH, the
holders of shares of the Fund nor any Trustee, officer, agent or employee of the
Trust shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
TGH only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Subadvisory
Agreement to be duly executed by their duly authorized officers and their
respective corporate seals to be hereunto duly affixed and attested.
TEMPLETON GALBRAITH & HANSBERGER, LTD.
By: /s/ Martin L. Flanagan
TEMPLETON INVESTMENT COUNSEL, INC.
By:/s/ Charles E. Johnson
BUSINESS MANAGEMENT AGREEMENT BETWEEN
FRANKLIN VALUEMARK FUNDS
(Templeton Global Asset Allocation Fund)
AND
TEMPLETON GLOBAL INVESTORS, INC.
AGREEMENT dated as of April 19, 1995, between Franklin Valuemark
Funds, a Massachussetts business trust (the "Trust"), on behalf of the Templeton
Global Asset Allocation Fund (the "Fund"), a separate series of the Trust, and
Templeton Global Investors, Inc. ("TGI").
In consideration of the mutual promises herein made, the parties
hereby agree as follows:
(1) TGI agrees, during the life of this Agreement, to be
responsible for:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) paying compensation of the Fund's officers for services
rendered as such;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gains
distributions and tax credits, and attending to routine
correspondence and other communications with individual
Shareholders;
(e) daily pricing of the Fund's investment portfolio and preparing
and supervising publication of daily quotations of the bid and
asked prices of the Fund's Shares, earnings reports and other
financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents and printers;
(g) providing trading desk facilities for the Fund;
(h) supervising compliance by the Fund with recordkeeping
requirements under the Investment Company Act of 1940 (the
"1940 Act") and the rules
and regulations thereunder, with state regulatory requirements,
maintenance of books and records for the Fund (other than
those maintained by the custodian and transfer agent),
preparing and filing of tax reports other than the Fund's
income tax returns;
(i) monitoring the qualifications of tax deferred retirement
plans providing for investment in Shares of the Fund; and
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities.
(2) The Trust agrees, during the life of this Agreement, to pay to
TGI as compensation for the foregoing a monthly fee equal on an annual basis to
0.15% of the first $200 million of the average daily net assets of the Fund
during the month preceding each payment, reduced as follows: on such net assets
in excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.10%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
(3) This Agreement shall remain in full force and effect through
April 30, 1996 and thereafter from year to year to the extent continuance is
approved annually by the Board of Trustees of the Trust.
(4) This Agreement may be terminated by the Trust at any time on
sixty (60) days' written notice without payment of penalty, provided that such
termination by the Trust shall be directed or approved by the vote of a majority
of the Trustees of the Trust in office at the time or by the vote of a majority
of the outstanding voting securities of the Trust (as defined by the 1940 Act);
and shall automatically and immediately terminate in the event of its assignment
(as defined by the 1940 Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of TGI, or of reckless disregard of its duties and
obligations hereunder, TGI shall not be subject to liability for any act or
omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
FRANKLIN VALUEMARK FUNDS
By: /s/ Martin L. Flanagan
TEMPLETON GLOBAL INVESTORS, INC.
By: Charles E. Johnson
Agreement adapted from FITBOFA.CUSCUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("AGREEMENT") IS MADE AND ENTERED INTO AS OF
SEPTEMBER 17, 1991, BY AND BETWEEN FRANKLIN VALUEMARK FUNDS, A MASSACHUSETTS
BUSINESS TRUST (THE "TRUST"), AND BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, A BANKING ASSOCIATION ORGANIZED UNDER THE LAWS OF THE UNITED STATES
(THE "CUSTODIAN").
RECITALS
A. THE TRUST IS AN INVESTMENT COMPANY REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "INVESTMENT COMPANY ACT")
THAT INVESTS AND REINVESTS, ON BEHALF OF ITS VARIOUS SERIES, IN DOMESTIC
SECURITIES AND FOREIGN SECURITIES.
B. THE CUSTODIAN IS, AND HAS REPRESENTED TO THE TRUST THAT THE
CUSTODIAN IS, A "BANK" AS THAT TERM IS DEFINED IN SECTION 2(A)(5) OF THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED AND IS ELIGIBLE TO RECEIVE AND
MAINTAIN CUSTODY OF INVESTMENT COMPANY ASSETS PURSUANT TO SECTION 17(F) AND RULE
17F-2 THEREUNDER.
C. THE TRUST AND THE CUSTODIAN DESIRE TO PROVIDE FOR THE RETENTION OF
THE CUSTODIAN AS THE CUSTODIAN OF THE ASSETS OF THE TRUST, AND SUCH SUBSEQUENT
SERIES AS THE PARTIES HERETO MAY DETERMINE FROM TIME-TO-TIME, ON THE TERMS AND
SUBJECT TO THE PROVISIONS SET FORTH HEREIN.
AGREEMENT
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS
CONTAINED HEREIN, AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND
ADEQUACY OF WHICH ARE HEREBY ACKNOWLEDGED, THE PARTIES HERETO AGREE AS FOLLOWS:
SECTION 1. DEFINITIONS
FOR PURPOSES OF THIS AGREEMENT, THE FOLLOWING TERMS SHALL HAVE THE
RESPECTIVE MEANINGS SPECIFIED BELOW:
"AGREEMENT" SHALL MEAN THIS CUSTODY AGREEMENT.
"BOARD OF TRUSTEES" SHALL MEAN THE BOARD OF TRUSTEES OF THE TRUST.
"BUSINESS DAY" WITH RESPECT TO ANY DOMESTIC SECURITY MEANS ANY DAY,
OTHER THAN A SATURDAY OR SUNDAY, THAT IS NOT A DAY ON WHICH BANKING INSTITUTIONS
ARE AUTHORIZED OR REQUIRED BY LAW TO BE CLOSED IN THE CITY OF NEW YORK AND, WITH
RESPECT TO FOREIGN SECURITIES, A LONDON BUSINESS DAY. "LONDON BUSINESS DAY"
SHALL MEAN ANY DAY ON WHICH DEALINGS AND DEPOSITS IN U.S. DOLLARS ARE TRANSACTED
IN THE LONDON INTERBANK MARKET.
"CUSTODIAN" SHALL MEAN BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION.
"DEPARTMENT" SHALL MEAN THE CALIFORNIA DEPARTMENT OF INSURANCE.
"DOMESTIC SECURITIES" SHALL HAVE THE MEANING PROVIDED IN SUBSECTION
2.1 HEREOF.
"EXECUTIVE COMMITTEE" SHALL MEAN THE EXECUTIVE COMMITTEE OF THE
BOARD OF TRUSTEES.
"FOREIGN CUSTODIAN" SHALL HAVE THE MEANING PROVIDED IN SECTION 4.1
HEREOF.
"FOREIGN SECURITIES" SHALL HAVE THE MEANING PROVIDED IN SECTION 2.1
HEREOF.
"FOREIGN SECURITIES DEPOSITORY" SHALL HAVE THE MEANING PROVIDED IN
SECTION 4.1 HEREOF.
"GUIDELINES" SHALL HAVE THE MEANING PROVIDED IN SUBSECTION 3.5(A)
HEREOF.
"INVESTMENT COMPANY ACT" SHALL MEAN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED.
"SECURITIES" SHALL HAVE THE MEANING PROVIDED IN SECTION 2.1 HEREOF.
"SECURITIES SYSTEM" SHALL HAVE THE MEANING PROVIDED IN SECTION 3.1
HEREOF.
"SECURITIES SYSTEM ACCOUNT" SHALL HAVE THE MEANING PROVIDED IN
SUBSECTION 3.8(A) HEREOF.
"SHARES" SHALL MEAN SHARES OF BENEFICIAL INTEREST OF THE TRUST.
"SUBCUSTODIAN" SHALL HAVE THE MEANING PROVIDED IN SUBSECTION 3.7
HEREOF, BUT SHALL NOT INCLUDE ANY FOREIGN CUSTODIAN.
"TRANSFER AGENT" SHALL MEAN THE DULY APPOINTED AND ACTING TRANSFER
AGENT FOR THE TRUST.
"TRUST" SHALL MEAN THE FRANKLIN VALUEMARK FUNDS AND ANY SEPARATE
SERIES OF THE TRUST HEREINAFTER ORGANIZED.
"U.S." SHALL MEAN UNITED STATES.
"WRITING" SHALL MEAN A COMMUNICATION IN WRITING, A COMMUNICATION BY
TELEX, THE CUSTODIAN'S GLOBAL CUSTODY INSTRUCTION SYSTEMTM, FACSIMILE
TRANSMISSION, BANKWIRE OR OTHER TELEPROCESS OR ELECTRONIC INSTRUCTION SYSTEM
ACCEPTABLE TO THE CUSTODIAN.
SECTION 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 APPOINTMENT OF CUSTODIAN. THE TRUST HEREBY APPOINTS AND DESIGNATES
THE CUSTODIAN AS THE CUSTODIAN OF THE ASSETS OF THE TRUST INCLUDING CASH,
SECURITIES THE TRUST DESIRES TO BE HELD WITHIN THE UNITED STATES ("DOMESTIC
SECURITIES") AND SECURITIES IT DESIRES TO BE HELD OUTSIDE THE UNITED STATES
("FOREIGN SECURITIES"). DOMESTIC SECURITIES AND FOREIGN SECURITIES ARE SOMETIMES
REFERRED TO HEREIN, COLLECTIVELY, AS "SECURITIES." THE CUSTODIAN HEREBY ACCEPTS
SUCH APPOINTMENT AND DESIGNATION AND AGREES THAT IT SHALL MAINTAIN CUSTODY OF
THE ASSETS OF THE TRUST DELIVERED TO IT HEREUNDER IN THE MANNER PROVIDED FOR
HEREIN.
2.2 DELIVERY OF ASSETS. THE TRUST AGREES TO DELIVER TO THE CUSTODIAN
SECURITIES AND CASH OWNED BY THE TRUST, PAYMENTS OF INCOME, PRINCIPAL OR CAPITAL
DISTRIBUTIONS RECEIVED BY THE TRUST WITH RESPECT TO SECURITIES OWNED BY THE
TRUST FROM TIME TO TIME, AND THE CONSIDERATION RECEIVED BY IT FOR SUCH SHARES OR
OTHER SECURITIES OF THE TRUST AS MAY BE ISSUED AND SOLD FROM TIME TO TIME. THE
CUSTODIAN SHALL HAVE NO RESPONSIBILITY WHATSOEVER FOR ANY PROPERTY OR ASSETS OF
THE TRUST HELD OR RECEIVED BY THE TRUST AND NOT DELIVERED TO THE CUSTODIAN
PURSUANT TO AND IN ACCORDANCE WITH THE TERMS HEREOF. ALL SECURITIES ACCEPTED BY
THE CUSTODIAN ON BEHALF OF THE TRUST UNDER THE TERMS OF THIS AGREEMENT SHALL BE
IN "STREET NAME" OR OTHER GOOD DELIVERY FORM AS DETERMINED BY THE CUSTODIAN.
2.3 SUBCUSTODIANS. UPON RECEIPT OF PROPER INSTRUCTIONS AND A CERTIFIED
COPY OF A RESOLUTION OF THE BOARD OF TRUSTEES OR OF THE EXECUTIVE COMMITTEE
CERTIFIED BY THE SECRETARY OR AN ASSISTANT SECRETARY OF THE TRUST, THE CUSTODIAN
MAY FROM TIME TO TIME APPOINT ONE OR MORE SUBCUSTODIANS OR FOREIGN CUSTODIANS TO
HOLD ASSETS OF THE TRUST IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT.
2.4 NO DUTY TO MANAGE. THE CUSTODIAN, A SUBCUSTODIAN OR A FOREIGN
CUSTODIAN SHALL NOT HAVE ANY DUTY OR RESPONSIBILITY TO MANAGE OR RECOMMEND
INVESTMENTS OF THE ASSETS OF THE TRUST HELD BY THEM OR TO INITIATE ANY PURCHASE,
SALE OR OTHER INVESTMENT TRANSACTION IN THE ABSENCE OF PROPER INSTRUCTIONS OR
EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED HEREIN.
SECTION 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE TRUST
HELD BY THE CUSTODIAN
3.1 HOLDING SECURITIES. THE CUSTODIAN SHALL HOLD AND PHYSICALLY
SEGREGATE FROM ANY PROPERTY OWNED BY THE CUSTODIAN, FOR THE ACCOUNT OF THE
TRUST, ALL NON-CASH PROPERTY DELIVERED BY THE TRUST TO THE CUSTODIAN HEREUNDER
OTHER THAN SECURITIES WHICH, PURSUANT TO SUBSECTION 3.8 HEREOF, ARE HELD THROUGH
A REGISTERED CLEARING AGENCY, A REGISTERED SECURITIES DEPOSITORY, THE FEDERAL
RESERVE'S BOOK-ENTRY SECURITIES SYSTEM (REFERRED TO HEREIN, INDIVIDUALLY, AS A
"SECURITIES SYSTEM"), OR HELD BY A SUBCUSTODIAN, FOREIGN CUSTODIAN OR IN A
FOREIGN SECURITIES DEPOSITORY.
3.2 DELIVERY OF SECURITIES. EXCEPT AS OTHERWISE PROVIDED IN SUBSECTION
3.5 HEREOF, THE CUSTODIAN, UPON RECEIPT OF PROPER INSTRUCTIONS, SHALL RELEASE
AND DELIVER SECURITIES OWNED BY THE TRUST AND HELD BY THE CUSTODIAN IN THE
FOLLOWING CASES OR AS OTHERWISE DIRECTED IN PROPER INSTRUCTIONS:
(A) EXCEPT AS OTHERWISE PROVIDED HEREIN, UPON SALE OF SUCH
SECURITIES FOR THE ACCOUNT OF THE TRUST AND RECEIPT BY THE
CUSTODIAN, A SUBCUSTODIAN OR A FOREIGN CUSTODIAN OF PAYMENT
THEREFOR;
(B) UPON THE RECEIPT OF PAYMENT BY THE CUSTODIAN, A
SUBCUSTODIAN OR A FOREIGN CUSTODIAN IN CONNECTION WITH ANY
REPURCHASE AGREEMENT RELATED TO SUCH SECURITIES ENTERED INTO BY
THE TRUST;
(C) IN THE CASE OF A SALE EFFECTED THROUGH A SECURITIES
SYSTEM, IN ACCORDANCE WITH THE PROVISIONS OF SUBSECTION 3.8
HEREOF;
(D) TO A TENDER AGENT OR OTHER AUTHORIZED AGENT IN CONNECTION
WITH (I) A TENDER OR OTHER SIMILAR OFFER FOR SECURITIES OWNED BY THE
TRUST, OR (II) A TENDER OFFER OR REPURCHASE BY THE TRUST OF ITS OWN
SHARES;
(E) TO THE ISSUER THEREOF OR ITS AGENT WHEN SUCH SECURITIES
ARE CALLED, REDEEMED, RETIRED OR OTHERWISE BECOME PAYABLE; PROVIDED,
THAT IN ANY SUCH CASE, THE CASH OR OTHER CONSIDERATION IS TO BE
DELIVERED TO THE CUSTODIAN, A SUBCUSTODIAN OR A FOREIGN CUSTODIAN;
(F) TO THE ISSUER THEREOF, OR ITS AGENT, FOR TRANSFER INTO THE
NAME OR NOMINEE NAME OF THE TRUST, THE NAME OR NOMINEE NAME OF THE
CUSTODIAN, THE NAME OR NOMINEE NAME OF ANY SUBCUSTODIAN OR FOREIGN
CUSTODIAN; OR FOR EXCHANGE FOR A DIFFERENT NUMBER OF BONDS,
CERTIFICATES OR OTHER EVIDENCE REPRESENTING THE SAME AGGREGATE FACE
AMOUNT OR NUMBER OF UNITS; PROVIDED THAT, IN ANY SUCH CASE, THE NEW
SECURITIES ARE TO BE DELIVERED TO THE CUSTODIAN, A SUBCUSTODIAN OR
FOREIGN CUSTODIAN;
(G) TO THE BROKER SELLING THE SAME FOR EXAMINATION IN
ACCORDANCE WITH THE "STREET DELIVERY" CUSTOM;
(H) FOR EXCHANGE OR CONVERSION PURSUANT TO ANY PLAN OF MERGER,
CONSOLIDATION, RECAPITALIZATION, OR REORGANIZATION OF THE ISSUER OF
SUCH SECURITIES, OR PURSUANT TO A CONVERSION OF SUCH SECURITIES;
PROVIDED THAT, IN ANY SUCH CASE, THE NEW SECURITIES AND CASH, IF
ANY, ARE TO BE DELIVERED TO THE CUSTODIAN OR A SUBCUSTODIAN;
(I) IN THE CASE OF WARRANTS, RIGHTS OR SIMILAR SECURITIES, THE
SURRENDER THEREOF IN CONNECTION WITH THE EXERCISE OF SUCH WARRANTS,
RIGHTS OR SIMILAR SECURITIES OR THE SURRENDER OF INTERIM RECEIPTS OR
TEMPORARY SECURITIES FOR DEFINITIVE SECURITIES; PROVIDED THAT, IN
ANY SUCH CASE, THE NEW SECURITIES AND CASH, IF ANY, ARE TO BE
DELIVERED TO THE CUSTODIAN, A SUBCUSTODIAN OR A FOREIGN CUSTODIAN;
(J) FOR DELIVERY IN CONNECTION WITH ANY LOANS OF SECURITIES
MADE BY THE TRUST, BUT ONLY AGAINST RECEIPT BY THE CUSTODIAN, A
SUBCUSTODIAN OR A FOREIGN CUSTODIAN OF ADEQUATE COLLATERAL AS
DETERMINED BY THE TRUST (AND IDENTIFIED IN PROPER INSTRUCTIONS
COMMUNICATED TO THE CUSTODIAN), WHICH MAY BE IN THE FORM OF CASH OR
OBLIGATIONS ISSUED BY THE UNITED STATES GOVERNMENT, ITS AGENCIES OR
INSTRUMENTALITIES, EXCEPT THAT IN CONNECTION WITH ANY LOANS FOR
WHICH COLLATERAL IS TO BE CREDITED TO THE ACCOUNT OF THE CUSTODIAN,
A SUBCUSTODIAN OR A FOREIGN CUSTODIAN IN THE FEDERAL RESERVE'S
BOOK-ENTRY SECURITIES SYSTEM, THE CUSTODIAN WILL NOT BE HELD LIABLE
OR RESPONSIBLE FOR THE DELIVERY OF SECURITIES OWNED BY THE TRUST
PRIOR TO THE RECEIPT OF SUCH COLLATERAL;
(K) FOR DELIVERY AS SECURITY IN CONNECTION WITH ANY BORROWINGS
BY THE TRUST REQUIRING A PLEDGE OF ASSETS BY THE TRUST, BUT ONLY
AGAINST RECEIPT BY THE CUSTODIAN, A SUBCUSTODIAN OR A FOREIGN
CUSTODIAN OF AMOUNTS BORROWED;
(L) FOR DELIVERY IN ACCORDANCE WITH THE PROVISIONS OF ANY
AGREEMENT AMONG THE TRUST, THE CUSTODIAN, A SUBCUSTODIAN OR A
FOREIGN CUSTODIAN AND A BROKER-DEALER RELATING TO COMPLIANCE WITH
THE RULES OF REGISTERED CLEARING CORPORATIONS AND OF ANY REGISTERED
NATIONAL SECURITIES EXCHANGE, OR OF ANY SIMILAR ORGANIZATION OR
ORGANIZATIONS, REGARDING ESCROW OR OTHER ARRANGEMENTS IN CONNECTION
WITH TRANSACTIONS BY THE TRUST;
(M) FOR DELIVERY IN ACCORDANCE WITH THE PROVISIONS OF ANY
AGREEMENT AMONG THE TRUST, THE CUSTODIAN, A SUBCUSTODIAN OR A
FOREIGN CUSTODIAN AND A FUTURES COMMISSION MERCHANT, RELATING TO
COMPLIANCE WITH THE RULES OF THE COMMODITY FUTURES TRADING
COMMISSION AND/OR ANY CONTRACT MARKET, OR ANY SIMILAR ORGANIZATION
OR ORGANIZATIONS, REGARDING ACCOUNT DEPOSITS IN CONNECTION WITH
TRANSACTIONS BY THE TRUST;
(N) UPON THE RECEIPT OF INSTRUCTIONS FROM THE TRANSFER AGENT
FOR DELIVERY TO THE TRANSFER AGENT OR TO THE HOLDERS OF SHARES IN
CONNECTION WITH DISTRIBUTIONS IN KIND IN SATISFACTION OF REQUESTS BY
HOLDERS OF SHARES FOR REPURCHASE OR REDEMPTION; AND
(O) FOR ANY OTHER PROPER PURPOSE, BUT ONLY UPON RECEIPT OF
PROPER INSTRUCTIONS, AND A CERTIFIED COPY OF A RESOLUTION OF THE
TRUSTEES OR OF THE EXECUTIVE COMMITTEE CERTIFIED BY THE SECRETARY OR
AN ASSISTANT SECRETARY OF THE TRUST, SPECIFYING THE SECURITIES TO BE
DELIVERED, SETTING FORTH THE PURPOSE FOR WHICH SUCH DELIVERY IS TO
BE MADE, DECLARING SUCH PURPOSE TO BE A PROPER PURPOSE, AND NAMING
THE PERSON OR PERSONS TO WHOM DELIVERY OF SUCH SECURITIES SHALL BE
MADE.
3.3 REGISTRATION OF SECURITIES. SECURITIES HELD BY THE CUSTODIAN, A
SUBCUSTODIAN OR A FOREIGN CUSTODIAN (OTHER THAN BEARER SECURITIES) SHALL BE
REGISTERED IN THE NAME OR NOMINEE NAME OF THE TRUST, IN THE NAME OR NOMINEE NAME
OF THE CUSTODIAN OR IN THE NAME OR NOMINEE NAME OF ANY SUBCUSTODIAN OR FOREIGN
CUSTODIAN. THE TRUST AGREES TO HOLD THE CUSTODIAN, ANY SUCH NOMINEE,
SUBCUSTODIAN OR FOREIGN CUSTODIAN HARMLESS FROM ANY LIABILITY AS A HOLDER OF
RECORD OF SUCH SECURITIES.
3.4 BANK ACCOUNTS. THE CUSTODIAN SHALL OPEN AND MAINTAIN A SEPARATE
BANK ACCOUNT OR ACCOUNTS FOR THE TRUST, SUBJECT ONLY TO DRAFT OR ORDER BY THE
CUSTODIAN ACTING PURSUANT TO THE TERMS OF THIS AGREEMENT, AND SHALL HOLD IN SUCH
ACCOUNT OR ACCOUNTS, SUBJECT TO THE PROVISIONS HEREOF, ALL CASH RECEIVED BY IT
HEREUNDER FROM OR FOR THE ACCOUNT OF THE TRUST, OTHER THAN CASH MAINTAINED BY
THE TRUST IN A BANK ACCOUNT ESTABLISHED AND USED IN ACCORDANCE WITH RULE 17F-3
UNDER THE INVESTMENT COMPANY ACT. FUNDS HELD BY THE CUSTODIAN FOR THE TRUST MAY
BE DEPOSITED BY IT TO ITS CREDIT AS CUSTODIAN IN THE BANKING DEPARTMENTS OF THE
CUSTODIAN, A SUBCUSTODIAN OR A FOREIGN CUSTODIAN. IT IS UNDERSTOOD AND AGREED BY
THE CUSTODIAN AND THE TRUST THAT THE RATE OF INTEREST, IF ANY, PAYABLE ON SUCH
FUNDS (INCLUDING FOREIGN CURRENCY DEPOSITS) THAT ARE DEPOSITED WITH THE
CUSTODIAN MAY NOT BE A MARKET RATE OF INTEREST AND THAT THE RATE OF INTEREST
PAYABLE BY THE CUSTODIAN TO THE TRUST SHALL BE AGREED UPON BY THE CUSTODIAN AND
THE TRUST FROM TIME TO TIME. SUCH FUNDS SHALL BE DEPOSITED BY THE CUSTODIAN IN
ITS CAPACITY AS CUSTODIAN AND SHALL BE WITHDRAWABLE BY THE CUSTODIAN ONLY IN
THAT CAPACITY.
3.5 COLLECTION OF INCOME; TRADE SETTLEMENT; CREDITING OF ACCOUNTS.
THE CUSTODIAN SHALL COLLECT INCOME PAYABLE WITH RESPECT TO SECURITIES OWNED BY
THE TRUST, SETTLE SECURITIES TRADES FOR THE ACCOUNT OF THE TRUST AND CREDIT AND
DEBIT THE TRUST'S ACCOUNT WITH THE CUSTODIAN IN CONNECTION THEREWITH AS FOLLOWS:
(A) UPON RECEIPT OF PROPER INSTRUCTIONS, THE CUSTODIAN SHALL
EFFECT THE PURCHASE OF A SECURITY BY CHARGING THE ACCOUNT OF THE
TRUST ON THE CONTRACTUAL SETTLEMENT DATE; PROVIDED, HOWEVER, THAT IN
THE CASE OF FOREIGN SECURITIES, PROPER INSTRUCTIONS ARE PROVIDED TO
THE CUSTODIAN BY THE TRUST PRIOR TO THE CONTRACTUAL SETTLEMENT DATE
IN ACCORDANCE WITH, AND WITHIN THE TIME PERIOD SPECIFIED IN THE
"GLOBAL CUSTODY GUIDELINES FOR THE FRANKLIN VALUEMARK FUNDS" (THE
"GUIDELINES") AS ADOPTED FOR THE USE OF THIS TRUST, AS MAY BE
AMENDED BY THE CUSTODIAN FROM TIME TO TIME IN ITS SOLE DISCRETION. A
COPY OF THE GUIDELINES HAS BEEN DELIVERED BY THE CUSTODIAN TO THE
FUND. THE CUSTODIAN SHALL HAVE NO LIABILITY OF ANY KIND TO ANY
PERSON, INCLUDING THE TRUST, IF THE CUSTODIAN EFFECTS PAYMENT ON
BEHALF OF THE TRUST AS PROVIDED FOR HEREIN OR IN PROPER
INSTRUCTIONS, AND THE SELLER OR SELLING BROKER FAILS TO DELIVER THE
SECURITIES PURCHASED.
(B) UPON RECEIPT OF PROPER INSTRUCTIONS, THE CUSTODIAN SHALL
EFFECT THE SALE OF A SECURITY BY DELIVERING A CERTIFICATE OR OTHER
INDICIA OF OWNERSHIP, AND SHALL CREDIT THE ACCOUNT OF THE TRUST WITH
THE PROCEEDS OF SUCH SALE ON THE CONTRACTUAL SETTLEMENT DATE;
PROVIDED, HOWEVER, THAT IN THE CASE OF FOREIGN SECURITIES, PROPER
INSTRUCTIONS ARE PROVIDED TO THE CUSTODIAN BY THE TRUST PRIOR TO THE
CONTRACTUAL SETTLEMENT DATE IN ACCORDANCE WITH, AND WITHIN THE TIME
PERIOD SPECIFIED IN, THE GUIDELINES. THE CUSTODIAN SHALL HAVE NO
LIABILITY OF ANY KIND TO ANY PERSON, INCLUDING THE TRUST, IF THE
CUSTODIAN DELIVERS SUCH A CERTIFICATE(S) OR OTHER INDICIA OF
OWNERSHIP AS PROVIDED FOR HEREIN OR IN PROPER INSTRUCTIONS, AND THE
PURCHASER OR PURCHASING BROKER FAILS TO EFFECT PAYMENT TO THE TRUST
WITHIN A REASONABLE TIME PERIOD, AS DETERMINED BY THE CUSTODIAN IN
ITS SOLE DISCRETION. IN SUCH EVENT, THE CUSTODIAN SHALL BE ENTITLED
TO REIMBURSEMENT OF THE AMOUNT SO CREDITED TO THE ACCOUNT OF THE
TRUST IN CONNECTION WITH SUCH SALE.
(C) THE TRUST IS RESPONSIBLE FOR ENSURING THAT THE CUSTODIAN
RECEIVES TIMELY AND ACCURATE PROPER INSTRUCTIONS TO ENABLE THE
CUSTODIAN TO EFFECT SETTLEMENT OF ANY PURCHASE OR SALE. IF THE
CUSTODIAN DOES NOT RECEIVE SUCH INSTRUCTIONS WITHIN THE REQUIRED
TIME PERIOD, THE CUSTODIAN SHALL HAVE NO LIABILITY OF ANY KIND TO
ANY PERSON, INCLUDING THE TRUST, FOR FAILING TO EFFECT SETTLEMENT ON
THE CONTRACTUAL SETTLEMENT DATE. HOWEVER, THE CUSTODIAN SHALL USE
ITS BEST REASONABLE EFFORTS TO EFFECT SETTLEMENT AS SOON AS POSSIBLE
AFTER RECEIPT OF PROPER INSTRUCTIONS.
(D) THE CUSTODIAN SHALL CREDIT THE ACCOUNT OF THE TRUST WITH
INTEREST INCOME PAYABLE ON INTEREST BEARING SECURITIES ON PAYABLE
DATE. INTEREST INCOME ON CASH BALANCES WILL BE CREDITED MONTHLY TO
THE ACCOUNT OF THE TRUST ON THE FIRST BUSINESS DAY (ON WHICH THE
CUSTODIAN IS OPEN FOR BUSINESS) FOLLOWING THE END OF EACH MONTH.
DIVIDENDS AND OTHER AMOUNTS PAYABLE WITH RESPECT TO DOMESTIC
SECURITIES AND FOREIGN SECURITIES SHALL BE CREDITED TO THE ACCOUNT
OF THE TRUST WHEN RECEIVED BY THE CUSTODIAN. THE CUSTODIAN SHALL NOT
BE REQUIRED TO COMMENCE SUIT OR COLLECTION PROCEEDINGS OR RESORT TO
ANY EXTRAORDINARY MEANS TO COLLECT SUCH INCOME AND OTHER AMOUNTS
PAYABLE WITH RESPECT TO SECURITIES OWNED BY THE TRUST. THE
COLLECTION OF INCOME DUE THE TRUST ON DOMESTIC SECURITIES LOANED
PURSUANT TO THE PROVISIONS OF SUBSECTION 3.2(J) SHALL BE THE
RESPONSIBILITY OF THE TRUST. THE CUSTODIAN WILL HAVE NO DUTY OR
RESPONSIBILITY IN CONNECTION THEREWITH, OTHER THAN TO PROVIDE THE
TRUST WITH SUCH INFORMATION OR DATA AS MAY BE NECESSARY TO ASSIST
THE TRUST IN ARRANGING FOR THE TIMELY DELIVERY TO THE CUSTODIAN OF
THE INCOME TO WHICH THE TRUST IS ENTITLED. THE CUSTODIAN SHALL HAVE
NO LIABILITY TO ANY PERSON, INCLUDING THE TRUST, IF THE CUSTODIAN
CREDITS THE ACCOUNT OF THE TRUST WITH SUCH INCOME OR OTHER AMOUNTS
PAYABLE WITH RESPECT TO SECURITIES OWNED BY THE TRUST (OTHER THAN
SECURITIES LOANED BY THE TRUST PURSUANT TO SUBSECTION 3.2(J) HEREOF)
AND THE CUSTODIAN SUBSEQUENTLY IS UNABLE TO COLLECT SUCH INCOME OR
OTHER AMOUNTS FROM THE PAYORS THEREOF WITHIN A REASONABLE TIME
PERIOD, AS DETERMINED BY THE CUSTODIAN IN ITS SOLE DISCRETION. IN
SUCH EVENT, THE CUSTODIAN SHALL BE ENTITLED TO REIMBURSEMENT OF THE
AMOUNT SO CREDITED TO THE ACCOUNT OF THE TRUST.
3.6 PAYMENT OF TRUST MONIES. UPON RECEIPT OF PROPER
INSTRUCTIONS THE CUSTODIAN SHALL PAY OUT MONIES OF THE TRUST IN THE FOLLOWING
CASES OR AS OTHERWISE DIRECTED IN PROPER INSTRUCTIONS:
(A) UPON THE PURCHASE OF SECURITIES, FUTURES CONTRACTS OR
OPTIONS ON FUTURES CONTRACTS FOR THE ACCOUNT OF THE TRUST BUT ONLY,
EXCEPT AS OTHERWISE PROVIDED HEREIN, (I) AGAINST THE DELIVERY OF
SUCH SECURITIES, OR EVIDENCE OF TITLE TO FUTURES CONTRACTS OR
OPTIONS ON FUTURES CONTRACTS, TO THE CUSTODIAN OR A SUBCUSTODIAN
REGISTERED PURSUANT TO SUBSECTION 3.3 HEREOF OR IN PROPER FORM FOR
TRANSFER; (II) IN THE CASE OF A PURCHASE EFFECTED THROUGH A
SECURITIES SYSTEM, IN ACCORDANCE WITH THE CONDITIONS SET FORTH IN
SUBSECTION 3.8 HEREOF; OR (III) IN THE CASE OF REPURCHASE AGREEMENTS
ENTERED INTO BETWEEN THE TRUST AND THE CUSTODIAN, ANOTHER BANK OR A
BROKER-DEALER (A) AGAINST DELIVERY OF THE SECURITIES EITHER IN
CERTIFICATED FORM TO THE CUSTODIAN OR A SUBCUSTODIAN OR THROUGH AN
ENTRY CREDITING THE CUSTODIAN'S ACCOUNT AT THE APPROPRIATE FEDERAL
RESERVE BANK WITH SUCH SECURITIES OR (B) AGAINST DELIVERY OF THE
CONFIRMATION EVIDENCING PURCHASE BY THE TRUST OF SECURITIES OWNED BY
THE CUSTODIAN OR SUCH BROKER-DEALER OR OTHER BANK ALONG WITH WRITTEN
EVIDENCE OF THE AGREEMENT BY THE CUSTODIAN OR SUCH BROKER-DEALER OR
OTHER BANK TO REPURCHASE SUCH SECURITIES FROM THE TRUST;
(B) IN CONNECTION WITH CONVERSION, EXCHANGE OR SURRENDER
OF SECURITIES OWNED BY THE TRUST AS SET FORTH IN SUBSECTION 3.2
HEREOF;
(C) FOR THE REDEMPTION OR REPURCHASE OF SHARES ISSUED BY
THE TRUST;
(D) FOR THE PAYMENT OF ANY EXPENSE OR LIABILITY INCURRED BY
THE TRUST, INCLUDING BUT NOT LIMITED TO THE FOLLOWING PAYMENTS FOR
THE ACCOUNT OF THE TRUST: CUSTODIAN FEES, INTEREST, TAXES,
MANAGEMENT, ACCOUNTING, TRANSFER AGENT AND LEGAL FEES AND OPERATING
EXPENSES OF THE TRUST WHETHER OR NOT SUCH EXPENSES ARE TO BE IN
WHOLE OR PART CAPITALIZED OR TREATED AS DEFERRED EXPENSES; AND
(E) FOR THE PAYMENT OF ANY DIVIDENDS OR DISTRIBUTIONS DECLARED
BY THE BOARD OF TRUSTEES WITH RESPECT TO THE SHARES.
3.7 APPOINTMENT OF SUBCUSTODIANS. THE CUSTODIAN MAY, UPON RECEIPT OF
PROPER INSTRUCTIONS, APPOINT ANOTHER BANK OR TRUST COMPANY, WHICH IS ITSELF
QUALIFIED UNDER THE INVESTMENT COMPANY ACT TO ACT AS A CUSTODIAN (A
"SUBCUSTODIAN"), AS THE AGENT OF THE CUSTODIAN TO CARRY OUT SUCH OF THE DUTIES
OF THE CUSTODIAN HEREUNDER AS THE CUSTODIAN MAY FROM TIME TO TIME DIRECT;
PROVIDED, HOWEVER, THAT THE APPOINTMENT OF ANY SUBCUSTODIAN SHALL NOT RELIEVE
THE CUSTODIAN OF ITS RESPONSIBILITIES OR LIABILITIES HEREUNDER.
3.8 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. THE CUSTODIAN MAY
DEPOSIT AND/OR MAINTAIN DOMESTIC SECURITIES OWNED BY THE TRUST IN A SECURITIES
SYSTEM IN ACCORDANCE WITH APPLICABLE FEDERAL RESERVE BOARD AND SECURITIES AND
EXCHANGE COMMISSION RULES AND REGULATIONS, IF ANY, AND SUBJECT TO THE FOLLOWING
PROVISIONS:
(A) THE CUSTODIAN MAY HOLD DOMESTIC SECURITIES OF THE TRUST IN
THE DEPOSITORY TRUST COMPANY OR THE FEDERAL RESERVE'S BOOK ENTRY
SYSTEM OR, UPON RECEIPT OF PROPER INSTRUCTIONS, IN ANOTHER
SECURITIES SYSTEM PROVIDED THAT SUCH SECURITIES ARE HELD IN AN
ACCOUNT OF THE CUSTODIAN IN THE SECURITIES SYSTEM ("SECURITIES
SYSTEM ACCOUNT") WHICH SHALL NOT INCLUDE ANY ASSETS OF THE CUSTODIAN
OTHER THAN ASSETS HELD AS A FIDUCIARY, CUSTODIAN OR OTHERWISE FOR
CUSTOMERS;
(B) THE RECORDS OF THE CUSTODIAN WITH RESPECT TO DOMESTIC
SECURITIES OF THE TRUST WHICH ARE MAINTAINED IN A SECURITIES SYSTEM
SHALL IDENTIFY BY BOOK-ENTRY THOSE DOMESTIC SECURITIES BELONGING TO
THE TRUST;
(C) THE CUSTODIAN SHALL PAY FOR DOMESTIC SECURITIES PURCHASED
FOR THE ACCOUNT OF THE TRUST UPON (I) RECEIPT OF ADVICE FROM THE
SECURITIES SYSTEM THAT SUCH SECURITIES HAVE BEEN TRANSFERRED TO THE
SECURITIES SYSTEM ACCOUNT, AND (II) THE MAKING OF AN ENTRY ON THE
RECORDS OF THE CUSTODIAN TO REFLECT SUCH PAYMENT AND TRANSFER FOR
THE ACCOUNT OF THE TRUST. THE CUSTODIAN SHALL TRANSFER DOMESTIC
SECURITIES SOLD FOR THE ACCOUNT OF THE TRUST UPON (A) RECEIPT OF
ADVICE FROM THE SECURITIES SYSTEM THAT PAYMENT FOR SUCH SECURITIES
HAS BEEN TRANSFERRED TO THE SECURITIES SYSTEM ACCOUNT, AND (B) THE
MAKING OF AN ENTRY ON THE RECORDS OF THE CUSTODIAN TO REFLECT SUCH
TRANSFER AND PAYMENT FOR THE ACCOUNT OF THE TRUST. COPIES OF ALL
ADVICES FROM THE SECURITIES SYSTEM OF TRANSFERS OF DOMESTIC
SECURITIES FOR THE ACCOUNT OF THE TRUST SHALL BE MAINTAINED FOR THE
TRUST BY THE CUSTODIAN AND BE PROVIDED TO THE TRUST AT ITS REQUEST.
UPON REQUEST, THE CUSTODIAN SHALL FURNISH THE TRUST CONFIRMATION OF
EACH TRANSFER TO OR FROM THE ACCOUNT OF THE TRUST IN THE FORM OF A
WRITTEN ADVICE OR NOTICE; AND
(D) UPON REQUEST, THE CUSTODIAN SHALL PROVIDE THE TRUST WITH
ANY REPORT OBTAINED BY THE CUSTODIAN ON THE SECURITIES SYSTEM'S
ACCOUNTING SYSTEM, INTERNAL ACCOUNTING CONTROL AND PROCEDURES FOR
SAFEGUARDING DOMESTIC SECURITIES DEPOSITED IN THE SECURITIES SYSTEM.
3.9 SEGREGATED ACCOUNT. THE CUSTODIAN SHALL UPON RECEIPT OF PROPER
INSTRUCTIONS ESTABLISH AND MAINTAIN A SEGREGATED ACCOUNT OR ACCOUNTS FOR AND ON
BEHALF OF THE TRUST, INTO WHICH ACCOUNT OR ACCOUNTS MAY BE TRANSFERRED CASH
AND/OR SECURITIES, INCLUDING SECURITIES MAINTAINED IN AN ACCOUNT BY THE
CUSTODIAN PURSUANT TO SECTION 3.8 HEREOF, (I) IN ACCORDANCE WITH THE PROVISIONS
OF ANY AGREEMENT AMONG THE TRUST, THE CUSTODIAN AND A BROKER-DEALER OR FUTURES
COMMISSION MERCHANT, RELATING TO COMPLIANCE WITH THE RULES OF REGISTERED
CLEARING CORPORATIONS AND OF ANY NATIONAL SECURITIES EXCHANGE (OR THE COMMODITY
FUTURES TRADING COMMISSION OR ANY REGISTERED CONTRACT MARKET), OR OF ANY SIMILAR
ORGANIZATION OR ORGANIZATIONS, REGARDING ESCROW OR OTHER ARRANGEMENTS IN
CONNECTION WITH TRANSACTIONS BY THE TRUST, (II) FOR PURPOSES OF SEGREGATING CASH
OR SECURITIES IN CONNECTION WITH OPTIONS PURCHASED, SOLD OR WRITTEN BY THE TRUST
OR COMMODITY FUTURES CONTRACTS OR OPTIONS THEREON PURCHASED OR SOLD BY THE TRUST
AND (III) FOR OTHER PROPER CORPORATE PURPOSES, BUT ONLY, IN THE CASE OF THIS
CLAUSE (III), UPON RECEIPT OF, IN ADDITION TO PROPER INSTRUCTIONS, A CERTIFIED
COPY OF A RESOLUTION OF THE BOARD OF TRUSTEES OR OF THE EXECUTIVE COMMITTEE
CERTIFIED BY THE SECRETARY OR AN ASSISTANT SECRETARY, SETTING FORTH THE PURPOSE
OR PURPOSES OF SUCH SEGREGATED ACCOUNT AND DECLARING SUCH PURPOSES TO BE PROPER
CORPORATE PURPOSES.
3.10 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. THE CUSTODIAN SHALL
EXECUTE OWNERSHIP AND OTHER CERTIFICATES AND AFFIDAVITS FOR ALL FEDERAL AND
STATE TAX PURPOSES IN CONNECTION WITH RECEIPT OF INCOME OR OTHER PAYMENTS WITH
RESPECT TO DOMESTIC SECURITIES OF THE TRUST HELD BY IT AND IN CONNECTION WITH
TRANSFERS OF SUCH SECURITIES.
3.11 PROXIES. THE CUSTODIAN SHALL, WITH RESPECT TO THE SECURITIES
HELD HEREUNDER, PROMPTLY DELIVER TO THE TRUST ALL PROXIES, ALL PROXY SOLICITING
MATERIALS AND ALL NOTICES RELATING TO SUCH SECURITIES. IF THE SECURITIES ARE
REGISTERED OTHERWISE THAN IN THE NAME OF THE TRUST OR A NOMINEE OF THE TRUST,
THE CUSTODIAN SHALL USE ITS BEST REASONABLE EFFORTS, CONSISTENT WITH APPLICABLE
LAW, TO CAUSE ALL PROXIES TO BE PROMPTLY EXECUTED BY THE REGISTERED HOLDER OF
SUCH SECURITIES IN ACCORDANCE WITH PROPER INSTRUCTIONS.
3.12 COMMUNICATIONS RELATING TO TRUST PORTFOLIO SECURITIES. THE
CUSTODIAN SHALL TRANSMIT PROMPTLY TO THE TRUST ALL WRITTEN INFORMATION
(INCLUDING, WITHOUT LIMITATION, PENDENCY OF CALLS AND MATURITIES OF SECURITIES
AND EXPIRATIONS OF RIGHTS IN CONNECTION THEREWITH AND NOTICES OF EXERCISE OF PUT
AND CALL OPTIONS WRITTEN BY THE TRUST AND THE MATURITY OF FUTURES CONTRACTS
PURCHASED OR SOLD BY THE TRUST) RECEIVED BY THE CUSTODIAN FROM ISSUERS OF
SECURITIES BEING HELD FOR THE TRUST. WITH RESPECT TO TENDER OR EXCHANGE OFFERS,
THE CUSTODIAN SHALL TRANSMIT PROMPTLY TO THE TRUST ALL WRITTEN INFORMATION
RECEIVED BY THE CUSTODIAN FROM ISSUERS OF THE SECURITIES WHOSE TENDER OR
EXCHANGE IS SOUGHT AND FROM THE PARTY (OR ITS AGENTS) MAKING THE TENDER OR
EXCHANGE OFFER. IF THE TRUST DESIRES TO TAKE ACTION WITH RESPECT TO ANY TENDER
OFFER, EXCHANGE OFFER OR ANY OTHER SIMILAR TRANSACTION, THE TRUST SHALL NOTIFY
THE CUSTODIAN AT LEAST THREE BUSINESS DAYS PRIOR TO THE DATE OF WHICH THE
CUSTODIAN IS TO TAKE SUCH ACTION.
3.13 REPORTS BY CUSTODIAN. THE CUSTODIAN SHALL SUPPLY TO THE
TRUST THE DAILY, WEEKLY AND MONTHLY REPORTS DESCRIBED IN THE GUIDELINES AS
WELL AS ANY OTHER REPORTS WHICH THE CUSTODIAN AND THE TRUST MAY AGREE UPON
FROM TIME TO TIME.
SECTION 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF
THE TRUST HELD OUTSIDE THE UNITED STATES
4.1 CUSTODY OUTSIDE THE UNITED STATES. THE TRUST AUTHORIZES THE
CUSTODIAN TO HOLD FOREIGN SECURITIES AND CASH IN CUSTODY ACCOUNTS WHICH HAVE
BEEN ESTABLISHED BY THE CUSTODIAN WITH (I) ITS FOREIGN BRANCHES, (II) FOREIGN
BANKING INSTITUTIONS, FOREIGN BRANCHES OF UNITED STATES BANKS AND SUBSIDIARIES
OF UNITED STATES BANKS OR BANK HOLDING COMPANIES (EACH A "FOREIGN CUSTODIAN")
AND (III) FOREIGN SECURITIES DEPOSITORIES OR CLEARING AGENCIES (EACH A "FOREIGN
SECURITIES DEPOSITORY"); PROVIDED, HOWEVER, THAT THE BOARD OF TRUSTEES OR THE
EXECUTIVE COMMITTEE HAS APPROVED IN ADVANCE THE USE OF EACH SUCH FOREIGN
CUSTODIAN AND FOREIGN SECURITIES DEPOSITORY AND THE CONTRACT BETWEEN THE
CUSTODIAN AND EACH FOREIGN CUSTODIAN AND THAT SUCH APPROVAL IS SET FORTH IN
PROPER INSTRUCTIONS AND A CERTIFIED COPY OF A RESOLUTION OF THE BOARD OF
TRUSTEES OR OF THE EXECUTIVE COMMITTEE CERTIFIED BY THE SECRETARY OR AN
ASSISTANT SECRETARY OF THE TRUST. UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN
THIS SECTION 4, CUSTODY OF FOREIGN SECURITIES AND ASSETS HELD OUTSIDE THE UNITED
STATES BY THE CUSTODIAN, A FOREIGN CUSTODIAN OR THROUGH A FOREIGN SECURITIES
DEPOSITORY SHALL BE GOVERNED BY SECTION 3 HEREOF.
4.2 ASSETS TO BE HELD. THE CUSTODIAN SHALL LIMIT THE SECURITIES AND
OTHER ASSETS MAINTAINED IN THE CUSTODY OF ITS FOREIGN BRANCHES, FOREIGN
CUSTODIANS AND FOREIGN SECURITIES DEPOSITORIES TO: (I) "FOREIGN SECURITIES", AS
DEFINED IN PARAGRAPH (C) (1) OF RULE 17F-5 UNDER THE INVESTMENT COMPANY ACT, AND
(II) CASH AND CASH EQUIVALENTS IN SUCH AMOUNTS AS THE CUSTODIAN OR THE TRUST MAY
DETERMINE TO BE REASONABLY NECESSARY TO EFFECT THE TRUST'S FOREIGN SECURITIES
TRANSACTIONS.
4.3 FOREIGN SECURITIES DEPOSITORIES. EXCEPT AS MAY OTHERWISE BE
AGREED UPON IN WRITING BY THE CUSTODIAN AND THE TRUST, ASSETS OF THE TRUST SHALL
BE MAINTAINED IN FOREIGN SECURITIES DEPOSITORIES ONLY THROUGH ARRANGEMENTS
IMPLEMENTED BY THE CUSTODIAN OR FOREIGN CUSTODIANS PURSUANT TO THE TERMS HEREOF.
4.4 SEGREGATION OF SECURITIES. THE CUSTODIAN SHALL IDENTIFY ON
ITS BOOKS AND RECORDS AS BELONGING TO THE TRUST, THE FOREIGN SECURITIES OF
THE TRUST HELD BY EACH FOREIGN CUSTODIAN.
4.5 AGREEMENTS WITH FOREIGN CUSTODIANS. EACH AGREEMENT WITH A
FOREIGN CUSTODIAN SHALL PROVIDE GENERALLY THAT: (A) THE TRUST'S ASSETS WILL NOT
BE SUBJECT TO ANY RIGHT, CHARGE, SECURITY INTEREST, LIEN OR CLAIM OF ANY KIND IN
FAVOR OF THE FOREIGN CUSTODIAN OR ITS CREDITORS, EXCEPT A CLAIM OF PAYMENT FOR
THEIR SAFE CUSTODY OR ADMINISTRATION; (B) BENEFICIAL OWNERSHIP FOR THE TRUST'S
ASSETS WILL BE FREELY TRANSFERABLE WITHOUT THE PAYMENT OF MONEY OR VALUE OTHER
THAN FOR CUSTODY OR ADMINISTRATION; (C) ADEQUATE RECORDS WILL BE MAINTAINED
IDENTIFYING THE ASSETS AS BELONGING TO THE TRUST; (D) THE INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE TRUST, WILL BE GIVEN ACCESS TO THE RECORDS OF THE FOREIGN
CUSTODIAN RELATING TO THE ASSETS OF THE TRUST OR CONFIRMATION OF THE CONTENTS OF
THOSE RECORDS; (E) THE DISPOSITION OF ASSETS OF THE TRUST HELD BY THE FOREIGN
CUSTODIAN WILL BE SUBJECT ONLY TO THE INSTRUCTIONS OF THE CUSTODIAN OR ITS
AGENTS; (F) THE FOREIGN CUSTODIAN SHALL INDEMNIFY AND HOLD HARMLESS THE
CUSTODIAN AND THE TRUST FROM AND AGAINST ANY LOSS, DAMAGE, COST, EXPENSE,
LIABILITY OR CLAIM ARISING OUT OF OR IN CONNECTION WITH THE FOREIGN CUSTODIAN'S
PERFORMANCE OF ITS OBLIGATIONS UNDER SUCH AGREEMENT; (G) TO THE EXTENT
PRACTICABLE, THE TRUST'S ASSETS WILL BE ADEQUATELY INSURED IN THE EVENT OF LOSS;
AND (H) THE CUSTODIAN WILL RECEIVE PERIODIC REPORTS WITH RESPECT TO THE
SAFEKEEPING OF THE TRUST'S ASSETS, INCLUDING NOTIFICATION OF ANY TRANSFER TO OR
FROM THE TRUST'S ACCOUNT.
4.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE TRUST. UPON REQUEST OF
THE TRUST, THE CUSTODIAN WILL USE ITS BEST REASONABLE EFFORTS TO ARRANGE FOR THE
INDEPENDENT ACCOUNTANTS OF THE TRUST TO BE AFFORDED ACCESS TO THE BOOKS AND
RECORDS OF ANY FOREIGN CUSTODIAN INSOFAR AS SUCH BOOKS AND RECORDS RELATE TO THE
CUSTODY BY ANY SUCH FOREIGN CUSTODIAN OF ASSETS OF THE TRUST.
4.7 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNTS. UPON RECEIPT OF PROPER
INSTRUCTIONS, THE CUSTODIAN SHALL INSTRUCT THE APPROPRIATE FOREIGN CUSTODIAN TO
TRANSFER, EXCHANGE OR DELIVER FOREIGN SECURITIES OWNED BY THE TRUST, BUT, EXCEPT
TO THE EXTENT EXPLICITLY PROVIDED HEREIN, ONLY IN ANY OF THE CASES SPECIFIED IN
SUBSECTION 3.2. UPON RECEIPT OF PROPER INSTRUCTIONS, THE CUSTODIAN SHALL PAY OUT
OR INSTRUCT THE APPROPRIATE FOREIGN CUSTODIAN TO PAY OUT MONIES OF THE TRUST IN
ANY OF THE CASES SPECIFIED IN SUBSECTION 3.6. NOTWITHSTANDING ANYTHING HEREIN TO
THE CONTRARY, SETTLEMENT AND PAYMENT FOR FOREIGN SECURITIES RECEIVED FOR THE
ACCOUNT OF THE TRUST AND DELIVERY OF FOREIGN SECURITIES MAINTAINED FOR THE
ACCOUNT OF THE TRUST MAY BE EFFECTED IN ACCORDANCE WITH THE CUSTOMARY OR
ESTABLISHED SECURITIES TRADING OR SECURITIES PROCESSING PRACTICES AND PROCEDURES
IN THE JURISDICTION OR MARKET IN WHICH THE TRANSACTION OCCURS, INCLUDING,
WITHOUT LIMITATION, DELIVERING SECURITIES TO THE PURCHASER THEREOF OR TO A
DEALER THEREFOR (OR AN AGENT FOR SUCH PURCHASER OR DEALER) AGAINST A RECEIPT
WITH THE EXPECTATION OF RECEIVING LATER PAYMENT FOR SUCH SECURITIES FROM SUCH
PURCHASER OR DEALER. FOREIGN SECURITIES MAINTAINED IN THE CUSTODY OF A FOREIGN
CUSTODIAN MAY BE MAINTAINED IN THE NAME OF SUCH ENTITY OR ITS NOMINEE NAME TO
THE SAME EXTENT AS SET FORTH IN SECTION 3.3 OF THIS AGREEMENT AND THE TRUST
AGREES TO HOLD ANY FOREIGN CUSTODIAN AND ITS NOMINEE HARMLESS FROM ANY LIABILITY
AS A HOLDER OF RECORD OF SUCH SECURITIES.
4.8 LIABILITY OF FOREIGN CUSTODIAN. EACH AGREEMENT BETWEEN THE
CUSTODIAN AND A FOREIGN CUSTODIAN SHALL REQUIRE THE FOREIGN CUSTODIAN TO
EXERCISE REASONABLE CARE IN THE PERFORMANCE OF ITS DUTIES AND TO INDEMNIFY AND
HOLD HARMLESS THE CUSTODIAN AND THE TRUST FROM AND AGAINST ANY LOSS, DAMAGE,
COST, EXPENSE, LIABILITY OR CLAIM ARISING OUT OF OR IN CONNECTION WITH THE
FOREIGN CUSTODIAN'S PERFORMANCE OF SUCH OBLIGATIONS. AT THE ELECTION OF THE
TRUST, IT SHALL BE ENTITLED TO BE SUBROGATED TO THE RIGHTS OF THE CUSTODIAN WITH
RESPECT TO ANY CLAIMS AGAINST A FOREIGN CUSTODIAN AS A CONSEQUENCE OF ANY SUCH
LOSS, DAMAGE, COST, EXPENSE, LIABILITY OR CLAIM IF AND TO THE EXTENT THAT THE
TRUST HAS NOT BEEN MADE WHOLE FOR ANY SUCH LOSS, DAMAGE, COST, EXPENSE,
LIABILITY OR CLAIM.
4.9 MONITORING RESPONSIBILITIES.
(A) THE CUSTODIAN WILL PROMPTLY INFORM THE TRUST IN THE EVENT
THAT THE CUSTODIAN LEARNS OF A MATERIAL ADVERSE CHANGE IN THE
FINANCIAL CONDITION OF A FOREIGN CUSTODIAN OR IS NOTIFIED BY (I) A
FOREIGN BANKING INSTITUTION EMPLOYED AS A FOREIGN CUSTODIAN THAT
THERE APPEARS TO BE A SUBSTANTIAL LIKELIHOOD THAT ITS SHAREHOLDERS'
EQUITY WILL DECLINE BELOW $200 MILLION OR THAT ITS SHAREHOLDERS'
EQUITY HAS DECLINED BELOW $200 MILLION (IN EACH CASE COMPUTED IN
ACCORDANCE WITH GENERALLY ACCEPTED UNITED STATES ACCOUNTING
PRINCIPLES) AND DENOMINATED IN U.S. DOLLARS, OR (II) A SUBSIDIARY OF
A UNITED STATES BANK OR BANK HOLDING COMPANY ACTING AS A FOREIGN
CUSTODIAN THAT THERE APPEARS TO BE A SUBSTANTIAL LIKELIHOOD THAT ITS
SHAREHOLDERS' EQUITY WILL DECLINE BELOW $100 MILLION OR THAT ITS
SHAREHOLDERS' EQUITY HAS DECLINED BELOW $100 MILLION (IN EACH CASE
COMPUTED IN ACCORDANCE WITH GENERALLY ACCEPTED UNITED STATES
ACCOUNTING PRINCIPLES) AND DENOMINATED IN U.S. DOLLARS.
(B) THE CUSTODIAN WILL FURNISH SUCH INFORMATION AS MAY BE
REASONABLY NECESSARY TO ASSIST THE TRUST'S BOARD OF TRUSTEES IN ITS
ANNUAL REVIEW AND APPROVAL OF THE CONTINUANCE OF ALL CONTRACTS OR
ARRANGEMENTS WITH FOREIGN SUBCUSTODIANS.
SECTION 5. PROPER INSTRUCTIONS
AS USED IN THIS AGREEMENT, THE TERM "PROPER INSTRUCTIONS" MEANS
INSTRUCTIONS OF THE TRUST RECEIVED BY THE CUSTODIAN VIA TELEPHONE OR IN WRITING
WHICH THE CUSTODIAN BELIEVES IN GOOD FAITH TO HAVE BEEN GIVEN BY AUTHORIZED
PERSONS (AS DEFINED BELOW) OR WHICH ARE TRANSMITTED WITH PROPER TESTING OR
AUTHENTICATION PURSUANT TO TERMS AND CONDITIONS WHICH THE CUSTODIAN MAY SPECIFY.
ANY PROPER INSTRUCTIONS DELIVERED TO THE CUSTODIAN BY TELEPHONE SHALL PROMPTLY
THEREAFTER BE CONFIRMED IN WRITING BY AN AUTHORIZED PERSON, BUT THE TRUST WILL
HOLD THE CUSTODIAN HARMLESS FOR ITS FAILURE TO SEND SUCH CONFIRMATION IN
WRITING, THE FAILURE OF SUCH CONFIRMATION TO CONFORM TO THE TELEPHONE
INSTRUCTIONS RECEIVED OR THE CUSTODIAN'S FAILURE TO PRODUCE SUCH CONFIRMATION AT
ANY SUBSEQUENT TIME. UNLESS OTHERWISE EXPRESSLY PROVIDED, ALL PROPER
INSTRUCTIONS SHALL CONTINUE IN FULL FORCE AND EFFECT UNTIL CANCELLED OR
SUPERSEDED. IF THE CUSTODIAN REQUIRES TEST ARRANGEMENTS, AUTHENTICATION METHODS
OR OTHER SECURITY DEVICES TO BE USED WITH RESPECT TO PROPER INSTRUCTIONS, ANY
PROPER INSTRUCTIONS GIVEN BY THE TRUST THEREAFTER SHALL BE GIVEN AND PROCESSED
IN ACCORDANCE WITH SUCH TERMS AND CONDITIONS FOR THE USE OF SUCH ARRANGEMENTS,
METHODS OR DEVICES AS THE CUSTODIAN MAY PUT INTO EFFECT AND MODIFY FROM TIME TO
TIME. THE TRUST SHALL SAFEGUARD ANY TESTKEYS, IDENTIFICATION CODES OR OTHER
SECURITY DEVICES WHICH THE CUSTODIAN SHALL MAKE AVAILABLE TO IT. THE CUSTODIAN
MAY ELECTRONICALLY RECORD ANY PROPER INSTRUCTIONS GIVEN BY TELEPHONE, AND ANY
OTHER TELEPHONE DISCUSSIONS, WITH RESPECT TO ITS ACTIVITIES HEREUNDER. AS USED
IN THIS AGREEMENT, THE TERM "AUTHORIZED PERSONS" MEANS SUCH OFFICERS OR SUCH
AGENTS OF THE TRUST AS HAVE BEEN DESIGNATED BY A RESOLUTION OF THE BOARD OF
TRUSTEES OR OF THE EXECUTIVE COMMITTEE, A CERTIFIED COPY OF WHICH HAS BEEN
PROVIDED TO THE CUSTODIAN, TO ACT ON BEHALF OF THE TRUST UNDER THIS AGREEMENT.
EACH OF SUCH PERSONS SHALL CONTINUE TO BE AN AUTHORIZED PERSON UNTIL SUCH TIME
AS THE CUSTODIAN RECEIVES PROPER INSTRUCTIONS THAT ANY SUCH OFFICER OR AGENT IS
NO LONGER AN AUTHORIZED PERSON.
SECTION 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
THE CUSTODIAN MAY IN ITS DISCRETION, WITHOUT EXPRESS AUTHORITY
FROM THE TRUST:
(A) MAKE PAYMENTS TO ITSELF OR OTHERS FOR MINOR EXPENSES OF
HANDLING SECURITIES OR OTHER SIMILAR ITEMS RELATING TO ITS DUTIES
UNDER THIS AGREEMENT, PROVIDED THAT ALL SUCH PAYMENTS SHALL BE
ACCOUNTED FOR TO THE TRUST;
(B) ENDORSE FOR COLLECTION, IN THE NAME OF THE TRUST,
CHECKS, DRAFTS AND OTHER NEGOTIABLE INSTRUMENTS; AND
(C) IN GENERAL, ATTEND TO ALL NON-DISCRETIONARY DETAILS IN
CONNECTION WITH THE SALE, EXCHANGE, SUBSTITUTION, PURCHASE, TRANSFER
AND OTHER DEALINGS WITH THE SECURITIES AND PROPERTY OF THE TRUST
EXCEPT AS OTHERWISE PROVIDED IN PROPER INSTRUCTIONS.
SECTION 7. EVIDENCE OF AUTHORITY
THE CUSTODIAN SHALL BE PROTECTED IN ACTING UPON ANY INSTRUCTIONS
(CONVEYED BY TELEPHONE OR IN WRITING), NOTICE, REQUEST, CONSENT, CERTIFICATE OR
OTHER INSTRUMENT OR PAPER BELIEVED BY IT TO BE GENUINE AND TO HAVE BEEN PROPERLY
GIVEN OR EXECUTED BY OR ON BEHALF OF THE TRUST. THE CUSTODIAN MAY RECEIVE AND
ACCEPT A CERTIFIED COPY OF A RESOLUTION OF THE BOARD OF TRUSTEES OR EXECUTIVE
COMMITTEE AS CONCLUSIVE EVIDENCE (A) OF THE AUTHORITY OF ANY PERSON TO ACT IN
ACCORDANCE WITH SUCH RESOLUTION OR (B) OF ANY DETERMINATION OR OF ANY ACTION BY
THE BOARD OF TRUSTEES OR EXECUTIVE COMMITTEE AS DESCRIBED IN SUCH RESOLUTION,
AND SUCH RESOLUTION MAY BE CONSIDERED AS IN FULL FORCE AND EFFECT UNTIL RECEIPT
BY THE CUSTODIAN OF WRITTEN NOTICE BY AN AUTHORIZED PERSON TO THE CONTRARY.
SECTION 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
THE CUSTODIAN SHALL COOPERATE WITH AND SUPPLY NECESSARY INFORMATION
IN ITS POSSESSION (TO THE EXTENT PERMISSIBLE UNDER APPLICABLE LAW) TO THE ENTITY
OR ENTITIES APPOINTED BY THE BOARD OF TRUSTEES TO KEEP THE BOOKS OF ACCOUNT OF
THE TRUST AND/OR COMPUTE THE NET ASSET VALUE PER SHARE OF THE OUTSTANDING SHARES
OF THE TRUST.
SECTION 9. RECORDS
THE CUSTODIAN SHALL CREATE AND MAINTAIN ALL RECORDS RELATING TO ITS
ACTIVITIES UNDER THIS AGREEMENT WHICH ARE REQUIRED WITH RESPECT TO SUCH
ACTIVITIES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT AND RULES 31A-1 AND
31A-2 THEREUNDER. ALL SUCH RECORDS SHALL BE THE PROPERTY OF THE TRUST AND SHALL
AT ALL TIMES DURING THE REGULAR BUSINESS HOURS OF THE CUSTODIAN BE OPEN FOR
INSPECTION BY DULY AUTHORIZED OFFICERS, EMPLOYEES OR AGENTS OF THE TRUST AND
EMPLOYEES AND AGENTS OF THE SECURITIES AND EXCHANGE COMMISSION. THE CUSTODIAN
SHALL, AT THE TRUST'S REQUEST, SUPPLY THE TRUST WITH A TABULATION OF SECURITIES
OWNED BY THE TRUST AND HELD BY THE CUSTODIAN AND SHALL, WHEN REQUESTED TO DO SO
BY THE TRUST AND FOR SUCH COMPENSATION AS SHALL BE AGREED UPON BETWEEN THE TRUST
AND THE CUSTODIAN, INCLUDE CERTIFICATE NUMBERS IN SUCH TABULATIONS.
SECTION 10. COMPENSATION OF CUSTODIAN
THE CUSTODIAN SHALL BE ENTITLED TO REASONABLE COMPENSATION FOR
ITS SERVICES AND EXPENSES AS CUSTODIAN, AS AGREED UPON FROM TIME TO TIME
BETWEEN THE TRUST AND THE CUSTODIAN.
SECTION 11. RESPONSIBILITY OF CUSTODIAN
THE CUSTODIAN SHALL BE RESPONSIBLE FOR THE PERFORMANCE OF ONLY SUCH
DUTIES AS ARE SET FORTH HEREIN OR CONTAINED IN PROPER INSTRUCTIONS AND SHALL USE
REASONABLE CARE IN CARRYING OUT SUCH DUTIES. THE CUSTODIAN SHALL BE LIABLE TO
THE TRUST FOR ANY LOSS WHICH SHALL OCCUR AS THE RESULT OF THE FAILURE OF A
FOREIGN CUSTODIAN OR A FOREIGN SECURITIES DEPOSITORY ENGAGED BY SUCH FOREIGN
CUSTODIAN OR THE CUSTODIAN TO EXERCISE REASONABLE CARE WITH RESPECT TO THE
SAFEKEEPING OF SECURITIES AND OTHER ASSETS OF THE TRUST TO THE SAME EXTENT THAT
THE CUSTODIAN WOULD BE LIABLE TO THE TRUST IF THE CUSTODIAN ITSELF WERE HOLDING
SUCH SECURITIES AND OTHER ASSETS. IN THE EVENT OF ANY LOSS TO THE TRUST BY
REASON OF THE FAILURE OF THE CUSTODIAN, A FOREIGN CUSTODIAN OR A FOREIGN
SECURITIES DEPOSITORY ENGAGED BY SUCH FOREIGN CUSTODIAN OR THE CUSTODIAN TO
UTILIZE REASONABLE CARE, THE CUSTODIAN SHALL BE LIABLE TO THE TRUST TO THE
EXTENT OF THE TRUST'S DAMAGES, TO BE DETERMINED BASED ON THE MARKET VALUE OF THE
PROPERTY WHICH IS THE SUBJECT OF THE LOSS AT THE DATE OF DISCOVERY OF SUCH LOSS
AND WITHOUT REFERENCE TO ANY SPECIAL CONDITIONS OR CIRCUMSTANCES. THE CUSTODIAN
SHALL BE HELD TO THE EXERCISE OF REASONABLE CARE IN CARRYING OUT THIS AGREEMENT.
THE TRUST AGREES TO INDEMNIFY AND HOLD HARMLESS THE CUSTODIAN AND ITS NOMINEES
FROM ALL TAXES, CHARGES, EXPENSES, ASSESSMENTS, CLAIMS AND LIABILITIES
(INCLUDING LEGAL FEES AND EXPENSES) INCURRED BY ANY OF THEM IN CONNECTION WITH
THE PERFORMANCE OF THIS AGREEMENT, EXCEPT SUCH AS MAY ARISE FROM ANY NEGLIGENT
ACTION, NEGLIGENT FAILURE TO ACT OR WILLFUL MISCONDUCT ON THE PART OF THE
INDEMNIFIED ENTITY OR ANY FOREIGN CUSTODIAN OR FOREIGN SECURITIES DEPOSITORY.
THE CUSTODIAN SHALL BE ENTITLED TO RELY, AND MAY ACT, ON ADVICE OF COUNSEL (WHO
MAY BE COUNSEL FOR THE TRUST) ON ALL MATTERS AND SHALL BE WITHOUT LIABILITY FOR
ANY ACTION REASONABLY TAKEN OR OMITTED PURSUANT TO SUCH ADVICE. THE CUSTODIAN
NEED NOT MAINTAIN ANY INSURANCE FOR THE BENEFIT OF THE TRUST.
ALL COLLECTIONS OF FUNDS OR OTHER PROPERTY PAID OR DISTRIBUTED IN
RESPECT OF SECURITIES HELD BY THE CUSTODIAN, AGENT, SUBCUSTODIAN OR FOREIGN
CUSTODIAN HEREUNDER SHALL BE MADE AT THE RISK OF THE TRUST. THE CUSTODIAN SHALL
HAVE NO LIABILITY FOR ANY LOSS OCCASIONED BY DELAY IN THE ACTUAL RECEIPT OF
NOTICE BY THE CUSTODIAN, AGENT, SUBCUSTODIAN OR BY A FOREIGN CUSTODIAN OF ANY
PAYMENT, REDEMPTION OR OTHER TRANSACTION REGARDING SECURITIES IN RESPECT OF
WHICH THE CUSTODIAN HAS AGREED TO TAKE ACTION AS PROVIDED IN SECTION 3 HEREOF.
THE CUSTODIAN SHALL NOT BE LIABLE FOR ANY ACTION TAKEN IN GOOD FAITH UPON PROPER
INSTRUCTIONS OR UPON ANY CERTIFIED COPY OF ANY RESOLUTION OF THE BOARD OF
TRUSTEES AND MAY RELY ON THE GENUINENESS OF ANY SUCH DOCUMENTS WHICH IT MAY IN
GOOD FAITH BELIEVE TO BE VALIDLY EXECUTED. THE CUSTODIAN SHALL NOT BE LIABLE FOR
ANY LOSS RESULTING FROM, OR CAUSED BY, THE DIRECTION OF THE TRUST TO MAINTAIN
CUSTODY OF ANY SECURITIES OR CASH IN A FOREIGN COUNTRY INCLUDING, BUT NOT
LIMITED TO, LOSSES RESULTING FROM NATIONALIZATION, EXPROPRIATION, CURRENCY
RESTRICTIONS, CIVIL DISTURBANCE, ACTS OF WAR OR TERRORISM, INSURRECTION,
REVOLUTION, NUCLEAR FUSION, FISSION OR RADIATION OR OTHER SIMILAR OCCURRENCES OR
EVENTS BEYOND THE CONTROL OF THE CUSTODIAN. FINALLY, THE CUSTODIAN SHALL NOT BE
LIABLE FOR ANY TAXES, INCLUDING INTEREST AND PENALTIES WITH RESPECT THERETO,
THAT MAY BE LEVIED OR ASSESSED UPON OR IN RESPECT OF ANY ASSETS OF THE TRUST
HELD BY THE CUSTODIAN.
SECTION 12. LIMITED LIABILITY OF THE TRUST
THE CUSTODIAN ACKNOWLEDGES THAT IT HAS RECEIVED NOTICE OF AND
ACCEPTS THE LIMITATIONS OF THE TRUST'S LIABILITY AS SET FORTH IN ITS AGREEMENT
AND DECLARATION OF TRUST. THE CUSTODIAN AGREES THAT THE TRUST'S OBLIGATION
HEREUNDER SHALL BE LIMITED TO THE ASSETS OF THE TRUST, AND THAT THE CUSTODIAN
SHALL NOT SEEK SATISFACTION OF ANY SUCH OBLIGATION FROM THE SHAREHOLDERS OF THE
TRUST NOR FROM ANY TRUSTEE, OFFICER, EMPLOYEE, OR AGENT OF THE TRUST.
SECTION 13. CALIFORNIA DEPARTMENT OF INSURANCE
SHOULD THE CALIFORNIA DEPARTMENT OF INSURANCE (THE "DEPARTMENT")
SUCCEED TO CONTROL OF THE TRUST'S ASSETS IN THE EVENT OF THE INSOLVENCY OF THE
TRUST, THE CUSTODIAN SHALL, UPON NOTICE OF SUCH SUCCESSION IN WRITING TO THE
CUSTODIAN BY THE DEPARTMENT, RECOGNIZE THE DEPARTMENT'S SUCCESSION TO THE
TRUST'S RIGHTS AND OBLIGATIONS UNDER THIS AGREEMENT AND, ACCORDINGLY, WILL CEASE
TO ACCEPT INSTRUCTIONS FROM AUTHORIZED PERSONS OF THE TRUST AND SHALL ACCEPT
INSTRUCTIONS HEREUNDER FROM THOSE PERSONS IDENTIFIED TO THE CUSTODIAN IN WRITING
BY THE DEPARTMENT AS AUTHORIZED PERSONS OF THE DEPARTMENT.
SECTION 14. EFFECTIVE PERIOD; TERMINATION
THIS AGREEMENT SHALL BECOME EFFECTIVE AS OF THE DATE OF ITS
EXECUTION AND SHALL CONTINUE IN FULL FORCE AND EFFECT UNTIL TERMINATED AS
HEREINAFTER PROVIDED. THIS AGREEMENT MAY BE TERMINATED BY THE TRUST OR THE
CUSTODIAN BY 60 DAYS NOTICE IN WRITING TO THE OTHER PROVIDED THAT ANY
TERMINATION BY THE TRUST SHALL BE AUTHORIZED BY A RESOLUTION OF THE BOARD OF
TRUSTEES, A CERTIFIED COPY OF WHICH SHALL ACCOMPANY SUCH NOTICE OF TERMINATION,
AND PROVIDED FURTHER, THAT SUCH RESOLUTION SHALL SPECIFY THE NAMES OF THE
PERSONS TO WHOM THE CUSTODIAN SHALL DELIVER THE ASSETS OF THE TRUST HELD BY IT.
IF NOTICE OF TERMINATION IS GIVEN BY THE CUSTODIAN, THE TRUST SHALL, WITHIN 60
DAYS FOLLOWING THE GIVING OF SUCH NOTICE, DELIVER TO THE CUSTODIAN A CERTIFIED
COPY OF A RESOLUTION OF THE BOARD OF TRUSTEES SPECIFYING THE NAMES OF THE
PERSONS TO WHOM THE CUSTODIAN SHALL DELIVER ASSETS OF THE TRUST HELD BY IT. IN
EITHER CASE THE CUSTODIAN WILL DELIVER SUCH ASSETS TO THE PERSONS SO SPECIFIED,
AFTER DEDUCTING THEREFROM ANY AMOUNTS WHICH THE CUSTODIAN DETERMINES TO BE OWED
TO IT HEREUNDER (INCLUDING ALL COSTS AND EXPENSES OF DELIVERY OR TRANSFER OF
TRUST ASSETS TO THE PERSONS SO SPECIFIED). IF WITHIN 60 DAYS FOLLOWING THE
GIVING OF A NOTICE OF TERMINATION BY THE CUSTODIAN, THE CUSTODIAN DOES NOT
RECEIVE FROM THE TRUST A CERTIFIED COPY OF A RESOLUTION OF THE BOARD OF TRUSTEES
SPECIFYING THE NAMES OF THE PERSONS TO WHOM THE CUSTODIAN SHALL DELIVER THE
ASSETS OF THE TRUST HELD BY IT, THE CUSTODIAN, AT ITS ELECTION, MAY DELIVER SUCH
ASSETS TO A BANK OR TRUST COMPANY DOING BUSINESS IN THE STATE OF CALIFORNIA TO
BE HELD AND DISPOSED OF PURSUANT TO THE PROVISIONS OF THIS AGREEMENT OR MAY
CONTINUE TO HOLD SUCH ASSETS UNTIL A CERTIFIED COPY OF ONE OR MORE RESOLUTIONS
AS AFORESAID IS DELIVERED TO THE CUSTODIAN. THE OBLIGATIONS OF THE PARTIES
HERETO REGARDING THE USE OF REASONABLE CARE, INDEMNITIES AND PAYMENT OF FEES AND
EXPENSES SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT.
SECTION 15. MISCELLANEOUS
15.1 RELATIONSHIP. NOTHING CONTAINED IN THIS AGREEMENT SHALL (I)
CREATE ANY FIDUCIARY, JOINT VENTURE OR PARTNERSHIP RELATIONSHIP BETWEEN THE
CUSTODIAN AND THE TRUST OR (II) BE CONSTRUED AS OR CONSTITUTE A PROHIBITION
AGAINST THE PROVISION BY THE CUSTODIAN OR ANY OF ITS AFFILIATES TO THE TRUST OF
INVESTMENT BANKING, SECURITIES DEALING OR BROKERAGES SERVICES OR ANY OTHER
BANKING OR FINANCIAL SERVICES.
15.2 FURTHER ASSURANCES. EACH PARTY HERETO SHALL FURNISH TO THE
OTHER PARTY HERETO SUCH INSTRUMENTS AND OTHER DOCUMENTS AS SUCH OTHER PARTY
MAY REASONABLY REQUEST FOR THE PURPOSE OF CARRYING OUT OR EVIDENCING THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
15.3 ATTORNEYS' FEES. IF ANY LAWSUIT OR OTHER ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT IS BROUGHT BY A PARTY HERETO AGAINST THE OTHER PARTY
HERETO, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER REASONABLE ATTORNEYS'
FEES, COSTS AND DISBURSEMENTS (INCLUDING ALLOCATED COSTS AND DISBURSEMENTS OF
IN-HOUSE COUNSEL), IN ADDITION TO ANY OTHER RELIEF TO WHICH THE PREVAILING PARTY
MAY BE ENTITLED.
15.4 NOTICES. EXCEPT AS OTHERWISE SPECIFIED HEREIN, EACH NOTICE OR
OTHER COMMUNICATION HEREUNDER SHALL BE IN WRITING AND SHALL BE DELIVERED TO THE
INTENDED RECIPIENT AT THE FOLLOWING ADDRESS (OR AT SUCH OTHER ADDRESS AS THE
INTENDED RECIPIENT SHALL HAVE SPECIFIED IN A WRITTEN NOTICE GIVEN TO THE OTHER
PARTIES HERETO):
IF TO THE TRUST :
FRANKLIN VALUEMARK FUNDS
C/O FRANKLIN RESOURCES, INC.
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94404
ATTENTION: TRUST MANAGER
IF TO THE CUSTODIAN:
BANK OF AMERICA NT&SA
INTERNATIONAL SECURITIES SERVICES
25 CANNON STREET
LONDON EC4P HN
ENGLAND
ATTENTION: MANAGER
15.5 HEADINGS. THE UNDERLINED HEADINGS CONTAINED HEREIN ARE FOR
CONVENIENCE OF REFERENCE ONLY, SHALL NOT BE DEEMED TO BE A PART OF THIS
AGREEMENT AND SHALL NOT BE REFERRED TO IN CONNECTION WITH THE INTERPRETATION
HEREOF.
15.6 COUNTERPARTS. THIS AGREEMENT MAY BE EXECUTED IN
COUNTERPARTS, EACH OF WHICH SHALL CONSTITUTE AN ORIGINAL AND BOTH OF WHICH,
WHEN TAKEN TOGETHER, SHALL CONSTITUTE ONE AGREEMENT.
15.7 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH, AND GOVERNED IN ALL RESPECTS BY, THE LAWS OF THE STATE OF CALIFORNIA
(WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICT OF LAWS).
15.8 FORCE MAJEURE. SUBJECT TO THE PROVISIONS OF SECTION 11 HEREOF
REGARDING THE CUSTODIAN'S GENERAL STANDARD OF CARE, NO FAILURE, DELAY OR DEFAULT
IN PERFORMANCE OF ANY OBLIGATION HEREUNDER SHALL CONSTITUTE AN EVENT OF DEFAULT
OR A BREACH OF THIS AGREEMENT, OR GIVE RISE TO ANY LIABILITY WHATSOEVER ON THE
PART OF ONE PARTY HERETO TO THE OTHER, TO THE EXTENT THAT SUCH FAILURE TO
PERFORM, DELAY OR DEFAULT ARISES OUT OF A CAUSE BEYOND THE CONTROL AND WITHOUT
NEGLIGENCE OF THE PARTY OTHERWISE CHARGEABLE WITH FAILURE, DELAY OR DEFAULT;
INCLUDING, BUT NOT LIMITED TO: ACTION OR INACTION OF GOVERNMENTAL, CIVIL OR
MILITARY AUTHORITY; FIRE; STRIKE; LOCKOUT OR OTHER LABOR DISPUTE; FLOOD; WAR;
RIOT; THEFT; EARTHQUAKE; NATURAL DISASTER; BREAKDOWN OF PUBLIC OR COMMON CARRIER
COMMUNICATIONS FACILITIES; COMPUTER MALFUNCTION; OR ACT, NEGLIGENCE OR DEFAULT
OF THE OTHER PARTY. THIS PARAGRAPH SHALL IN NO WAY LIMIT THE RIGHT OF EITHER
PARTY TO THIS AGREEMENT TO MAKE ANY CLAIM AGAINST THIRD PARTIES FOR ANY DAMAGES
SUFFERED DUE TO SUCH CAUSES.
15.9 SUCCESSORS AND ASSIGNS. THIS AGREEMENT SHALL BE BINDING
UPON, AND SHALL INURE TO THE BENEFIT OF, THE PARTIES HERETO AND THEIR
RESPECTIVE SUCCESSORS AND ASSIGNS, IF ANY.
15.10 WAIVER. NO FAILURE ON THE PART OF ANY PERSON TO EXERCISE ANY
POWER, RIGHT, PRIVILEGE OR REMEDY HEREUNDER, AND NO DELAY ON THE PART OF ANY
PERSON IN THE EXERCISE OF ANY POWER, RIGHT, PRIVILEGE OR REMEDY HEREUNDER, SHALL
OPERATE AS A WAIVER THEREOF; AND NO SINGLE OR PARTIAL EXERCISE OF ANY SUCH
POWER, RIGHT, PRIVILEGE OR REMEDY SHALL PRECLUDE ANY OTHER OR FURTHER EXERCISE
THEREOF OR OF ANY OTHER POWER, RIGHT, PRIVILEGE OR REMEDY.
15.11 AMENDMENTS. THIS AGREEMENT MAY NOT BE AMENDED, MODIFIED,
ALTERED OR SUPPLEMENTED OTHER THAN BY MEANS OF AN AGREEMENT OR INSTRUMENT
EXECUTED ON BEHALF OF EACH OF THE PARTIES HERETO.
15.12 SEVERABILITY. IN THE EVENT THAT ANY PROVISION OF THIS
AGREEMENT, OR THE APPLICATION OF ANY SUCH PROVISION TO ANY PERSON OR SET OF
CIRCUMSTANCES, SHALL BE DETERMINED TO BE INVALID, UNLAWFUL, VOID OR
UNENFORCEABLE TO ANY EXTENT, THE REMAINDER OF THIS AGREEMENT, AND THE
APPLICATION OF SUCH PROVISION TO PERSONS OR CIRCUMSTANCES OTHER THAN THOSE AS TO
WHICH IT IS DETERMINED TO BE INVALID, UNLAWFUL, VOID OR UNENFORCEABLE, SHALL NOT
BE IMPAIRED OR OTHERWISE AFFECTED AND SHALL CONTINUE TO BE VALID AND ENFORCEABLE
TO THE FULLEST EXTENT PERMITTED BY LAW.
15.13 PARTIES IN INTEREST. NONE OF THE PROVISIONS OF THIS
AGREEMENT IS INTENDED TO PROVIDE ANY RIGHTS OR REMEDIES TO ANY PERSON OTHER
THAN THE TRUST AND THE CUSTODIAN AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS,
IF ANY.
15.14 ENTIRE AGREEMENT. THIS AGREEMENT SETS FORTH THE ENTIRE
UNDERSTANDING OF THE PARTIES HERETO AND SUPERSEDES ALL PRIOR AGREEMENTS AND
UNDERSTANDINGS BETWEEN THE PARTIES HERETO RELATING TO THE SUBJECT MATTER
HEREOF.
15.15 VARIATIONS OF PRONOUNS. WHENEVER REQUIRED BY THE CONTEXT
HEREOF, THE SINGULAR NUMBER SHALL INCLUDE THE PLURAL, AND VICE VERSA; THE
MASCULINE GENDER SHALL INCLUDE THE FEMININE AND NEUTER GENDERS; AND THE NEUTER
GENDER SHALL INCLUDE THE MASCULINE AND FEMININE GENDERS.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE
EXECUTED AND DELIVERED AS OF THE DATE FIRST ABOVE WRITTEN.
"CUSTODIAN": BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
BY /S/ JOHN B. HOUSEN
ITS
"TRUST" FRANKLIN VALUEMARK FUNDS
BY /S/ CHARLES B. JOHNSON
ITS PRESIDENT
FOREIGN EXCHANGE NETTING AGREEMENT
Agreement dated as of the 19th day of March 1992 between the FRANKLIN VALUEMARK
FUNDS, on behalf of the INTERNATIONAL EQUITY FUND, AND MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, a New York State banking corporation, acting through its
London Branch.
WITNESSETH:
WHEREAS: the parties hereto may enter into forward and spot foreign currency
contracts with each other from time to time, each of which shall be governed by
the terms and conditions of this document and the contract confirmations
exchanged by the parties hereto pursuant to this document; and
WHEREAS, the purpose of such arrangement is to provide an efficient system for
valuing all such currency contracts on a daily basis and determining a single
net amount owed or due in U. S. dollars on all such contracts; and
WHEREAS, each contract confirmation shall supplement and form a part of this
document and shall be read and construed as one with this document, so that this
document and all contract confirmations shall constitute a single agreement
between the parties hereto (hereinafter collectively referred to as this
"Agreement"); and
WHEREAS, the parties hereto acknowledge that in entering into all currency
contracts subject to this Agreement, the parties are relying on the fact that
this document and each contract confirmation shall form a single agreement
between the parties, it being understood that the parties would not otherwise
enter into any contract;
NOW THEREFORE, in consideration of the mutual premises set forth herein, the
parties hereto agree as follows:
1. For the purposes of this Agreement, the following terms shall have the
meanings set forth below:
(a) "Business Day" means a day on which banks are open for
business (including dealings in foreign exchange) in London,
England, and, in respect of payments in a foreign currency,
a day on which banks are open for business in the country of
issuance of such foreign currency.
(b) "Contract" means an agreement (including a Netted Contract
as defined in Section 4) under which one party hereto shall
sell to the other party an agreed amount of one currency on
a specified Value Date against payment by the other party to
the first party on such Value Date of an agreed amount of
another currency, which amount shall be calculated by
reference to a specified exchange rate in accordance with
customs and usage generally accepted and practiced by
dealers in the interbank foreign exchange market.
(c) "Event of Default" means the occurrence of any of the
following with respect to a party (the "Defaulting Party"):
(i) the Defaulting Party shall default in the payment or
performance of any obligation to the other party (the
"Non-Defaulting Party") and such failure shall continue for
two Business Days after notice of nonpayment or
non-performance by the Non-Defaulting Party, except as
provided in Section 4; (ii) the Defaulting Party shall
commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to
itself or to its debts under any bankruptcy, insolvency or
similar law, or seeking the appointment of a trustee,
receiver, liquidator or other similar official of it or any
substantial part of its assets, (y) consent to any of the
foregoing in an involuntary proceeding commenced against it
or (z) take any corporate action to authorize any of the
foregoing; (iii) an involuntary case or other proceeding
shall be commenced against the Defaulting Party seeking
liquidation, reorganization or other relief with respect to
it or its debts under any bankruptcy, insolvency or other
similar law or seeking the appointment of a trustee,
receiver or similar official of it or any substantial part
of its assets and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60
days; (iv) the Defaulting Party shall otherwise be unable to
pay its debts as they become due; or (v) any representation
made or deemed made pursuant to this Agreement by the
Defaulting Party shall prove to have been false or
misleading in any material respect as at the time it was
made or given.
(d) "Netting Cut-off Time" means, in relation to a particular
currency and a particular Value Date, such time and date
(being either the Value Date or, as the case may be, a
number of Business Days preceding the Value Date) as may
from time to time be agreed between the parties in writing
for the purpose of this Agreement.
(e) "Netting Date" means each Business Day on which the parties
enter into a Contract that is combined with another
Contract, as provided in Section 4.
(f) "Value Date" means the date specified for delivery of the
currencies bought and sold under a Contract.
2. Except as otherwise agreed in writing, the terms and conditions of
this Agreement shall apply to every contract between the parties.
3. Each obligation of each party hereto to pay or deliver any amount
pursuant to a Contract shall be subject to the condition precedent
that all amounts then due to such party from the other party hereto
shall have been paid or delivered in full.
4. (a) In the event a Contract is entered into by the parties before the
Netting Cut-Off Time for both currencies which are the subject of such
Contracts, such Contracts with the same Value Date as one or more
outstanding Contracts, shall automatically and without further action
be netted with any other Contract having the same Value Date and
thereafter the two Contracts so netted shall be regarded as a single
contract (a "Netted Contract"), and the sole performance required by
each party with respect to the Contracts so netted into a Netted
Contract shall be to pay to the other on the Value Date the amount, if
any, of each relevant currency produced by netting amounts of such
currency to be paid and to be received by each party under the
Contracts so netted; provided that the parties hereto may upon mutual
agreement exclude any specified Contracts from the netting provisions
of this Section 4; provided further that the amounts to be paid shall
be adjusted for any Contract liquidated pursuant to Section 6 hereof.
(b) The parties hereto shall confirm to each other the
transactions and netting hereunder in a mutually agreed
manner; provided that any confirmation in respect of a
Netted Contract shall set forth the details of each of the
Contracts being netted. If a party disputes the correctness
of any confirmation, it must promptly notify the other
party. The parties agree to resolve any disputes in good
faith and promptly.
(c) In relation to each Contract that has not been agreed before
the Netting Cut-Off Time for both currencies involved in
that Contract, each party shall pay to the other the amount
sold by it under the Contract in the currency so sold.
5. If it becomes unlawful for either party to make a payment or to
receive a payment in respect of any Contract due to the adoption of,
or change in, any applicable treaty, law, rule or regulation after the
date hereof or the promulgation of, or change in, the interpretation
of any court, tribunal or regulatory authority with competent
jurisdiction of any applicable treaty, law, rule or regulation after
the date hereof, then the party for whom such performance has become
illegal shall promptly give notice thereof to the other party and the
parties shall thereupon negotiate in good faith to find a satisfactory
method of avoiding such illegality. If after 30 days following the
giving of such notice, the parties have not agreed to such a
satisfactory method, then either party hereto may, by notice to the
other party, close out each affected Contract in accordance with the
provisions of Section 6 hereof.
6. (a) The occurrence of an Event of Default with respect to a party
shall constitute a repudiation and anticipatory breach of all
Contracts between the parties and shall result in the immediate
termination of such Contracts, as of a time just prior to the
occurrence of the Event of Default.
(b) Upon acquiring actual knowledge of the occurrence of an Event of
Default with respect to the Defaulting Party, the Non-Defaulting Party
shall promptly close out each Contract in accordance with Section 6(c)
and shall promptly notify the Defaulting Party of such action.
(c) To close out the Contracts pursuant to Section 6(b), the
Non-Defaulting Party shall liquidate each Contract and net-out all
Contracts as of the date of the occurrence of the Event of Default, if
it falls on a Business Day, or if not then as of the next succeeding
business Day (the "Termination Date") by:
(i) determining the market value in U.S. dollars of each
Contract, calculated on the basis of the U.S. Dollars which
could be purchased or sold, as the case may be, on the
Termination Date (at the appropriate prevailing market rate
as determined by the Non-Defaulting Party, such
determination to be conclusive in the absence of manifest
error) with the amount of currency which the Non-Defaulting
Party was due to deliver or receive on the Value Date under
such Contract;
(ii) determining the "Closing Gain or Loss" for each Contract,
which shall be the difference between the contract value of
the Contract in U.S. Dollars and the market value of the
Contract, determined as provided in (i) above, on the
Termination Date;
(iii) adjusting the Closing Gain or Loss for each Contract to
present value by discounting or, if the Value Date precedes
the Termination Date, adding interest to the Closing Gain or
Loss, in either case from the Value Date to the Termination
Date, at the appropriate Eurodollar rates (determined by the
Non-Defaulting Party in its discretion and in good faith,
which determination shall be binding on both parties hereto)
based on a year of twelve 30-day months; and
(iv) netting against each other, as appropriate, the following
amounts in the following order:
(A) all adjusted Closing Gain or Loss owed by one party to the
other; and
(B) at the election of the Non-Defaulting Party, all other
amounts owing and then due by one party to the other.
(d) The net amount owed after closing out and netting all
Contracts as provided above shall be immediately due and
payable, with interest on the unpaid portion thereof at a
market rate (determined by the Non-Defaulting Party in its
discretion and in good faith, which determination shall be
binding on both parties hereto) from the Termination Date
until paid in full.
(e) The parties agree that (i) the amount recoverable by a party
under this Section 6 is a reasonable estimate of the loss or
gain it would have incurred or received on its Contracts had
they matured and is not a penalty, (ii) such amount is
payable as liquidated damages to the party for the loss of
its bargains and (iii) neither party shall be entitled to
recover additional damages in respect of such loss of
bargain.
7. All notices, consents, requests, waivers and demands, except as
otherwise specifically provided in this Agreement, will be effective
only it in writing (including telex) or confirmed in writing and when
delivered at the respective addresses specified below (or, in the case
sent by telex, when the appropriate answerback has been received), as
they may be changed by notice from time to time:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
60 Victoria Embankment
London EC4Y OJP, England
Attn: FX Operations
Telex: 885181 Answerback: MGTFXAG
FRANKLIN VALUEMARK FUNDS- INTERNATIONAL EQUITY FUND 777 Mariners
Island Blvd.
SAN MATEO, CA 94404
Attn: Deborah R. Gatzek, Legal Department
8. Neither party to this Agreement shall be obligated to enter into any
Contract with the other.
9. This Agreement shall continue in force until terminated by either
party hereto upon not less than seven days' prior written notice;
provided that any such termination shall not affect the obligations
and rights of the parties hereto under any Contract entered into prior
to such termination date.
10. This Agreement shall be deemed incorporated by reference into such
Contract and shall be a part thereof as if fully set forth therein. In
the event of any inconsistency between this Agreement and the
provisions of any Contract between the parties, this Agreement shall
prevail to the extent of such inconsistency.
11. If any term or provision of this Agreement or the application thereof
to any circumstance shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the
application of such term or provision to other circumstances shall not
be affected thereby, but rather each term and provision of this
Agreement shall be valid and enforceable to the fullest extent
permitted by law.
12. This Agreement may only be amended by mutual written consent of the
parties hereto. Neither party may assign its rights or obligations
under this Agreement or under any Contract without the prior written
consent of the other party.
13. This Agreement may be executed in counterparts, each of which when
executed shall be deemed to be an original.
14. This Agreement shall be governed by and construed in accordance with
the laws of England.
15. This Agreement shall become effective on the date hereof and shall
apply to each Contract with a Value Date at least two business days
after such date.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, London
Office
By: /s/ Colin Jelley
COLIN JELLEY, M.D.
FRANKLIN VALUEMARK FUNDS
on behalf of INTERNATIONAL EQUITY FUND
By: /s/ Deborah R. Gatzek
Title: Secretary
FOREIGN EXCHANGE NETTING AGREEMENT
Agreement dated as of the 19th day of March 1992 between the FRANKLIN VALUEMARK
FUNDS, on behalf of the PACIFIC GROWTH FUND, and MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, a New York State banking corporation, acting through its London
Branch.
WITNESSETH:
WHEREAS: the parties hereto may enter into forward and spot foreign currency
contracts with each other from time to time, each of which shall be governed by
the terms and conditions of this document and the contract confirmations
exchanged by the parties hereto pursuant to this document; and
WHEREAS, the purpose of such arrangement is to provide an efficient system for
valuing all such currency contracts on a daily basis and determining a single
net amount owed or due in U. S. dollars on all such contracts; and
WHEREAS, each contract confirmation shall supplement and form a part of this
document and shall be read and construed as one with this document, so that this
document and all contract confirmations shall constitute a single agreement
between the parties hereto (hereinafter collectively referred to as this
"Agreement"); and
WHEREAS, the parties hereto acknowledge that in entering into all currency
contracts subject to this Agreement, the parties are relying on the fact that
this document and each contract confirmation shall form a single agreement
between the parties, it being understood that the parties would not otherwise
enter into any contract;
NOW THEREFORE, in consideration of the mutual premises set forth herein, the
parties hereto agree as follows:
1. For the purposes of this Agreement, the following terms shall have the
meanings set forth below:
(a) "Business Day" means a day on which banks are open for business
(including dealings in foreign exchange) in London, England, and, in
respect of payments in a foreign currency, a day on which banks are
open for business in the country of issuance of such foreign currency.
(b) "Contract" means an agreement (including a Netted Contract as defined
in Section 4) under which one party hereto shall sell to the other
party an agreed amount of one currency on a specified Value Date
against payment by the other party to the first party on such Value
Date of an agreed amount of another currency, which amount shall be
calculated by reference to a specified exchange rate in accordance
with customs and usage generally accepted and practiced by dealers in
the interbank foreign exchange market.
(c) "Event of Default" means the occurrence of any of the following with
respect to a party (the "Defaulting Party"): (i) the Defaulting Party
shall default in the payment or performance of any obligation to the
other party (the "Non-Defaulting Party") and such failure shall
continue for two Business Days after notice of nonpayment or
non-performance by the Non-Defaulting Party, except as provided in
Section 4; (ii) the Defaulting Party shall commence a voluntary case
or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or to its debts under any bankruptcy,
insolvency or similar law, or seeking the appointment of a trustee,
receiver, liquidator or other similar official of it or any
substantial part of its assets, (y) consent to any of the foregoing in
an involuntary proceeding commenced against it or (z) take any
corporate action to authorize any of the foregoing; (iii) an
involuntary case or other proceeding shall be commenced against the
Defaulting Party seeking liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency or
other similar law or seeking the appointment of a trustee, receiver or
similar official of it or any substantial part of its assets and such
involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days; (iv) the Defaulting Party shall
otherwise be unable to pay its debts as they become due; or (v) any
representation made or deemed made pursuant to this Agreement by the
Defaulting Party shall prove to have been false or misleading in any
material respect as at the time it was made or given.
(d) "Netting Cut-off Time" means, in relation to a particular currency and
a particular Value Date, such time and date (being either the Value
Date or, as the case may be, a number of Business Days preceding the
Value Date) as may from time to time be agreed between the parties in
writing for the purpose of this Agreement.
(e) "Netting Date" means each Business Day on which the parties enter into
a Contract that is combined with another Contract, as provided in
Section 4.
(f) "Value Date" means the date specified for delivery of the currencies
bought and sold under a Contract.
2. Except as otherwise agreed in writing, the terms and conditions of this
Agreement shall apply to every contract between the parties.
3. Each obligation of each party hereto to pay or deliver any amount pursuant
to a Contract shall be subject to the condition precedent that all amounts
then due to such party from the other party hereto shall have been paid or
delivered in full.
4.
(a) In the event a Contract is entered into by the parties before the
Netting Cut-Off Time for both currencies. which are the subject of
such Contracts, such Contracts with the same Value Date as one or more
outstanding Contracts, shall automatically and without further action
be netted with any other Contract having the same Value Date and
thereafter the two Contracts so netted shall be regarded as a single
contract (a "Netted Contract"), and the sole performance required by
each party with respect to the Contracts so netted into a Netted
Contract shall be to pay to the other on the Value Date the amount, if
any, of each relevant currency produced by netting amounts of such
currency to be paid and to be received by each party under the
Contracts so netted; provided that the parties hereto may upon mutual
agreement exclude any specified Contracts from the netting provisions
of this Section 4; provided further that the amounts to be paid shall
be adjusted for any Contract liquidated pursuant to Section 6 hereof.
(b) The parties hereto shall confirm to each other the transactions and
netting hereunder in a mutually agreed manner; provided that any
confirmation in respect of a Netted Contract shall set forth the
details of each of the Contracts being netted. If a party disputes the
correctness of any confirmation, it must promptly notify the other
party. The parties agree to resolve any disputes in good faith and
promptly.
(c) In relation to each Contract that has not been agreed before the
Netting Cut-Off Time for both currencies involved in that Contract,
each party shall pay to the other the amount sold by it under the
Contract in the currency so sold.
5. If it becomes unlawful for either party to make a payment or to receive a
payment in respect of any Contract due to the adoption of, or change in,
any applicable treaty, law, rule or regulation after the date hereof or the
promulgation of, or change in, the interpretation of any court, tribunal or
regulatory authority with competent jurisdiction of any applicable treaty,
law, rule or regulation after the date hereof, then the party for whom such
performance has become illegal shall promptly give notice thereof to the
other party and the parties shall thereupon negotiate in good faith to find
a satisfactory method of avoiding such illegality. If after 30 days
following the giving of such notice, the parties have not agreed to such a
satisfactory method, then either party hereto may, by notice to the other
party, close out each affected Contract in accordance with the provisions
of Section 6 hereof.
6. (a) The occurrence of an Event of Default with respect to a party shall
constitute a repudiation and anticipatory breach of all Contracts between
the parties and shall result in the immediate termination of such
Contracts, as of a time just prior to the occurrence of the Event of
Default.
(b) Upon acquiring actual knowledge of the occurrence of an Event of
Default with respect to the Defaulting Party, the Non-Defaulting Party
shall promptly close out each Contract in accordance with Section 6(c)
and shall promptly notify the Defaulting Party of such action.
(c) To close out the Contracts pursuant to Section 6(b), the
Non-Defaulting Party shall liquidate each Contract and net-out all
Contracts as of the date of the occurrence of the Event of Default, if
it falls on a Business Day, or if not then as of the next succeeding
business Day (the "Termination Date") by:
(i) determining the market value in U.S. dollars of each Contract,
calculated on the basis of the U.S. Dollars which could be
purchased or sold, as the case may be, on the Termination Date
(at the appropriate prevailing market rate as determined by the
Non-Defaulting Party, such determination to be conclusive in the
absence of manifest error) with the amount of currency which the
Non-Defaulting Party was due to deliver or receive on the Value
Date under such Contract;
(ii) determining the "Closing Gain or Loss" for each Contract, which
shall be the difference between the contract value of the
Contract in U.S. Dollars and the market value of the Contract,
determined as provided in (i) above, on the Termination Date;
(iii)adjusting the Closing Gain or Loss for each Contract to present
value by discounting or, if the Value Date precedes the
Termination Date, adding interest to the Closing Gain or Loss, in
either case from the Value Date to the Termination Date, at the
appropriate Eurodollar rates (determined by the Non-Defaulting
Party in its discretion and in good faith, which determination
shall be binding on both parties hereto) based on a year of
twelve 30-day months; and
(iv) netting against each other, as appropriate, the following amounts
in the following order:
(A) all adjusted Closing Gain or Loss owed by one party to the
other; and
(B) at the election of the Non-Defaulting Party, all other
amounts owing and then due by one party to the other.
(d) The net amount owed after closing out and netting all Contracts as
provided above shall be immediately due and payable, with interest on
the unpaid portion thereof at a market rate (determined by the
Non-Defaulting Party in its discretion and in good faith, which
determination shall be binding on both parties hereto) from the
Termination Date until paid in full.
(e) The parties agree that (i) the amount recoverable by a party under
this Section 6 is a reasonable estimate of the loss or gain it would
have incurred or received on its Contracts had they matured and is not
a penalty, (ii) such amount is payable as liquidated damages to the
party for the loss of its bargains and (iii) neither party shall be
entitled to recover additional damages in respect of such loss of
bargain.
7. All notices, consents, requests, waivers and demands, except as otherwise
specifically provided in this Agreement, will be effective only it in
writing (including telex) or confirmed in writing and when delivered at the
respective addresses specified below (or, in the case sent by telex, when
the appropriate answerback has been received), as they may be changed by
notice from time to time:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
60 Victoria Embankment
London EC4Y OJP, England
Attn: FX Operations
Telex: 885181 Answerback: MGTFXAG
FRANKLIN VALUEMARK FUNDS- PACIFIC GROWTH FUND 777 Mariners Island
Blvd.
San Mateo, CA 94404
Attn: Deborah R. Gatzek, Legal Department
8. Neither party to this Agreement shall be obligated to enter into any
Contract with the other.
9. This Agreement shall continue in force until terminated by either party
hereto upon not less than seven days' prior written notice; provided that
any such termination shall not affect the obligations and rights of the
parties hereto under any Contract entered into prior to such termination
date.
10. This Agreement shall be deemed incorporated by reference into such
Contract and shall be a part thereof as if fully set forth therein. In the
event of any inconsistency between this Agreement and the provisions of
any Contract between the parties, this Agreement shall prevail to the
extent of such inconsistency.
11. If any term or provision of this Agreement or the application thereof to
any circumstance shall, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Agreement and the application of such
term or provision to other circumstances shall not be affected thereby,
but rather each term and provision of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
12. This Agreement may only be amended by mutual written consent of the
parties hereto. Neither party may assign its rights or obligations under
this Agreement or under any Contract without the prior written consent of
the other party.
13. This Agreement may be executed in counterparts, each of which when executed
shall be deemed to be an original.
14. This Agreement shall be governed by and construed in accordance with the
laws of England.
15. This Agreement shall become effective on the date hereof and shall apply to
each Contract with a Value Date at least two business days after such date.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
London Office
By: /s/ Colin Jelley
COLIN JELLEY, M.D.
FRANKLIN VALUEMARK FUNDS
on behalf of PACIFIC GROWTH FUND
By: /s/ Deborah R. Gatzek
Title: Secretary
This GLOBAL CUSTODY AGREEMENT is effective as of March 15, 1994 and is between
THE CHASE MANHATTAN BANK, n.a. (the "Bank") and FRANKLIN VALUEMARK FUNDS (the
"Customer") on behalf of certain of its series, as listed in Schedule B.
1. CUSTOMER ACCOUNTS.
The Bank agrees to establish and maintain the following accounts
("Accounts"):
(a) A custody account in the name of the Customer ("Custody Account") for
any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same or evidencing or representing any other rights or
interests therein and other similar property whether certificated or
uncertificated as may be received by the Bank or its Subcustodian (as defined in
Section 3) for the account of the Customer ("Securities"); and
(b) A deposit account in the name of the Customer ("Deposit Account") for
any and all cash in any currency received by the Bank or its Subcustodian for
the account of the Customer, which cash shall not be subject to withdrawal by
draft or check.
The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give Instructions (as
defined in Section 11) ("Instructions") concerning the Accounts. The Bank
may deliver securities of the same class in place of those deposited in the
Custody Account.
Upon written agreement between the Bank and the Customer, additional
Accounts may be established and separately accounted for as additional Accounts
under the terms of this Agreement.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN
LOCATIONS.
Unless Instructions specifically require another location acceptable to
the Bank:
(a) Securities will be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired: and
(b) Cash will be credited to an account in a country or other jurisdiction
in which such cash may be legally deposited or is the legal currency for the
payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and the Bank can comply with such
Instructions, the Bank is authorized to maintain cash balances on deposit for
the Customer with itself or one of its affiliates at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as the Customer may direct, if acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians or their securities
depositories, such arrangement must be authorized by a written agreement, signed
by the Bank and the Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
The Bank may act under this Agreement through the subcustodians listed in
Schedule A of this Agreement with which the Bank has entered into subcustodian
agreements ("Subcustodians). The Customer authorizes the Bank to hold Assets in
the Accounts in accounts which the Bank has established with one or more of its
branches or Subcustodians. The Bank and Subcustodians are authorized to hold any
of the Securities in their account with any securities depository in which they
participate.
The Bank reserves the right to add new, replace or remove Subcustodians.
The Customer will be given reasonable notice by the Bank of any amendment to
Schedule A. Upon request by the Customer, the Bank will identify the name,
address and principal place of business of any Subcustodian of the Customer's
Assets and the name and address of the governmental agency or other regulatory
authority that supervises or regulates such Subcustodian.
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible foreign
custodian or an eligible foreign securities depository, which are further
defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the Investment Company Act (the "Act"):
(b) "eligible foreign custodian" shall mean (i) a banking institution or
trust company incorporated or organized under the laws of a country other than
the United States that is regulated as such by that country's government or an
agency thereof and that has shareholders' equity in excess of $200 million in
U.S. currency (or a foreign currency equivalent thereof), (ii) a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than the
United States and that has shareholders' equity in excess of $100 million in
U.S. currency (or a foreign currency equivalent thereof), (iii) a banking
institution or trust company incorporated or organized under the laws of a
country other than the United States or a majority owned direct or indirect
subsidiary of a qualified U.S. bank or bank holding company that is incorporated
or organized under the laws of a country other than the United States which has
such other qualifications as shall be specified in Instructions and approved by
the Bank, or (iv) any other entity that shall have been so qualified by
exemptive rule or other appropriate action of the SEC: and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of a
country other than the United States, which operates (i) the central system for
handling securities or equivalent book-entries in that country or (ii) a
transnational system for the central handling of securities or equivalent
book-entries.
The Customer represents that its Board of Trustees has approved each of
the Subcustodians listed in Schedule A of this Agreement and the terms of the
subcustody agreements between the Bank and each Subcustodian, and further
represents that its Board has determined that the use of each Subcustodian and
the terms of each subcustody agreement are consistent with the best interests of
the Customer's fund(s) and its (their) shareholders. The Bank will supply the
Customer with any amendment to Schedule A for approval. The Customer has
supplied or will supply the Bank with certified copies of its Board of Trustees
resolution(s) with respect to the foregoing prior to placing Assets with any
Subcustodian so approved.
4. USE OF SUBCUSTODIAN.
(a) The Bank will identify Assets on its books as belonging to the
Customer.
(b) A Subcustodian will hold Assets together with assets belonging to
other customers of the Bank in accounts identified on such Subcustodian's books
as special custody accounts for the exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be subject only
to the Instructions of the Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian will be subject only to
the Instructions of such Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for holding its
customer's assets shall provide that such assets will not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
the Customer with any particular Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) The Bank or its Subcustodians will make payments from the Deposit
Account upon receipt of Instructions which include all information required by
the Bank.
(b) In the event that any payment to be made under this Section 5 exceeds
the funds available in the Deposit Account, the Bank, in its discretion, may
advance the Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by the Bank on similar
loans.
(c) If the Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, the Customer will
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If the Customer does not promptly return
any amount upon such notification, the Bank shall be entitled, upon oral or
written notification to the Customer to reverse such credit by debiting the
Deposit Account for the amount previously credited. The Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim or
a proof of claim in any insolvency proceeding or take any other action with
respect to the collection of such amount, but may act for the Customer upon
Instructions after consultation with the Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities will be transferred, exchanged or delivered by the Bank or
its Subcustodian upon receipt by the Bank of Instructions which include all
information required by the Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transaction will be credited
or debited to the Accounts on the date cash or Securities are actually received
by the Bank and reconciled to the Accounts.
(i) The Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a reasonable
period, determined by the Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, the Bank may reverse the credits and debits
of the particular transaction at any time.
7. ACTIONS OF THE BANK.
The Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, the Bank will
perform the following functions.
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that the Bank or Subcustodian
is actually aware of such opportunities.
(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of Securities.
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, affiliates of the Bank or any
Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of any transfers
of Assets to or from the Accounts. Such statements, advices or notifications
shall indicate the identity of the entity having custody of the Assets. Unless
the Customer sends the Bank a written exception or objection to any Bank
statement within sixty days of receipt, the Customer shall be deemed to have
approved such statement. In such event, or where the Customer has otherwise
approved any such statement, the Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in such
statement or reasonably implied therefrom as though it had been settled by the
decree of a court of competent jurisdiction in an action where the Customer and
all persons having or claiming an interest in the Customer or the Customer's
Accounts were parties.
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of the Customer.
The Bank shall have no liability for any loss occasioned by delay in the actual
receipt of notice by the Bank or by its Subcustodians of any payment, redemption
or other transaction regarding Securities in the Custody Account in respect of
which the Bank has agreed to take any action under this Agreement.
8. CORPORATE ACCOUNTS; PROXIES.
Whenever the Bank receives information concerning the Securities which
requires discretionary action by the beneficial owner of the Securities (other
than a proxy), such as subscription rights, bonus issues, stock repurchase plans
and rights offerings, or legal notices or other material intended to be
transmitted to securities holders ("Corporate Actions"), the Bank will give the
Customer notice of such Corporate Actions to the extent that the Bank's central
corporate actions department has actual knowledge of a Corporate Action in time
to notify its customers.
When a rights entitlement or a fractional interest resulting from a rights
issue, stock dividend, stock split or similar Corporate Action is received which
bears an expiration date, the Bank will endeavor to obtain Instructions from the
Customer or its Authorized Person, as defined in Section 10, but if Instructions
are not received in time for the Bank to take timely action, or actual notice of
such Corporate Action was received too late to seek Instructions, the Bank is
authorized to sell such rights entitlement or fractional interest and to credit
the Deposit Account with the proceeds or take any other action it deems, in good
faith, to be appropriate in which case it shall be held harmless for any such
action.
The Bank will deliver proxies to the Customer or its designed agent
pursuant to special arrangements which may have been agreed to in writing. Such
proxies shall be executed in the appropriate nominee name relating to Securities
in the Custody Account registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted, and where bearer
Securities are involved, proxies will be delivered in accordance with
Instructions.
9. NOMINEES.
Securities which are ordinarily held in registered form may be registered in
a nominee name of the Bank, Subcustodian or securities depository, as the case
may be. The Bank may, without notice to the Customer, cause any such Securities
to cease to be registered in the name of any such nominee and to be registered
in the name of the Customer. In the event that any Securities registered in a
nominee name are called for partial redemption by the issuer, the Bank may allot
the called portion to the respective beneficial holders of such class of
security in any manner the Bank deems to be fair and equitable. The Customer
agrees to hold the Bank, Subcustodians, and their respective nominees harmless
from any liability arising directly or indirectly from their status as a mere
record holder of Securities in the Custody Account.
10. AUTHORIZED PERSONS.
As used in this Agreement the term "Authorized Person" means employees or
agents including investment managers as have been designated by written notice
from the Customer or its designated agent to act on behalf of the Customer under
this Agreement. Such persons shall continue to be Authorized Persons until such
time as the Bank receives Instructions from the Customer or its designated agent
that any such employee or agent is no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means Instructions of any Authorized Person received
by the Bank, via telephone, telex, TWX, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to the Bank which the Bank believes in good faith to have been given
by Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Bank may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until cancelled or superseded.
Any Instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but the Customer will hold the
Bank harmless for the failure of an Authorized Person to send such confirmation
in writing, the failure of such confirmation to conform to the telephone
Instructions received or the Bank's failure to produce such confirmation at any
subsequent time. Either Party may electronically record any Instructions given
by telephone, and any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.
Account transactions made pursuant to Sections 5 and 6 of this Agreement
may be made only for the purposes listed below. Instructions must specify the
purpose for which any transaction is to be made and the Customer shall be solely
responsible to assure that Instructions are in accord with any limitations or
restrictions applicable to the Customer by law or as may be set forth in its
prospectus.
(a) In connection with the purchase or sale of Securities at prices
as confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a pledge
of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any restrictions
applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of the Bank, its
Subcustodian or the Customer's transfer agent, such shares to be purchased or
redeemed.
(j) For the purpose of redeeming in kind shares of the Customer against
delivery of the shares to be redeemed to the Bank, its Subcustodian or the
Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement among
the Customer, the Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc, relating to compliance with the rules of
The Options Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to the Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or at
expiration, the Bank will receive the Securities previously deposited from
brokers. The Bank will act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly when due other
than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related transactions.
(n) For other proper purposes as may be specified in Instructions issued
by an officer of the Customer which shall include a statement of the purpose for
which the delivery or payment is to be made, the amount of the payment or
specific Securities to be delivered, the name of the person or persons to whom
delivery or payment is to be made, and a certification that the purpose is a
proper purpose under the instruments governing the Customer.
(o) Upon the termination of this Agreement as set forth in Section
14(i).
Should the California Department of Insurance (the "Department") succeed
to control of the Trust's assets in the event of the insolvency of the Trust,
the Custodian shall, upon notice of such succession in writing to the Custodian
by the Department, recognize the Department's succession to the Trust's rights
and obligations under this Agreement and, accordingly, will cease to accept
Instructions from Authorized Persons of the Trust and shall accept Instructions
hereunder from those persons identified to the Custodian in writing by the
Department as Authorized Persons of the Department. Custodian shall be without
liability for following Instructions from the Department, consistent with this
Agreement and specifically paragraph 12 below.
12. STANDARD OF CARE; LIABILITIES.
(a) The Bank shall be responsible for the performance of only such duties
as are set forth in this Agreement or expressly contained in Instructions which
are consistent with the provisions of this Agreement.
(i) The Bank will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of Assets. The Bank shall
be liable to the Customer for any loss which shall occur as the result of the
failure of a Subcustodian to exercise reasonable care with respect to the
safekeeping of such Assets to the same extent that the Bank would be liable to
the Customer if the Bank were holding such Assets in New York. In the event of
any loss to the Customer by reason of the failure of the Bank or its
Subcustodian to utilize reasonable care, the Bank shall be liable to the
Customer only to the extent of the Customers direct damages, to be determined
based on the market value of the property which is the subject of the loss at
the date of discovery of such loss and without reference to any special
conditions or circumstances.
(ii) The Bank will not be responsible of any act, omission, default
or for the solvency of any broker or agent which it or a Subcustodian appoints
unless such appointment was made negligently or in bad faith.
(iii) The Bank shall be indemnified by and without liability to the
Customer for any action taken or omitted by the Bank whether pursuant to
Instructions or otherwise within the scope of this Agreement if such act or
omission was in good faith without negligence. In performing its obligations
under this Agreement, the Bank may rely on the genuineness of any document which
it believes in good faith to have been validly executed.
(iv) The Customer agrees to pay for and hold the Bank harmless from
any liability or loss resulting from the imposition or assessment of any taxes
or other governmental charges, and any related expenses with respect to income
from or Assets in the Accounts.
(v) The Bank shall be entitled to rely and may act upon the advice
of counsel (who may be counsel for the Customer) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
(vi) The Bank need not maintain any insurance for the benefit of
the Customer.
(vii) Without limiting the foregoing, the Bank shall not be liable
for any loss which results from: 1) the general risk of investing or 2)
investing or holding Assets in a particular country including, but not limited
to, losses resulting from nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which prevent
the orderly execution of securities transactions or affect the value of Assets.
(viii) Neither party shall be liable to the other for any loss due
to forces beyond their control including, but not limited to strikes or work
stoppages, acts of war or terrorism, insurrection, revolution, nuclear fusion,
fission or radiation, or acts of God.
b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that the Bank shall have no duty or
responsibility to:
(i) Question Instructions or make any suggestions to the
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise the Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other than as
provided in Section 5(c) of this Agreement;
iv) evaluate or report to the Customer or an Authorized Person
regarding the financial condition of any broker. agent or other party to
which Securities are delivered or payments are made pursuant to this
Agreement; or
v) review or reconcile trade confirmations received from brokers.
The Customer or its Authorized Persons issuing Instructions shall bear any
responsibility to review such confirmations against Instructions issued to and
statements issued by the Bank.
(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates may have a
material interest in a transaction, or circumstances are such that the Bank may
have a potential conflict of duty or interest including the fact that the Bank
or any of its affiliates may provide brokerage services to other customers, act
as financial advisor to the issuer of Securities, act as a lender to the issuer
of Securities, act in the same transaction as agent for more than one customer
have a material interest in the issue of Securities, or earn profits from any of
the activities listed herein.
(d) the Bank hereby warrants to the Customer that in its opinion, after
due inquiry, the established procedures to be followed by each of its branches,
each branch of a qualified U.S. bank, each eligible foreign custodian and each
eligible foreign securities depository holding the Customer's Securities
pursuant to this Agreement afford protection for such Securities at least equal
to that afforded by the Bank's established procedures with respect to similar
securities held by the Bank and its securities depositories in New York.
13. FEES AND EXPENSES.
The Customer agrees to pay the Bank for its services under this Agreement
such amount as may be agreed upon in writing, together with the Bank's
reasonable out-of-pocket or incidental expenses, including, but not limited to
legal fees. The Bank shall have a lien on and is authorized to charge any
Accounts of the Customer for any amount owing to the Bank under any provision of
this Agreement.
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the administration of the
Customers trading and investment activity, the Bank is authorized to enter into
spot or forward foreign exchange contracts with the Customer or an Authorized
Person for the Customer and may also provide foreign exchange through its
subsidiaries, affiliates or Subcustodians. Instructions, including standing
Instructions, may be issued with respect to such contracts but the Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of the Bank,
its subsidiary, affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement, shall apply to such transaction.
(b) Certification of Residency, etc. The Customer certifies that it is a
resident of the United States and agrees to notify the Bank of any changes in
residency. The Bank may rely upon this certification or the certification of
such other facts as may be required to administer the Bank's obligations under
this Agreement. The Customer will indemnify the Bank against all losses,
liability, claims or demands arising directly or indirectly from any such
certifications.
(c) Access to Records. The Bank shall allow the Customers independent
public accountants reasonable access to the records of the Bank relating to the
Assets as is required in connection with their examination of books and records
pertaining to the Customer's affairs. Subject to restrictions under applicable
law, the Bank shall also obtain an undertaking to permit the Customer's
independent public accountants reasonable access to the records of any
Subcustodian which has physical possession of any Assets as may be required in
connection with the examination of the Customers books and records. Upon
reasonable request from the Customer, the Bank shall furnish the Customer such
reports (or portions thereof) of the Bank's system of internal accounting
controls applicable to the Bank's duties under this Agreement. The Bank shall
endeavor to obtain and furnish the Customer with such similar reports as it may
reasonably request with respect to each Subcustodian and securities depository
holding the Customer's assets.
(d) Governing Law; Successors and Assigns. This Agreement shall be governed
by the laws of the State of New York and shall not be assignable by either
party, but shall bind the successors in interest of the Customer and the Bank.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (check one):
____ employee benefit plan or other assets subject to the Employee
Retirement Income Security Act of 1974; as amended ("ERlSA");
x mutual fund assets subject to Securities and Exchange Commission
("SEC") rules and regulations; or
____ neither of the above.
This Agreement consists exclusively of this document together with Schedule
A and the following rider(s) [check applicable rider(s)]:
_____ ERISA
X MUTUAL FUND
_____ SPECIAL TERMS AND CONDITIONS
There are no other provisions of this Agreement and this Agreement
supersedes any other agreements, whether written or oral, between the parties.
Any amendment to this Agreement must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions of this Agreement
are held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of any such provision and the remaining provisions, under other
circumstances or in other jurisdictions will not in any way be affected or
impaired.
(g) Waiver. Except as otherwise provided in this Agreement, no failure or
delay on the part of either party in exercising any power or right under this
Agreement operates as a waiver, nor does any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. No waiver by a party of any provision of this
Agreement, or waiver of any breach or default, is effective unless in writing
and signed by the party against whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be effective when
actually received. Any notices or other communications which may be required
under this Agreement are to be sent to the parties at the following addresses or
such other addresses as may subsequently be given to the other party in writing;
Bank: The Chase Manhattan Bank, N.A.
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Attention: Global Securities Services
Customer: Franklin Valuemark Funds
777 Mariners Island Blvd.
San Mateo, California 94404
Attention: Di Loo-Tam
Fund Accounting
with a copy to:
Templeton Group of Funds
Broward Financial Center
500 East Broward, Suite 2100
Ft. Lauderdale, Florida 33394-3091
Attention: Jim Baio
Fund Accounting
(i) Termination. This Agreement may be terminated by the Customer or the
Bank by giving sixty days written notice to the other, provided that such notice
to the Bank shall specify the names of the persons to whom the Bank shall
deliver the Assets in the Accounts. If notice of termination is given by the
Bank, the Customer shall, within sixty days following receipt of the notice,
deliver to the Bank Instructions specifying the names of the persons to whom the
Bank shall deliver the Assets. In either case the Bank will deliver the Assets
to the persons so specified, after deducting any amounts which the Bank
determines in good faith to be owed to it under Section 13. If within sixty days
following receipt of a notice of termination by the Bank, the Bank does not
receive Instructions from the Customer specifying the names of the persons to
whom the Bank shall deliver the Assets, the Bank, at its election, and
consistent with the requirements of the Investment Company Act of 1940, may
deliver the Assets to a bank or trust company doing business in the State of New
York to be held and disposed of pursuant to the provisions of this Agreement, or
to Authorized Persons, or may continue to hold the Assets until Instructions are
provided to the Bank.
FRANKLIN VALUEMARK FUNDS
By /s/ Kenneth V. Domingues
Kenneth V. Domingues
Vice President and Treasurer
THE CHASE MANHATTAN BANK, N.A.
By /s/ illegible
Vice President
Title
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank. N.A. and
Franklin Valuemark Funds
effective as of March 15, 1994
Customer represents that the Assets being placed in the Bank's custody are
subject to the Act, as the same may be amended from time to time.
Except to the extent that the Bank has specifically agreed to comply with
a condition of a rule, regulation or interpretation promulgated by or under the
authority of the Securities and Exchange Commission or the Exemptive Order
applicable to accounts of this nature issued to the Bank (investment Company Act
of 1940, Release No. 12053, November 20, 1981), as amended, or unless the Bank
has otherwise specifically agreed, the Customer shall be solely responsible to
assure that the maintenance of Assets under this Agreement complies with such
rules, regulations, interpretations or exemptive order promulgated by or under
the authority of the Securities and Exchange Commission.
<TABLE>
<CAPTION>
SCHEDULE A
JULY 1994
SUB-CUSTODIANS EMPLOYED BY
THE CHASE MANHATFAN BANK, N.A. LONDON, GLOBAL CUSTODY
COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK
<S> <C> <C>
ARGENTINA The Chase Manhattan Bank, N.A. The Chase Manhattan Bank,
Main Branch Buenos Aires
25 De Mayo 130/140
Buenos Aires
ARGENTINA
AUSTRALIA The Chase Manhattan Bank The Chase Manhattan Bank
Australia Limited Australia Limited
36th Floor Sydney
World Trade Centre
Jamison Street
Sydney
New South Wales 2000
AUSTRALIA
AUSTRIA Creditanstalt - Bankverein Credit Lyonnais
Schouengasse 6 Vienna
A - 1011, Vienna
AUSTRIA
BANGLADESH Standard Chartered Bank Standard Chartered Bank
18-20 Motijheel C.A. Dhaka
Box 536,
Dhaka-1000
BANGLADESH
BELGIUM Generale Bank Credit Lyonnais Bank
3 Montagne Du ParC Brussels
1000 Bruxelles
BELGIUM
BOTSWANA Standard Chartered Bank Standard Chartered Bank
Botswana Ltd. Botswana Ltd.
4th Floor Commerce House Gaborone
The Mall
Gaborone
BOTSWANA
BRAZIL Banco Chase Manhattan, S.A. Banco Chase Manhattan S.A.
Chase Manhattan Center Sao Paulo
Rua Verbo Divino, 1400
Sao Paulo, SP 04719-002
BRAZIL
CANADA The Royal Bank of Canada Toronto Dominion Bank
Royal Bank Plaza Toronto
Toronto
Ontario M5J 2J5
CANADA
Canada Trust Toronto Dominion Bank
Canada Trust Tower Toronto
BCE Place
161 Bay at Front
Toronto
Ontario M5J 2T2
CANADA
CHILE The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
Agustinas 1235 Santiago
Casilla 9192
Santiago
CHILE
COLOMBIA Cititrust Colombia S.A. Ciatrust Colombia S.A.
Sociedad Fiduciaria Sociedad Fiduciaria
Carrera 9a No 99-02 Santafe de Bogota
Santafe de Bogota, DC
COLOMBIA
CZECH REPUBLIC Ceskoslovenska Obchodni Banka, A.S. Ceskoslovenska Obchodni Banka, A.S.
Na Prikope 14 Praha
115 20 Praha I
CZECH REPUBLIC
DENMARK Den Danske Bank Den Danske Bank
2 Holmens Kanala DK 1091 Copenhagen
Copenhagen
DENMARK
EGYPT National Bank of Egypt National Bank of Egypt
24 Sherif Street
Cairo
EGYPT
EUROBONDS Cedel S.A. ECU:Lloyds Bank PLC
67 Boulevard Grande Duchesse Charlotte International Banking Division London
LUXEMBOURG For all other currencies: see
A/c The Chase Manhattan Bank, N.A. relevant country
London
A/c No. 17817
EURO CDS First Chicago Clearing Centre ECU:Lloyds Bank PLC
27 Leadenhall Street Banking Division London
London EC3A 1AA For all other currencies: see
UNITED KINGDOM relevant country
FINLAND Kansallis-Osake-Pankki Kanasallis-Osake-Pankki
Aleksanterinkatu 42 Helsinki
00100 Helsinki 10
FINLAND
FRANCE Banque Paribas Societe Generale
Ref 256 Paris
BP 141
3, Rue D'Antin
75078 Paris
Cedex 02
FRANCE
GERMANY Chase Bank A.G. Chase Bank A.G.
Alexanderstrasse 59 Frankfurt
Posffach 90 01 09
60441 Frankfurt/Main
GERMANY
GREECE Barclays Bank plc National Bank of Greece S.A.
1 Kolokotroni Street Athens
10562 Athens A/c Chase Manhattan Bank, N.A.,
GREECE
London
A/c No. 040/7/921578-68
HONG KONG The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
40/F One Exchange Square Hong Kong
8, Connaught Place
Central, Hong Kong
HONG KONG
HUNGARY Citibank Budapest Rt. Citibank Budapest Rt.
Vaci Utca 19-21 Budapest
1052 Budapest V
HUNGARY
INDIA The Hongkong and Shanghai The Hongkong and
Banking Corporation Limited Shanghai
52/60 Mahatma Gandhi Road Banking Corporation Limited
Bombay 400 001 Bombay
INDIA
INDONESIA The Hongkong and Shanghai The Chase Manhattan Bank; N.A.
Banking Corporation Limited Jakarta
World Trade Center
J1. Jend Sudirman Kav. 29-31
Jakarta 10023
INDONESIA
IRELAND Bank of Ireland Allied Irish Bank
International Financial Services Dublin
Centre
1 Harbourmaster Place
Dublin 1
IRELAND
ISRAEL Bank Leumi Le-Israel B.M. Bank Leumi Le-Israel B.M.
19 Herzl Street Tel Aviv
65136 Tel Aviv
ISRAEL
ITALY The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
Piazza Meda 1 Milan
20121 Milan
ITALY
JAPAN The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
1-3 Marunouchi 1-Chome Tokyo
Chiyoda-Ku
Tokyo 100
JAPAN
JORDAN Arab Bank Limited Arab Bank Limited
P O Box 950544-5 Amman
Amman
Shmeisani
JORDAN
LUXEMBOURG Banque Generale du Luxembourg SA. Banque Generale du Luxembourg S.A.
27 Avenue Monterey Luxembourg
LUXEMBOURG
MALAYSIA The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
Pernas International Kuala Lumpur
Jalan Sultan Ismail
50250, Kuala Lumpur
MALAYSIA
MEXICO The Chase Manhattan Bank, N.A. No correspondent Bank
(Equities) Hamburgo 213, Piso 7
06660 Mexico D.F.
MEXICO
(Government Banco Nacional de Mexico, Avertida No correspondent Bank
Bonds) Juarez No. 104-11 Piso
06040 Mexico D.F.
MEXICO
MOROCCO Banque Commerciale du Maroc Banque Commerciale du Maroc
1 Rue Idriss Lahrizi Casablanca
Casablanca 01
MOROCCO
NETHERLANDS ABN AMRO N.V. Credit Lyonnais
Securities Centre Bank Nederland N.V.
P O Box 3200 Rotterdam
4800 De Breda
NETHERLANDS
NEW ZEALAND National Nominees Limited National Bank of New Zealand
Level 2 BNZ Tower Wellington
125 Queen Street
Auckland
NEW ZEALAND
NORWAY Den Norske Bank Den Norske Bank
Kirkegaten 21 Oslo
Oslo 1
NORWAY
PAKISTAN Citibank N.A. Citibank N.A.
State Life Building No. 1 Karachi
I.I. Chundrigar Road
Karachi
PAKISTAN
PERU Citibank, N.A. Citibank N.A.
Camino Real 457 Lima
CC Torre Real - 5th Floor
San Isidro, Lima 27
PERU
PHILIPPINES The Hongkong and Shanghai The Hongkong and Shanghai
Banking Corporation Limited Banking Corporation Limited
Hong Kong Bank Centre 3/F Manila
San Miguel Avenue
Ortigas Commercial Centre
Pasig Metro Manila
PHILIPPINES
POLAND Bank Polska Kasa Opieki S.A. Bank Polska Kasa Opieki S.A.
6/12 Nowy Swiat Sir Warsaw
00-920 Warsaw
POLAND
FOR MUTUAL FUNDS:
Bank Handlowy W. Warsawie. S.A. Bank Polska Kasa Opieki S.A.
6/12 Nowy Swiat Street Warsaw
00-920 Warsaw
POLAND
PORTUGAL Banco Espirito Santo & Comercial de Banco Pinto & Sotto
Lisboa
Servico de Gestaode Timlos Mayor
R. Mouzirtho da Silveira, 36 r/c Avenida Fontes Pereira de Melo1000
Lisbon
1200 Lisbon
PORTUGAL
SHANGHAI (CHINA) The Hongkong and Shanghai Banking The Chase Manhattan Bank, N.A. Hong
Corporation Limited Kong
Shanghai Branch
Corporate Banking Centre
Unit 504, 5/F Shanghai Centre
1376 Nanjing Xi Lu
Shanghai
THE PEOPLE'S REPUBLIC OF CHINA
SHENZHEN (CHINA) The Hongkong and Shanghai Banking The Chase Manhattan Bank, N.A. Hong
Corporation Limited Kong
1st Floor
Central Plaza Hotel
No. 1 Chun Feng Lu
Shenzhen
THE PEOPLE'S REPUBLIC OF CHINA
SINGAPORE The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
Shell Tower Singapore
50 Raffles Place
Singapore 0104
SINGAPORE
SOUTH KOREA The Hongkong & Shanghai The Hongkong & Shanghai
Banking Corporation Limited Banking Corporaaon Limited
6/F Kyobo Building Seoul
#1 Chongro, l-ka Chongro-Ku,
Seoul
SOUTH KOREA
SPAIN The Chase Manhattan Bank, N.A. Banco Zaragozano, S.A.
Calle Peonias 2 Madrid
7th Floor
La Piovera
28042 Madrid
SPAIN
SRI LANKA The Hongkong & Shanghai The Hongkong & Shangai
Banking Corporation Limited Banking Corporation Limited
24, Sir Baron hyatilaka Mawatha, Colombo
Colombo 1,
SRI LANKA
SWEDEN Skandinaviska Enskilda Banken Svenska Handelsbanken
Kungstradgardsgatan 8 Stockholm
Stockholm S-106 40
SWEDEN
SWITZERLAND Union Bank of Switzerland Union Bank of Switzerland
45 Bahnhofstrasse Zurich
8021 Zurich
SWITZERLAND
TAIWAN The Chase Manhattan Bank, N.A. No correspondent Bank
673 Min Sheng East Road - 9th Floor
Taipei
TAIWAN
REPUBLIC OF CHINA
THAILAND The Chase Maxthattan Bank, N.A. The Chase Manhattan Bank, N.A.
Bubhajit Building Bangkok
20 North Sathorn Road
Silore, Bangrak
Bangkok 10500
TUNISIA Banque Intemationale Arabe de Tunisie Banque Internationale Arabe de
Tunisle, Tunisia
70-72 Avenue Habib Bourguiba
P.O. BOX 520
1080 Tunis Cedex
TUNISIA
TURKEY The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
Yildiz Posta Caddesi 52 Istanbul
Dedeman Ticaret Merkezi, Kat 11
80700 Esentepe
Istanbul
TURKEY
U.K. The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
Woolgate House London
Coleman Street
London EC2P 2HD
UNITED KINGDOM
URUGUAY The First National Bank of Boston The First National Bank of Boston
Zabala 1463 Montevideo
Montevideo
URUGUAY
U.S.A. The Chase Manhattan Bank, N.A. The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza New York
New York
NY 10081
U.S.A.
VENEZUELA Citibank N.A. Citibank N.A.
Carmelitas a Altagracia Caracas
Edificio Citibank
Caracas 1010
VENEZUELA
ZIMBABWE Barclays Bank of Zimbabwe Barclays Bank of Zimbabwe
Ground Floor Harare
Kurima House
42 George Silundika Avenue
Harare
ZlMBABWE
SCHEDULE B
REGISTERED INVESTMENT COMPANY SERIES
Franklin Valuemark Funds Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
</TABLE>
(Franklin logo)
FRANKLIN
RESOURCES, INC.
777 Mariners Island Blvd.
San Mateo, CA 94404
415/312-5818
FAX 415/312-3528
Martin L. Flanagan CPA, CFA
Senior Vice President
Chief Financial Officer
April 12, 1995
Mr. Stephen H. Kilbuck
Vice President Corporate Banking
Bank of America, NT & SA
555 California Street, 41st Floor
San Francisco, CA 94104
Dear Steve:
Various Franklin Funds/Portfolios (the "Funds") and Bank of America,
National Trust and Savings Association ("Bank") are parties to custody
agreements (the "Agreements") as well as separate cash management and deposit
services arrangements.
By this Letter Agreement, each of the Funds and Bank desire to establish
the cash compensation to be paid by each Fund for services rendered to it by
Bank.
Effective April 1, 1995, commencing with the first statement prepared
thereafter each Fund will pay to Bank a monthly fee in cash equal to an annual
rate of 87.5/100 ths. (.875) basis points of the net asset value of each such
Funds domestic portfolios held in custody by Bank and nine and three-tenths
(9.3) basis points of the net asset value of each such Funds international
portfolios held in custody by Bank or held by foreign sub-custodians calculated
as of the last business day of the month. For purposes of calculating the
monthly fee, 000007291 will be used as the monthly factor for the domestic
portfolio and .0000775 will be used as the monthly factor for the international
portfolio. The obligation of each Fund is separate from the obligation of any
other Fund.
The purpose of this Letter of Agreement is to provide for a fair level of
compensation to Bank for its service. The fee is based on the assumption that
each Fund will continue to use services of a type and volume comparable to the
services currently used. The parties agree that any party may initiate
discussions concerning revisions to the terms of this Letter Agreement at any
time it believes the level of compensation to be inappropriate. The parties
further agree that any party may, upon at least sixty (60) days' written notice,
terminate this Letter Agreement with respect to that party. Upon its
termination, if the parties have not agreed to a substitute fee arrangement, any
party may also terminate all or some of the service provided by Bank upon
additional sixty (60) days' written notice.
On an ongoing basis, Bank will continue to prepare the monthly corporate
account analysis statements on behalf of each Fund, which estimates all revenues
and expenses for the parties' relationship. From time to time, Bank and any
Fund(s) may renegotiate the estimated "prices" used in the account analysis
process. The account analysis statement will provide a basis for any
negotiations between the parties on the appropriateness of the fee agreement as
embodied in this Letter Agreement. However, no payment of any kind shall be due
on account of any shortfall on the account analysis statement.
Sincerely,
Authorized Officer for Each Trust/Franklin
Fund Portfolio (List Attached)
By /s/ Martin L. Flanagan
Martin L. Flanagan
Executive Financial Officer
ACCEPTED AND AGREED TO BY:
BANK OF AMERICA, NT & SA
By /s/ Stephen H. Kilbuck
Title: Vice President
Amendment to Global Custody Agreement
The Chase Manhattan Bank, N.A., and Franklin Valuemark Funds, a Massachussetts
business trust, hereby amend Schedule B of their Global Custody Agreement of
March 15, 1994 to read as follows:
SCHEDULE B
Registered Investment Company Series
Franklin Valuemark Funds Global Income Fund
Templeton Devoloping Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Templeton International Equity Fund
Templeton Pacific Growth Fund
Dated as of: July 1, 1995
FRANKLIN VALUEMARK FUNDS
By: /s/ Harmon E. Burns
Title: Vice President
THE CHASE MANHATTAN BANK, N.A.
By: /s/ illegible
Title: Vice President
GASTON SNOW & ELY BARTLETT
COUNSELORS AT LAW
101 CALIFORNIA STREET, SUITE 3000
SAN FRANCISCO, CALIFORNIA 94111
TELECOPY 415/989-4505
TELEX 510/601-7966 GASTON SF
SEPTEMBER 16, 1987
Franklin Investment Trust
777 Mariners Island Boulevard
San Mateo, California 94404
Gentlemen:
We understand that the Franklin Investment Trust, a Massachusetts business
trust (the "Trust") has filed with the Securities and Exchange Commission a
Registration Statement on Form N-1A under the Securities Act of 1933 and the
Investment Company Act of 1940. We also understand that pursuant to said
Registration Statement, the Trust has elected to register an indefinite number
of shares of beneficial interest pursuant to Rule 24f-2 under the Investment
Company Act of 1940.
In connection with the registration of such shares, we have examined the
Trust's Agreement and Declaration of Trust, the Trust's By-Laws, and the
Registration Statement, all as amended or proposed to be amended, including all
exhibits thereto, as well as such other records and documents as we have deemed
necessary. Based upon such examination, we are of the opinion that:
1. The Trust has been duly organized and is validly existing in good
standing as a business trust under the laws of the Commonwealth of
Massachusetts; and
2. The shares of beneficial interest in the Trust to be offered to the
public have been duly authorized for issuance and will be legally issued, fully
paid and nonassessable when said shares have been issued and sold in accordance
with the terms and in the manner set forth in the Trust's Registration
Statement, as amended.
We hereby consent to the filing of this opinion as an exhibit to the
Trust's Registration Statement and to the reference of our name in the documents
comprising said Registration Statement.
Sincerely Yours,
/s/ Gaston Snow & Ely Barlett
Allianz Life Insurance Company of North America
JAMES P. KELSO
Vice President
Variable Products
1750 Hennepin Avenue
Minneapolis, MN 55403
Telephone: 612/347-6568
Telefax: 612/337/6136
April 11, 1995
Franklin Valuemark Funds
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We, through our Allianz Life Variable Account B, propose to acquire 50,000
shares of beneficial interest (the "Shares") of the Templeton Global Asset
Allocation Fund (the "Fund"), a series of Franklin Valuemark Funds (the "Trust")
at the purchase price of $10.00 per share for a total of $500,000.00. We will
purchase the Shares in a private offering prior to the effectiveness of the Form
N-1A registration statement filed on behalf of the Fund. The Shares are being
purchased to serve as the initial capital for the Fund.
In connection with such purchase, we understand that we, the purchaser, intend
to acquire the Shares for our own account as the sole beneficial owner thereof
and have no present intention of redeeming or reselling the Shares so acquired;
until the earlier of (1)6 months; or (ii) total assets of the Fund exceed
$15,000,000.
We consent to the filing of this Investment Letter as an exhibit to the form
N-1A registration statement of the Fund.
Sincerely,
Allianz Life Insurance Company of
North America
By: /s/ James P. Kelso
James P. Kelso
Vice President
Variable Products
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN VALUEMARK FUNDS (the
"Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE] (with full power to each of them
to act alone) his attorney-in-fact and agent, in all capacities, to execute, and
to file any of the documents referred to below relating to Post-Effective
Amendments to the Registrant's registration statement on Form N-1A under the
Investment Company Act of 1940, as amended, and under the Securities Act of 1933
covering the sale of shares by the Registrant under prospectuses becoming
effective after this date, including any amendment or amendments increasing or
decreasing the amount of securities for which registration is being sought, with
all exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys, full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and
agents, may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 18th day of July 1995.
/s/ Charles E. Johnson /s/ Charles B. Johnson
Charles E. Johnson, Principal Charles B. Johnson,
Executive Officer Trustee
and Trustee
/s/ Frank H. Abbott, III /s/ Harris J. Ashton
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/s/ Lowell C. Anderson /s/ S. Joseph Fortunato
Lowell C. Anderson, S. Joseph Fortunato,
Trustee Trustee
/s/ David W. Garbellano /s/ Rupert H. Johnson, Jr.
David W. Garbellano, Rupert H. Johnson, Jr.,
Trustee Trustee
/s/ Frank W. T. LaHaye /s/ Gordon S. Macklin
Frank W. T. LaHaye, Gordon S. Macklin,
Trustee Trustee
/s/ Martin L. Flanagan /s/ Diomedes Loo-Tam
Martin L. Flanagan, Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, Larry L. Greene, certify that I am Assistant Secretary of Franklin
Valuemark Funds (the "Trust").
As Assistant Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust. Present at a
meeting held at 777 Mariners Island Boulevard, San Mateo, California, on July
18, 1995.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Mark H.
Plafker, Harmon E. Burns, Deborah R. Gatzek, Karen L. Skidmore
and Larry L. Greene as attorneys-in-fact for the purpose of
filing documents with the Securities and Exchange Commission, be
executed by a majority of the Trustees and designated officers.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/s/ Larry L. Greene
Dated: July 18, 1995 Larry L. Greene
Assistant Secretary
