AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997.
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. 22
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
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)
[XX] on May 1, 1997 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on [date] pursuant to paragraph (a)(2)of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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 27, 1996.(to be updated by amendment)
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 "Summary of Fund Objectives"; "Intro-
duction"; "General Investment Con-
derations"; "Fund Investment
Objectives and Policies";
"Highlighted Risk Considerations";
"Investment Methods and Risks Common
to More than One Fund"; "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 Gains
Securities Distributions Distributions"; "Tax
Considerations"; "General Information"
7. Purchase of Securities "Purchase, Redemption, and Exchange of
Being Offered Shares"; "Determination of Net Asset
Value"
8. Redemption or Repurchase "Purchase, Redemption, and Exchange of
Shares"; "How the Trust Measures
Performance"; "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 "Introduction, (See also "Introduction";
and History and "General Information" in the
Prospectus)"; "Additional Information"
13. Fund Investment "Fund Investment Objectives and Policies"
Objectives and "Highlighted Risk Considerations";
Policies "Investment Methods and Risks Common to
More Than One Fund"; "Fundamental Investment
Restrictions"; "Non- Fundamental Investment
Restrictions"; (See also "Fund Investment
Objectives and Policies"; "Highlighted Risk
Considerations"; "Investment Methods and
Risks Common to More Than One Fund" 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 "Introduction"; (See also "Introduction"
Other Securities 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 "How the Trust Measures Performance"
Performance Data
23. Financial Statements Financial Statements
FRANKLIN
VALUEMARK
FUNDS
PROSPECTUS MAY 1, 1997
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-three 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 May 1, 1997, 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; and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. Government. 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, jurisdiction or country, 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
FUND 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.
FUNDS SEEKING CURRENT INCOME
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.
TEMPLETON GLOBAL INCOME SECURITIES FUND ("GLOBAL INCOME FUND")1 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.
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.
ZERO COUPON FUNDS, 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.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND1 seeks capital appreciation, with current income
return as a secondary objective, by investing primarily in U.S. common
stocks, securities convertible into common stocks, and preferred stocks.
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.
MUTUAL SHARES SECURITIES FUND ("MUTUAL SHARES FUND")1,2 seeks capital
appreciation, with income as a secondary objective. The Fund invests
primarily in domestic and foreign equity securities trading at prices below
their intrinsic values. The Fund may also invest in securities of companies
involved in corporate restructuring, mergers, bankruptcies and liquidations,
as well as debt securities of any quality including "junk bonds," and
defaulted securities, all of which involve increased risks related to the
creditworthiness of their issuers. Foreign investing involves special risks.
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.
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, including up to 25% in high yield, high risk,
lower rated debt obligations (commonly referred to as "junk bonds"), 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
CAPITAL GROWTH FUND ("GROWTH FUND") seeks capital appreciation, with current
income as a secondary consideration. The Fund invests primarily in equity
securities, including common stocks and securities convertible into common
stocks.
MUTUAL DISCOVERY SECURITIES FUND ("MUTUAL DISCOVERY FUND")1,2 seeks capital
appreciation. The Fund invests primarily in domestic and foreign equity
securities, including securities of small capitalization companies, trading
at prices below their intrinsic values. The Fund may also invest in
securities of companies involved in corporate restructuring, mergers,
bankruptcies and liquidations, as well as debt securities of any quality
including "junk bonds," and defaulted securities, all of which involve
increased risks related to the creditworthiness of their issuers. Foreign
investing involves special risks.
NATURAL RESOURCES SECURITIES FUND ("NATURAL RESOURCES FUND")1 The
Natural Resources Securities Fund's investment objective is capital
appreciation; current income is a secondary objective. The Fund seeks
to achieve its objective by concentrating its investments in securities
issued by companies in or related to the natural resources sector.
Prior to May 1, 1997 the Fund was named the Precious Metals Fund and
had different investment objectives and policies.
SMALL CAP FUND1 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.
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 EQUITY 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 INTERNATIONAL SMALLER COMPANIES FUND ("INTERNATIONAL SMALLER
COMPANIES FUND")1 seeks long-term capital appreciation. The Fund seeks to
achieve this objective by investing primarily in equity securities of smaller
companies outside the U.S., including developing markets. Foreign investing
involves special risks and smaller company investments may involve higher
volatility. An investment in the Fund should not be considered a complete
investment program.
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 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, Capital Growth, Developing Markets, Global Growth,
Global Income, Growth and Income, Income Securities, International Equity,
International Smaller Companies, Money Market, Mutual Discovery, Mutual
Shares, Pacific, Natural Resources, Small Cap, and Utility 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, Income Securities, Mutual Discovery and Mutual Shares 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................
Current Income ...................
High Income Fund ................
Templeton Global Income Securities Fund
U.S. Government Securities Fund..
Zero Coupon Funds, 2000, 2005, 2010
Growth and Income ................
Growth and Income Fund ..........
Income Securities Fund ..........
Mutual Shares Securities Fund ...
Real Estate Securities Fund .....
Rising Dividends Fund ...........
Templeton Global Asset Allocation Fund
Utility Equity Fund..............
Capital Growth ...................
Capital Growth Fund .............
Mutual Discovery Securities Fund
Natural Resources Securities Fund
(formerly Precious Metals Fund) ..
Small Cap Fund...................
Templeton Developing Markets
Equity Fund ....................
Templeton Global Growth Fund ....
Templeton International Equity Fund
Templeton International
Smaller Companies 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 ....
Defaulted Debt Obligations......
The Funds' Portfolios...........
Asset Composition Table.........
INVESTMENT METHODS AND
RISKS, COMMON TO MORE
THAN ONE FUND....................
Borrowing .......................
Concentration ...................
Convertible Securities...........
Debt Obligations ................
Corporate Debt Obligations......
Money Market Instruments........
U.S. Government Securities ....
Zero Coupon Bonds ..............
Deferred Interest and Pay-in-Kind Bonds
Derivatives .....................
Diversification .................
Loan Participations .............
Loans of Portfolio Securities ...
Options and Futures Contracts ...
Portfolio Turnover...............
Repurchase and Reverse Repurchase Agreements
Restricted and Illiquid Securities
"Rolls"..........................
Small Capitalization Issuers ....
Structured Notes.................
Temporary Investments ...........
Trade Claims.....................
Warrants ........................
"When-Issued" and "Delayed
Delivery" Transactions..........
INVESTMENT RESTRICTIONS...........
MANAGEMENT .......................
Trustees and Officers ...........
Managers ........................
Services provided by the Managers
Management Fees ................
Operating Expenses .............
Portfolio Transactions .........
Subadvisor ......................
Fund Administrator...............
Portfolio Operations ............
Biographical Information ........
PURCHASE, REDEMPTION, AND
EXCHANGE OF SHARES ..............
INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS .....
DETERMINATION OF
NET ASSET VALUE .................
TAX CONSIDERATIONS ...............
HOW THE TRUST MEASURES
PERFORMANCE ....................
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
This table summarizes the financial history of each Fund. The information has
been audited by Coopers & Lybrand L.L.P., the Trust's independent auditors.
Their audit report covering each of the most recent five years, appears in
the Trust's annual report for the fiscal year ended December 31, 1996. The
Annual Report to Contractholders includes the Trust's annual report, as well
as more information about each Fund's performance. For a free copy, please
call 1-800-342-3863.
(Financial Highlights to be provided by amendment)
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 twenty-three separate investment portfolios or funds
(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 Allianz Life Insurance Company of North America, or
its wholly owned subsidiary Preferred Life Insurance Company of New York, or
their affiliates ("Insurance Companies"), to fund the benefits under variable
life insurance policies and variable annuity contracts (collectively the
"Contracts") issued by the Insurance Companies. The Variable Accounts are
divided into sub-accounts (the "Sub-Accounts"), each of which will invest in
one of the Funds, as directed by the owners of the Contracts (collectively
the "Contract Owners"). Some of the current Funds in the Trust may not be
available in connection with a particular Contract or in a particular state.
Contract Owners should consult the accompanying prospectus describing the
specific Contract or the appropriate Insurance Company for information on
available Funds and any applicable limitations with respect to their
investment options.
GENERAL INVESTMENT CONSIDERATIONS
Each Fund has one or more investment objectives and related investment
policies and uses various investment methods to pursue these objectives and
policies. There can be no assurance that any Fund 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 Contract Owner
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 ("junk bonds"), foreign investments
including those of "developing market" issuers located in emerging nations
generally as defined by the World Bank, specialized industry sectors,
derivative instruments or complex securities. These and other types of
investments and investment methods common to more than one Fund are described
in greater detail, including the risks of each and any limitations, in
"Highlighted Risk Considerations," "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
FUND 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, or (b) more
than 5% of its total assets in Eligible Securities of all issuers rated in
the second highest category.
Under the policies discussed in "Investment Methods and Risks" and in the
SAI, the Fund may acquire U.S. Government Securities on a when-issued or
delayed delivery basis, lend portfolio securities, enter into repurchase
agreements, and engage in other activities specifically identified for this
Fund.
FUNDS SEEKING CURRENT INCOME
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.
The Fund may also invest in lower rated zero-coupon, deferred interest and
pay-in-kind obligations, which may involve special risk considerations. See
"Investment Methods and Risks."
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," "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
information about the ratings of the debt obligations in the Fund during 1995.
These ratings, which represent the opinions of the rating services, do not
reflect the risk of market fluctuations nor are they absolute credit
standards. Ratings 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 rating 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 lower rated debt obligations, changes in the level of
interest rates, among other things, will likely have an increased effect on
the value of the Fund's holdings and thus the value of the Fund's shares.
OTHER INVESTMENT POLICIES. The Fund may invest, up to 10% in foreign
securities including developing markets, which involve special risks
including market fluctuations and political uncertainty. See "Highlighted
Risk Considerations, Foreign Transactions" and the SAI. Under the policies
discussed in "Investment Methods and Risks," "Highlighted Risk
Considerations," and the SAI, the Fund may also 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.
TEMPLETON GLOBAL INCOME SECURITIES FUND
The investment objective of the Templeton Global Income Securities Fund 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 use of forward currency
exchange contracts or options on currencies for hedging purposes. 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 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), other business
organizations, and 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 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 all types of long-term or short-term debt obligations,
such as bonds, debentures, notes, convertible debt obligations, and
commercial paper. 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. Many debt obligations of foreign issuers, and
especially developing markets issuers, are either (i) rated below investment
grade, or (ii) not rated by U.S. rating agencies so that their selection
depends on the Manager's 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; investments in such securities will not exceed 25% of
the Fund's net assets. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT
OBLIGATIONS," "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 information about the ratings of the debt
obligations in the Fund during 1995.
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, to hedge income or capital. Under the policies discussed in
"Investment Methods and Risks Common to More than One Fund," "Highlighted
Risk Considerations," and in the SAI, the Fund may also acquire loan
participations; loan its portfolio securities; enter into repurchase, reverse
repurchase, and "when-issued" transactions; invest in preferred stock; invest
in structured notes; 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 "Investment
Methods and Risks."
U.S. GOVERNMENT SECURITIES FUND
The investment objective of the U.S. Government Securities 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.
PORTFOLIO INVESTMENTS. The Fund pursues its objective by investing in all
types of U.S. Government Securities, including obligations issued or
guaranteed by U.S. government agencies and instrumentalities. These
obligations may also include fixed-rate mortgage backed securities, or
adjustable-rate mortgage-backed securities ("ARMS") or a hybrid of the two.
See "Investment Methods and Risks-Debt Obligations." Some of these
investments are supported by the full faith and credit of the U.S.
government, while others are supported principally by the issuing agency and
may not permit recourse against the U.S. Treasury if the issuing agency does
not meet its commitments.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Fund anticipates that a
significant portion of its portfolio will consist of Government National
Mortgage Association ("Association") mortgage-backed certificates ("GNMAs")
and similar mortgage-backed securities issued or guaranteed by other
agencies. GNMAs are mortgage-backed securities representing part ownership of
a pool of mortgage loans. GNMAs differ from other bonds in that principal may
be paid back on an unscheduled basis rather than returned in a lump sum at
maturity. The Fund purchases GNMAs for which principal and interest are
guaranteed.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the United States government. The
Association may borrow U.S. Treasury funds to the extent needed to make
payments under its guarantee. Of course, this guarantee does not extend to
the market value or yield of the GNMAs or the net asset value or performance
of the Fund, which will fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment which represents a return of principal will be reinvested by
the Fund in securities which may bear interest at a rate higher or lower than
the obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, such principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value
of a GNMA will generally decline. In a period of declining interest rates,
however, it is more likely that mortgages contained in GNMA pools will be
prepaid thus reducing the effective yield. This potential for prepayment
during periods of declining interest rates may reduce the general upward
price increases of GNMAs as compared to noncallable debt securities over the
same periods. Moreover, any premium paid on the purchase of a GNMA will be
lost if the obligation is prepaid. Of course, price changes of GNMAs and
other securities held by the Fund will have a direct impact on the net asset
value per share of the Fund.
Adjustable Rate Securities. In addition to ARMS, the Fund may also invest in
adjustable rate U.S. Government securities, which may include securities
backed by other types of assets, including business loans guaranteed by the
U.S. Small Business Administration ("SBA").
The ARMS in which the Fund invests are issued primarily by the Government
National Mortgage Association ("Association"), 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 the Association are fully
guaranteed by the Federal Housing Administration or the Veterans
Administration, while those collateralizing ARMS issued by the FNMA or the
FHLMC are typically conventional residential mortgages conforming to standard
underwriting size and maturity constraints.
ARMS 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.
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 to exceed the maximum annual or
lifetime reset limits (or "cap rates"). Fluctuations in interest rates above
these levels could cause such ARMS to behave more like long-term, fixed-rate
debt obligations. See the SAI for additional details.
OTHER INVESTMENT POLICIES. Under the policies discussed in "Investment
Methods and Risks" and in the SAI, the Fund may invest in re-securitized
government project loans, enter into covered mortgage "dollar rolls," loan
portfolio securities, engage in repurchase agreements, and engage in other
activities specifically identified for this Fund.
ZERO COUPON FUNDS:
MATURING IN DECEMBER OF 2000, 2005, 2010
The objective of each of the three 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 CONTRACT OWNERS WHO DO NOT
PLAN TO HAVE THEIR PURCHASE PAYMENTS 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, including treasury
bills, debt obligations issued by the U.S. Treasury which have been stripped
of their unmatured interest coupons or which were issued without 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. The availability of
Stripped Securities, other than Stripped Treasury Securities, may be limited
at times; during such periods, because the Fund must meet annuity tax
diversification rules, the Fund may invest in other types of fixed-income
securities.
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 three separate
Zero Coupon Funds, each maturing on the third Friday of December of its
specific maturity year (the "Target Date"): 2000, 2005 and 2010. 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,
contract 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 Contract Owners will be
notified of such event.
Because each Fund will be primarily invested in zero coupon securities,
investors whose purchase payments 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 Fund reserves the right to
invest up to 10% 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. Although each Fund reserves the right to invest up to 10%,
each Fund currently does not intend to invest more than 5% of its assets in
certain structured notes. These notes are comparable to zero coupon bonds in
terms of credit quality, interest rate volatility, and yield. See "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 although typically the actual amount is
substantially less. Under the policies discussed in "Investment Methods and
Risks," "Highlighted Risk Considerations," 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 GROWTH AND INCOME
GROWTH AND INCOME 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 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. Stocks and other equities representing
ownership interest in a corporation, have historically outperformed other
asset classes over the long term but tend to fluctuate more dramatically over
the short term.
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,
enhanced convertible securities, debt obligations, and Money Market
Instruments.
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's Manager uses 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 generally results in the Fund investing predominantly
in 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 no more
than 20% of the Fund's total net assets, including ADRs. 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.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. The
convertible debt obligations in which the Fund may invest are subject to the
same rating criteria and investment policies as the Fund's investments in
debt obligations. Convertible preferred stocks are equity securities,
generally carry a higher degree of market risk than debt obligations, and
often may be regarded as speculative in nature. The Fund may also invest in
enhanced convertible securities which may provide higher dividend income but
which may carry additional risks, including reduced liquidity. See
"Highlighted Risk Considerations" and "Investment Methods and Risks."
REITS. The Fund currently intends to invest no more than 10% of its assets in
equity real estate investment trusts ("REITs"). REITs may provide an
attractive alternative to direct investments in Real Estate, but are subject
to risks related to the skill of their management, changes in value of the
properties owned by the REITs, the quality of any credit extended by the
REITs, and other factors. See "Real Estate Securities Fund"
OTHER INVESTMENT POLICIES. The Fund currently does not intend to 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 discussed in "Highlighted Risk Considerations" "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, including "forward conversion" transactions; loan its portfolio
securities; enter into repurchase transactions; and engage in other
activities specifically identified for this Fund.
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 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.
The assets of the Fund may be held in cash or invested in securities traded
on any national securities exchange, in Money Market Instruments, or in
securities issued by a corporation, association or similar legal entity
having gross assets valued at not less than $1,000,000 as shown by its latest
published annual report. Such investments may include zero coupon, deferred
interest or pay-in-kind bonds, or preferred stocks. See "Investment Methods
and Risks." There are no restrictions as to the proportion of investments
which may be made in any particular type 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.
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.
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.
Currently, however, the Fund intends generally to 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, comparable obligations in the
view of the Manager. The lower rated obligations in which the Fund may invest
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. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS,"
"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 information about the ratings of the debt obligations
in the Fund during 1995.
These ratings, which represent the opinions of the rating services, do not
reflect the risk of market fluctuations nor are they absolute credit
standards. Ratings 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.
In the event the rating on an issue held in the Fund's portfolio is changed
by the rating 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.
Because a substantial portion of this Fund's investments at any particular
time may consist of lower rated debt obligations, changes in the level of
interest rates, among other things, will likely have an increased effect on
the value of the Fund's holdings and thus the value of the Fund's shares.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest up to 5% of its assets in
defaulted debt obligations which may be considered speculative.
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. Investments in
foreign developing markets involve heightened risks related to the smaller
size and lesser liquidity of these markets. 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. The Fund currently intends to invest no more than
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; and currently intends to invest no more than 5%
of its assets in enhanced convertible securities. Under the policies
discussed in "Investment Methods and Risks," "Highlighted Risk
Considerations," and in the SAI, the Fund may also 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.
MUTUAL SHARES SECURITIES FUND
The principal investment objective of the Mutual Shares Securities Fund is
capital appreciation, with income as a secondary objective.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued
by corporations or governments in any form, including notes, bonds, or
debentures, as well as distressed mortgage obligations and other debt secured
by real property. The Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer,
including smaller capitalization companies, which may be subject to different
and greater risks. See "Common Investment Methods and Risks, Smaller
Capitalization Issuers." It will tend to invest, however, in securities of
issuers with market capitalizations in excess of $500 million. It may invest
in securities that are traded on U.S. or foreign exchanges, NASDAQ national
market or in the over-the-counter market. It may invest in any industry
sector, although it will not concentrate in any one industry. From time to
time, the Fund may hold significant cash positions, consistent with its
policy on temporary investments, until suitable investment opportunities are
available.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as
to which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50%
of its assets in such investments, but is not restricted to that amount.
There can be no assurance that any such transaction proposed at the time of
the Fund's investment will be consummated or will be consummated on the terms
and within the time period contemplated. The Fund may also invest in other
forms of secured or unsecured indebtedness or participations
("Indebtedness"), including without limitation, loan participations and trade
claims, of debtor companies involved in reorganization or financial
restructuring, some of which may have very long maturities. Some of the
indebtness is illiquid.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of the Manager, are available at prices less
than their intrinsic values. The Manager's opinions are based upon analysis
and research, taking into account, among other factors, the relationship of
book value to market value of the securities, cash flow, and multiples of
earnings of comparable securities. These factors are not applied
formulaically, as the Manager examines each security separately; the Manager
has no general criteria as to asset size, earnings or industry type which
would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for
the purpose of influencing or controlling management of the issuer. However,
in certain circumstances when the Manager perceives that the Fund may
benefit, the Fund may itself seek to influence or control management or may
invest in other entities that purchase securities for the purpose of
influencing or controlling management, such as investing in a potential
takeover or leveraged buyout or investing in other entities engaged in such
practices.
CREDIT QUALITY. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the
very highest to the very lowest categories (currently C for Moody's and D for
S&P). Medium and lower-rated debt obligations are commonly referred to as
"junk bonds." In general, it will invest in these instruments for the same
reasons underlying its investments in equity securities, i.e., that the
instruments are available, in the Manager's opinion, at prices less than
their intrinsic values. Consequently, the Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than
the stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated
or low rated securities that are often in, or are about to, default, that the
Manager seeks to identify securities which are sometimes available at prices
which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk,
lower rating categories of S&P or Moody's; 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. Moreover, securities
rated BB or lower by S&P or Ba or lower by Moody's are predominantly
speculative with respect to the issuer's ability to pay principal and
interest and may be in default. These securities may also be less liquid than
higher rated securities, or have no established markets, thereby increasing
the degree to which judgment plays a role in valuing such securities. 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. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND "APPENDIX."
DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted
debt obligations, subject to the Fund's restriction on investments in
illiquid securities. Defaulted debt obligations may be considered
speculative. See the discussion above under "Credit Quality" for the
circumstances under which the Fund generally invests in defaulted debt
obligations.
FOREIGN INVESTMENTS. Although the Fund reserves the right to purchase
securities in any foreign country, developed or undeveloped, the Fund's
current investment strategy is to invest primarily in domestic securities,
with a significant portion, but generally less than 50%, of its total assets
in foreign securities, including sponsored or unsponsored Depository
Receipts. The Fund presently does not intend to invest more than 5% of its
assets in developing markets securities. Foreign investments may include both
voting and non-voting securities, sovereign debt and participation in foreign
government deals. 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.
CURRENCY TECHNIQUES. The Fund generally expects it will hedge against
currency risks to the extent that hedging is available. Currency hedging
techniques may include investments in foreign currency futures contracts,
options on foreign currencies or currency futures, forward foreign currency
exchange contracts ("forward contracts") and currency swaps, all of which
involve specialized risks. See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN
TRANSACTIONS."
OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies,
it may invest from time to time in other investment company securities
subject to the limitation that it will not purchase more than 3% of the
voting securities of another investment company. In addition, the Fund will
not invest more than 5% of its assets in the securities of any single
investment company and will not invest more than 10% of its assets in
investment company securities. Investors should recognize that an investment
in the securities of such investment companies results in layering of
expenses such that investors indirectly bear a proportionate share of the
expenses of such investment companies, including operating costs, and
investment advisory and administrative fees. The Fund may also sell short
securities it does not own up to 5% of its assets. Short sales have risks of
loss if the price of the security sold short increases after the sale, but
the Fund can profit if the price decreases. The Fund may also sell
securities "short against the box" (i.e., securities which the Fund owns or
has the immediate and unconditional right to acquire at no additional cost)
without limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase securities and debt
obligations on a "when-issued" or "delayed delivery" basis; invest in
restricted or illiquid securities; purchase and sell exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments; purchase and sell financial futures
contracts and options thereon; 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.
The Fund will typically invest predominately in securities issued by mid-cap
or smaller cap U.S. companies which have market capitalizations of $5 billion
and $1 billion or less, respectively, because that is reflective of the
industry itself. Small cap companies can be subject to different and greater
risks than mid or larger cap issuers. See "Investment Methods and Risks-Small
Capitalization Issuers."
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. The Fund may invest up to 10% in foreign
securities, including developing markets, which involve special risks
including market fluctuations and political uncertainty. See "Highlighted
Risk Considerations, Foreign Transactions" and the SAI. Under the policies
discussed in "Highlighted Risk Considerations," "Investment Methods and
Risks," and in the SAI, the Fund may also write covered call options, loan
its portfolio securities, engage in repurchase transactions, invest in
foreign securities (including Depository Receipts), invest in enhanced
convertible 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:
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. This criterion applies only at the time of purchase.
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.
Following these policies, the Fund will typically invest predominantly in
equity securities issued by large-cap or mid-cap U.S. companies, which have
market capitalizations of $1 billion or more. It may also invest to a lesser
degree in smaller capitalization companies, which are subject to different
and greater risks. See "Common Investment Objectives and Risks, Smaller
Capitalization Issuers."
OTHER INVESTMENT POLICIES. The Fund may invest up to 10% in foreign
securities, including developing markets, which involve special risks
including market fluctuations and political uncertainty. See "Highlighted
Risk Considerations, Foreign Transactions" and the SAI. Under the policies
discussed in "Investment Methods and Risks," "Highlighted Risk Considerations
- - Foreign Transactions," 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 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 governments or companies, such as
bonds, debentures, notes, commercial paper, collateralized mortgage
obligations ("CMOs") and obligations issued or guaranteed by governments or
government agencies or instrumentalities including, specifically, Government
National Mortgage Association ("GNMA") mortgage-backed certificates. The
yields provided by GNMA 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 "Investment Methods and Risks." 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," "INVESTMENT METHODS AND RISKS," THE SAI FOR ADDITIONAL
INFORMATION, AND THE "APPENDIX" FOR A DISCUSSION OF THE RATING CATEGORIES.
As an operating policy established by the Board, however, the Fund will not
invest more than 25% 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 include defaulted debt
obligations. Many debt obligations of foreign issuers, and especially
developing markets issuers, are either (i) rated below investment grade or
(ii) not rated by U.S. rating agencies so that their selection depends on the
Manager's internal analysis. The Board may consider an increase 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.
MONEY MARKET INSTRUMENTS. The Fund may invest in Money Market Instruments. 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 Appendix.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest up to 10% of its assets in
defaulted debt obligations, which may be considered speculative.
FOREIGN SECURITIES. The Fund has an unlimited right to purchase securities in
any foreign country, developed or emerging, if they are listed on an
exchange, as well as a limited right to purchase such securities if they are
unlisted. However, as a non-fundamental policy, the Fund will limit its
investments in securities of Russian issuers to 5% of total assets. 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 developing markets involve
heightened risks related to the smaller size and lesser liquidity of these
markets. 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."
CURRENCY TECHNIQUES. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency hedging techniques.
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.
See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENT POLICIES. Under the policies discussed in "Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI, the
Fund may also invest in illiquid and restricted securities, purchase
securities on a "when-issued" basis, enter into repurchase transactions, loan
its 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 developing markets
involve heightened risks related to the smaller size and lesser liquidity of
these markets. 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 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
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; 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 ratings, 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. The Fund currently intends to invest no more than 5% of its
assets in preferred stocks or convertible preferred stocks issued by public
utility issuers. Under the policies discussed in "Investment Methods and
Risks," "Highlighted Risk Considerations," 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.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
The primary investment objective of the Capital Growth Fund is capital
appreciation. Current income is only a secondary consideration in selecting
portfolio securities.
Under normal market conditions, the Fund will invest primarily (at least 65%
of assets) in equity securities, including common and preferred stocks, or
securities convertible into common stocks, which are believed to offer
favorable possibilities for capital appreciation, but some of which may yield
little or no current income. The Fund's assets may be invested in shares of
common or capital stock traded on any national securities exchange or
over-the-counter, in convertible securities or, for temporary or defensive
purposes, in cash and Money Market Instruments. Stocks and other equities
representing ownership interest in a corporation, have historically
outperformed other asset classes over the long term but tend to fluctuate
more dramatically over the short term.
The Manager will generally make long-term investments in equity securities
which have been selected based upon fundamental and quantitative analysis.
Following these policies, the Fund will typically invest predominantly in
equity securities issued by large-cap or mid-cap U.S. companies, which have
market capitalizations of $1 billion or more. It may also invest to a lesser
degree in smaller capitalization companies, which may be subject to different
and greater risks, but there is no present intention of investing more than
20% of the Fund's assets in such securities. See "Common Investment
Objectives and Risks, Smaller Capitalization Issuers."
FOREIGN SECURITIES. As an operating policy, the Fund currently intends to
invest no more than 15% of its assets in foreign securities, including
Depository Receipts which involve special risks including market fluctuations
and political uncertainty. See "Highlighted Risk Considerations - Foreign
Transactions."
OTHER INVESTMENTS. The Fund currently intends to invest no more than 5% of
its assets in debt obligations, including convertible debt obligations, rated
Ba or lower by Moody's or BB or lower by S&P, or unrated securities
determined by the Manager to be of comparable quality. The Fund may invest in
convertible preferred stocks, which are equity securities, generally carry a
higher degree of market risk than debt obligations, and often may be regarded
as speculative in nature. See "Highlighted Risk Considerations" and
"Investment Methods and Risks." Under the policies discussed in "Investment
Methods and Risks" and in the SAI, the Fund may also write covered call
options; purchase put options on securities; loan its portfolio securities;
enter into repurchase transactions; invest in restricted or illiquid
securities; and engage in other activities specifically identified for this
Fund.
MUTUAL DISCOVERY SECURITIES FUND
The investment objective of the Mutual Discovery Securities Fund is capital
appreciation.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund invests in
domestic and foreign equity securities, including common and preferred stocks
and securities convertible into common stocks, as well as debt obligations of
any quality. Debt obligations may include securities or indebtedness issued
by corporations or governments in any form, including notes, bonds, or
debentures, as well as distressed mortgage obligations and other debt secured
by real property. The Manager has no pre-set limits as to the percentages
which may be invested in equity securities, debt securities or Money Market
Instruments. The Fund may invest in securities from any size issuer, and will
tend to invest a substantial portion of its assets in securities of small
capitalization issuers, which have market capitalizations of less than $1
billion. Securities of foreign or small cap issuers may be subject to
different and greater risks, as discussed below. The Fund may invest in
securities that are traded on U.S. or foreign exchanges, NASDAQ national
market or in the over-the-counter market. It may invest in any industry
sector, although it will not concentrate in any one industry. From time to
time, the Fund may hold significant cash positions until suitable investment
opportunities are available, consistent with its policy on temporary
investments.
The Fund also seeks to invest in securities of domestic and foreign companies
involved in mergers, consolidations, liquidations and reorganizations or as
to which there exist tender or exchange offers, and may participate in such
transactions. The Fund does not presently anticipate investing more than 50%
of its assets in such investments, but is not restricted to that amount.
There can be no assurance that any such transaction proposed at the time of
the Fund's investment will be consummated or will be consummated on the terms
and within the time period contemplated. The Fund may also invest in other
forms of secured or unsecured indebtedness or participations
("Indebtedness"), including without limitation loan participations and trade
claims, of debtor companies involved in reorganization or financial
restructuring, some of which may have very long maturities. Some of the
Indebtedness is illiquid.
SELECTION OF PORTFOLIO INVESTMENTS. The Fund's general policy is to invest in
securities which, in the opinion of its Manager, are available at prices less
than their intrinsic values. The Manager's opinions are based upon analysis
and research, taking into account, among other factors, the relationship of
book value to market value of the securities, cash flow, and multiples of
earnings of comparable securities. These factors are not applied
formulaically, as the Manager examines each security separately; the Manager
has no general criteria as to asset size, earnings or industry type which
would make a security unsuitable for purchase by the Fund.
The Fund generally purchases securities for investment purposes and not for
the purpose of influencing or controlling management of the issuer. However,
in certain circumstances when the Manager perceives that the Fund may
benefit, the Fund may itself seek to influence or control management or may
invest in other entities that purchase securities for the purpose of
influencing or controlling management, such as investing in a potential
takeover or leveraged buyout or investing in other entities engaged in such
practices.
FOREIGN INVESTMENTS. The Fund may purchase securities in any foreign country,
developed or undeveloped, and currently expects to invest up to 50% or more
of its total assets in foreign securities, including sponsored or unsponsored
Depository Receipts. The Fund presently does not intend to invest more than
5% of its assets in developing markets securities. Foreign investments may
include both voting and non-voting securities, sovereign debt and
participation in foreign government deals. 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 developing
markets including certain Eastern European countries and Russia, involve
heightened risks related to the smaller size and lesser liquidity of those
markets. These developing markets risks are in addition to the special risks
associated with foreign investing. INVESTORS SHOULD CONSIDER CAREFULLY THE
SUBSTANTIAL RISKS INVOLVED IN INVESTING IN FOREIGN SECURITIES, RISKS THAT ARE
HEIGHTENED IN DEVELOPING MARKETS. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN SECURITIES" BELOW AND IN THE SAI.
CURRENCY TECHNIQUES. The Fund generally expects it will hedge against
currency risks to the extent that hedging is available. Currency hedging
techniques may include investments in foreign currency futures contracts,
options on foreign currencies or currency futures, forward foreign currency
exchange contracts ("forward contracts") and currency swaps, all of which
involve specialized risks. See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN
TRANSACTIONS."
RISKS ASSOCIATED WITH SMALL CAP INVESTMENTS. Securities of smaller companies,
particularly if they are unseasoned, present greater risks than securities of
larger, more established companies. The smaller companies in which the Fund
invests are often not well known, may often trade at a discount and may not
be followed by institutions. The companies may have relatively small
revenues, limited product lines, and 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 fluctuate independently of larger
company stocks. See "Investment Methods and Risks."
CREDIT QUALITY. Debt obligations (including Indebtedness) in which the Fund
invests may be rated or unrated and, if rated, ratings may range from the
very highest to the very lowest categories (currently C for Moody's and D for
S&P). Medium and lower-rated debt obligations are commonly referred to as
"junk bonds." In general, it will invest in these instruments for the same
reasons underlying its investments in equity securities, i.e., that the
instruments are available, in the Manager's opinion, at prices less than
their intrinsic values. Consequently, the Manager's own analysis of a debt
instrument exercises a greater influence over the investment decision than
the stated coupon rate or credit rating. The Fund expects to invest in debt
obligations issued by reorganizing or restructuring companies, or companies
which recently emerged from, or are facing the prospect of a financial
restructuring. It is under these circumstances, which usually involve unrated
or low rated securities that are often in, or are about to, default, that the
Manager seeks to identify securities which are sometimes available at prices
which it believes are less than their intrinsic values. The purchase of
Indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. However, the debt securities of reorganizing or restructuring companies
typically rank senior to the equity securities of such companies.
Higher yields are generally available from securities in the higher risk,
lower rating categories of S&P or Moody's. 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. Moreover, securities
rated BB or lower by S&P or Ba or lower by Moody's are predominantly
speculative with respect to the issuer's ability to pay principal and
interest and may be in default. These securities may also be less liquid than
higher rated securities, or have no established markets, thereby increasing
the degree to which judgment plays a role in valuing such securities. 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. SEE "HIGHLIGHTED RISK
CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS" AND "APPENDIX."
DEFAULTED DEBT OBLIGATIONS. The Fund may invest without limit in defaulted
debt obligations, subject to the Fund's restriction on investments in
illiquid securities. Defaulted debt obligations may be considered
speculative. See the discussion above under "Credit Quality" for the
circumstances under which the Fund generally invests in defaulted debt
obligations.
OTHER INVESTMENT POLICIES. While the Fund may not purchase securities of
registered open-end investment companies or affiliated investment companies,
it may invest from time to time in other investment company securities
subject to the limitation that it will not purchase more than 3% of the
voting securities of another investment company. In addition, the Fund will
not invest more than 5% of its assets in the securities of any single
investment company and will not invest more than 10% of its assets in
investment company securities. Investors should recognize that an investment
in the securities of such investment companies results in layering of
expenses such that investors indirectly bear a proportionate share of the
expenses of such investment companies, including operating costs, and
investment advisory and administrative fees. The Fund may also sell short
securities it does not own up to 5% of its assets. Short sales have risks of
loss if the price of the security sold short increases after the sale, but
the Fund can profit if the price decreases. The Fund may also sell securities
"short against the box" (i.e., securities which the Fund owns or has the
immediate and unconditional right to acquire at no additional cost) without
limit. See the SAI for further details concerning short sales.
Under the policies discussed in "Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also loan its portfolio
securities; enter into repurchase transactions; purchase securities and debt
obligations on a "when-issued" or "delayed delivery" basis; invest in
restricted or illiquid securities; purchase and sell exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other financial instruments; purchase and sell financial futures
contracts and options thereon; and engage in other activities specifically
identified for this Fund.
NATURAL RESOURCES SECURITIES FUND
EFFECTIVE MAY 1, 1997, THE FUND'S NAME CHANGED FROM "PRECIOUS METALS
FUND" TO "NATURAL RESOURCES SECURITIES FUND," TO REFLECT THE CHANGES
APPROVED BY SHAREHOLDERS IN THE FUND'S INVESTMENT OBJECTIVE, INDUSTRY
CONCENTRATION POLICY AND RELATED FUNDAMENTAL AND NON FUNDAMENTAL
INVESTMENT POLICIES.
The Natural Resources Securities Fund's investment objective is capital
appreciation; current income is a secondary objective. The Fund seeks
to achieve its objective by concentrating its investments in securities
issued by companies in or related to the natural resources sector.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund will
invest primarily (at least 65% of assets) in securities issued by
companies in or related to the natural resources sector. Companies in
the natural resources sector may own, produce, refine, process or
market natural resources, or provide support services for natural
resources companies (e.g., develop technologies or provide services,
supplies or equipment directly related to the production of natural
resources). The natural resources sector includes, but is not limited
to, the following industries: integrated oil; oil and gas exploration
and production; gold and precious metals; steel and iron ore
production; aluminum production; forest products; farming products;
paper products; chemicals; building materials; energy services and
technology; environmental services; and energy generation and
distribution.
The Fund may invest in common stocks (including preferred or debt
securities convertible into common stocks), preferred stocks and debt
obligations. While the Fund normally expects to invest primarily in
equity securities, the mixture of common stocks, preferred stocks and
debt obligations may vary from time to time based upon the Manager's
assessment as to whether investments in each category will contribute
to meeting the Fund's investment objective.
RISKS OF INVESTING IN NATURAL RESOURCES SECTOR. Due to the Fund's
policy of concentrating its investments in the natural resources
sector, 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. In addition, at the Manager's
discretion, the Fund may from time to time invest up to 25% of its
assets in any industry or group of industries within the natural
resources sector; such a strategy may expose the Fund to greater
investment risk than a more diversified strategy within the sector.
Certain of the natural resources industries' commodities are subject to
limited pricing flexibility as a result of similar supply and demand
factors. Others are subject to broad price fluctuations, reflecting the
volatility of certain raw materials' prices and the instability of
supplies of other resources. These factors can affect the overall
profitability of an individual company operating within the natural
resources sector. While the Managers may strive to diversify among the
industries within the natural resources sector to reduce this
volatility, there will be occasions where the value of an individual
company's securities will prove more volatile than the broader market.
In addition, many of these companies operate in areas of the world
where they are subject to unstable political environments, currency
fluctuations and inflationary pressures.
FOREIGN INVESTMENTS. While the Fund will normally invest a greater
percentage of its assets in securities of U.S. issuers than in
securities of issuers in any other single country, the Fund may invest
50% or more of its assets in foreign securities, including Depository
Receipts, of issuers in both developed and developing markets. Foreign
securities include both equity securities and debt obligations.
Investments in foreign developing markets, including certain Eastern
European countries and Russia, involve heightened risks related to the
small size and lesser liquidity of these markets. These developing
markets risks are in addition to the special risks associated with
foreign investing. 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."
SMALL CAP INVESTMENTS. The Fund may invest without minimum or maximum
limitation in small capitalization companies ("small cap companies")
which have market capitalizations of $1 billion or less at the time of
purchase. These may include investments in small mining or oil and gas
exploration concerns which are believed to have significant potential
for appreciation, but are subject to the risk that their exploration
efforts will not be successful. The Fund will not invest more than 10%
of its assets in securities of companies with less than three years of
continuous operation. Due to these and other factors, small cap and
unseasoned 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, these stocks may fluctuate independently of larger company
stocks. See "Investment Methods and Risks."
DEBT OBLIGATIONS AND CREDIT QUALITY. The Fund may invest in debt
obligations issued by domestic or foreign corporations or governments.
The Fund may invest, without percentage limitation, in debt obligations
rated as "investment grade" by Moody's or S&P, or in unrated debt
obligations of similar quality as determined by the Manager. The Fund
may also invest up to 15% of its total assets in debt obligations rated
BB or lower by S&P or Ba or lower by Moody's, so long as they are not
rated lower than B by Moody's or S&P, or in unrated debt obligations of
similar quality as determined by the Manager. The Manager does not
currently expect investments in lower rated debt obligations to exceed
5% of the Fund's assets. SEE "HIGHLIGHTED RISK CONSIDERATIONS, LOWER
RATED DEBT OBLIGATIONS," "INVESTMENT METHODS AND RISKS, DEBT
OBLIGATIONS," AND "APPENDIX."
OTHER INVESTMENT POLICIES. The Fund may invest up to 35% of its assets
in equity securities or debt obligations of foreign or domestic issuers
outside the natural resources sector, which may include REITs. Some of
these issuers may be in industries related to the natural resources
sector and, therefore, may be subject to similar risks. The Fund may
invest up to 5% of its assets in commodities (including gold bullion or
gold coins) or futures on commodities related to the natural resources
sector as defined above. Under the policies discussed in "Investment
Methods and Risks," "Highlighted Risk Considerations," and in the SAI,
the Fund may also make temporary defensive investments, purchase debt
obligations on a "when-issued" or "delayed delivery" basis, write
covered call options, loan its portfolio securities, enter into
repurchase transactions, borrow money, invest in restricted or illiquid
securities, and engage in other activities specifically identified for
this Fund.
SMALL CAP FUND
The investment objective of the Small Cap Fund 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 Fund's
investment and, in the opinion of the Fund's Manager, is positioned for rapid
growth in revenues, earnings or assets. Market capitalization is defined as
the total market value of a company's 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 Fund's 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 currently does not intend to invest more than 10% of its
assets in convertible securities, which are discussed below in "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 "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. Although the Fund may invest up to 25% of its total
assets in foreign securities, including those of developing market issuers
and sponsored or unsponsored Depository Receipts, it currently has no
intention of investing more than 15%. The Fund presently does not intend to
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 Fund's 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
Fund's objective of capital growth. The Fund may invest in debt securities
rated B or above by Moody's or S&P, or in unrated securities the Manager has
determined are of comparable quality. Currently, however, the Fund does not
intend to invest more than 5% of its assets in debt obligations (including
convertible debt securities) rated lower than BBB by S&P or Baa by Moody's
or, 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 currently does not intend to invest more than 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. Under the policies discussed in "Investment
Methods and Risks," "Highlighted Risk Considerations," and the SAI, the Fund
may also write covered put and call options on securities or financial
indices; purchase put and call options on securities or financial indices;
purchase and sell futures contracts or related options with respect to
securities, indices and currencies; invest in restricted or illiquid
securities; lend portfolio securities; borrow 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 as defined under
"Highlighted Risk Considerations-Foreign Transactions." It is currently
expected that under normal conditions at least 65% of the Fund's total assets
will be invested in such securities. The Fund will at all times, except
during defensive periods, maintain investments in at least three countries
having developing markets. The Fund has the right to purchase securities in
any foreign country, developed or developing. However, as a non-fundamental
policy, the Fund will limit its investments in securities of Russian issuers
to 5% of total assets. Investments in foreign developing markets, including
certain Eastern European countries and Russia, involve heightened risks
related to the small size and lesser liquidity of these markets. These
developing markets risks are in addition to the special risks associated with
foreign investing, including currency fluctuations, market volatility, and
economic, social, and political uncertainty. From time to time, the Fund may
hold significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments. AN INVESTMENT
IN THE FUND MAY BE CONSIDERED SPECULATIVE. INVESTORS SHOULD CONSIDER
CAREFULLY THE SUBSTANTIAL AND HEIGHTENED RISKS INVOLVED IN INVESTING IN
FOREIGN DEVELOPING MARKETS SECURITIES. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
FOREIGN TRANSACTIONS AND THE SAI."
INVESTMENTS IN DEVELOPING MARKETS. "Developing market equity securities" for
purposes of the Fund means any of the following: (i) equity securities of
companies the principal securities trading market for which is a developing
market country, (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. Determinations as to eligibility
will be made by the Investment Manager based on publicly available
information and inquiries to the companies. 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
lower rated 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 an increase in
the above percentages if 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.
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. As a fundamental policy the Fund may invest up to
10% of its assets in defaulted debt obligations which may be considered
speculative.
CURRENCY TECHNIQUES. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency hedging techniques.
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.
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. The Fund may invest up to 10% of its total assets
in securities of closed end investment companies to facilitate foreign
investment. Under the policies discussed in "Highlighted Risk
Considerations", "Investment Methods and Risks" and the SAI, the Fund may
also loan its portfolio securities; engage in repurchase transactions; borrow
money for investment purposes; for hedging purposes only, enter into
transactions in options on securities and securities indices 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.
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 emerging. However, as a
non-fundamental policy, the Fund will limit its investments in securities of
Russian issuers to 5% of total assets. 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.
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 developing markets including
certain Eastern European countries and Russia, involve heightened risks
related to the smaller size and lesser liquidity of these markets. These
developing markets risks are in addition to the special risks associated with
foreign investing. 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 lower-rated debt obligations
entail predominantly speculative risks. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
LOWER RATED DEBT 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. As a fundamental policy, the Fund may invest up
to 10% of its assets in defaulted debt obligations which may be considered
speculative.
CURRENCY TECHNIQUES. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency hedging techniques.
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.
See "HIGHLIGHTED RISK CONSIDERATIONS, FOREIGN TRANSACTIONS."
OTHER INVESTMENT POLICIES. The Fund may also 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 discussed in "Investment Methods and Risks,"
"Highlighted Risk Considerations," 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.
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 be issued by (i) companies domiciled in
countries other than the U.S., or (ii) companies 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. Following these policies, the Fund will typically invest
predominantly in equity securities issued by large-cap or mid-cap U.S.
companies, which have market capitalizations of $1 billion or more. It may
also invest to a lesser degree in smaller capitalization companies, which are
subject to different and greater risks. See "Common Investment Objectives and
Risks, Smaller Capitalization Issuers."
The Fund has the right to purchase securities in any foreign country,
developed or emerging. Normally, the Fund will invest at least 65% of its
total assets in securities traded in at least three foreign countries. As a
non-fundamental policy, the Fund will limit its investments in securities of
Russian issuers to 5% of total assets. 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
developing markets including certain Eastern European countries and Russia,
involve heightened risks related to the smaller size and lesser liquidity of
these markets. These developing markets risks are in addition to the special
risks associated with foreign investing. 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 lower-rated debt obligations
entail predominantly speculative risks. SEE "HIGHLIGHTED RISK CONSIDERATIONS,
LOWER RATED DEBT 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 "Investment Methods and
Risks."
OTHER INVESTMENT POLICIES. The Fund may invest up to 10% of its net assets in
illiquid securities. The Fund may also invest up to 10% of its net assets in
warrants, including such warrants that are not listed on an exchange. Under
the policies discussed in "Investment Methods and Risks," "Highlighted Risk
Considerations," and in the SAI, the Fund may also write covered call and put
options on securities, purchase call and put 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.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
The investment objective of the Templeton International Smaller Companies
Fund is to seek long-term capital appreciation. The Fund seeks to achieve
this objective by investing primarily in equity securities of smaller
companies outside the U.S., including developing market countries.
PORTFOLIO INVESTMENTS. Under normal market conditions, the Fund expects to
invest at least 65% of its portfolio in equity securities of companies of any
foreign nation (including developing market nations) whose market
capitalizations do not exceed $1 billion at the time of purchase, generally
considered "small cap companies." 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 Manager
believes that international small cap companies may provide attractive
investment opportunities, because these securities make up most of the
world's equity securities and because they are frequently overlooked by
investors or undervalued in relation to their perceived earning power. In
addition, such securities may provide investors with the opportunity to
increase the diversification of their overall investment portfolios, because
these securities' market performance may differ from that of U.S. small cap
stocks and from that of large-cap stocks of any nation. Equity securities of
small cap companies may include common stock, preferred stock, warrants for
the purchase of common stock, and convertible securities. See "Investment
Methods and Risks, Convertible Securities."
RISK FACTORS. Securities of smaller companies, particularly if they are
unseasoned, present greater risks than securities of larger, more established
companies. The companies may have relatively small revenues, limited product
lines, and 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 fluctuate independently of larger
company stocks. As an operating policy, the Fund will not invest more than
10% of its assets in securities of companies with less than three years of
continuous operation. See "Investment Methods and Risks." THE FUND MAY NOT BE
APPROPRIATE FOR SHORT-TERM INVESTORS, AND AN INVESTMENT IN THE FUND SHOULD
NOT BE CONSIDERED A COMPLETE INVESTMENT PROGRAM.
The Fund has the right to purchase securities in any foreign country,
developed or emerging. However, as a non-fundamental policy, the Fund will
limit its investments in securities of Russian issuers to 5% of total assets.
The Fund's investments in foreign securities, especially those in developing
markets, 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
developing markets, including certain Eastern European countries and Russia,
involve heightened risks related to the small size and lesser liquidity of
these markets. These developing markets risks are in addition to the special
risks associated with foreign investing. 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 Securities."
OTHER INVESTMENTS. The Fund may invest up to 35% of its total assets in:
equity securities of larger capitalization issuers outside the U.S.; equity
securities of larger or smaller capitalization issuers within the U.S.,
although such investments are not currently expected to exceed 5% of total
assets; or debt obligations issued by companies or governments in any nation
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. As a current policy,
however, the Fund will not invest more than 5% of its total assets in debt
obligations rated lower than BBB by S&P or Baa by Moody's, which entail
increased risks related to the creditworthiness of their issuers. SEE
"HIGHLIGHTED RISK CONSIDERATIONS, LOWER RATED DEBT OBLIGATIONS." These
investments may cause the Fund's performance to vary from those of
international smaller capitalization equity markets.
DEFAULTED DEBT OBLIGATIONS. The Fund may invest up to 10% of its assets in
defaulted debt obligations, which may be considered speculative.
CURRENCY TECHNIQUES. The Fund may, but with respect to equity securities does
not currently intend, to employ certain active currency management
techniques. 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. Further, the Fund will not enter into forward contracts
if, as a result, the Fund would have more that 20% of its total assets
committed to the consummation of such contracts. See "Highlighted Risk
Considerations, Foreign Transactions" and the SAI.
OTHER INVESTMENT POLICIES. The Fund may invest no more than 5% of its total
assets in securities of any one issuer, exclusive of U.S. Government
Securities. For hedging purposes only, the Fund may enter into: transactions
in options on securities, securities indices, and foreign currencies; forward
foreign currency contracts; and futures contracts and related options. 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. See
"Investment Methods and Risks, Options and Futures Contracts" and the SAI.
Under the policies discussed in "Investment Methods and Risks," "Highlighted
Risk Considerations," and in the SAI, the Fund may also enter into repurchase
agreements, invest in illiquid securities, lend its portfolio securities, and
engage 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 Equity 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, China, Hong Kong, India, Indonesia, Japan, Korea,
Malaysia, New Zealand, Pakistan, the Philippines, 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 Fund may invest up to 20% of its assets in the securities of issuers in
any single country, and up to 35% in certain developed countries under the
Trust's diversification policy. See "Investment Methods and Risk" In
addition, 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 "Investment
Methods and Risks."
OTHER INVESTMENT POLICIES. The Fund may invest up to 10% of its net assets in
illiquid securities. Currently the Fund intends to invest no more than 10% of
its net assets in warrants, including such warrants that are not listed on an
exchange. Under the policies discussed in "Investment Methods and Risks,"
"Highlighted Risk Considerations," and in the SAI, the Fund may also write
covered call and put options on securities, purchase called put 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. 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.
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 debt 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 foreign markets, including developing markets, are generally
higher than in the U.S. Such markets also have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. 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 generally considered to have developing markets are all countries
that are 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 Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Spain, Sweden, Switzerland, the United Kingdom and the U.S.
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, including certain Eastern
European countries 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, including certain Eastern European countries 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 Funds' investments in such countries less liquid 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. Russia's
system of share registration and custody creates certain risks of loss
(including the risk of total loss) that are not normally associated with
investments in other securities markets. These risks and other risks
associated with the Russian securities market are discussed more fully in the
SAI under "Highlighted Risk Considerations" and investors should read the
section in detail. 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 Funds 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 U.S. GOVERNMENT SECURITIES FUND DOES NOT INVEST IN
FOREIGN SECURITIES. THE 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. OTHER
FUNDS INVEST IN FOREIGN SECURITIES ABOVE 10% OF THEIR ASSETS, AS NOTED IN THE
INDIVIDUAL FUND DESCRIPTIONS.
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. Consistent with the 1940 Act and subject to
applicable fundamental investment restrictions, 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 Asset Allocation, Developing Markets, Global Growth, Global Income,
International Equity, International Smaller Companies, Mutual Discovery,
Mutual Shares, Natural Resources and Pacific 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 any
single foreign country, 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," "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 segregate liquid assets 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 "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 value of
junk bonds tends to reflect individual developments affecting the issuer to a
greater extent than the market value of higher rated obligations, which react
primarily to fluctuations in the general level of interest rates. Lower rated
obligations tend to be more sensitive to economic conditions and are
considered by the rating agencies, on balance, to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and generally will
involve more credit risk than securities in the higher rating categories.
Bonds rated BBB by S&P or Baa by Moody's ratings which are considered
investment grade, also possess some speculative characteristics. Unrated debt
obligations are not necessarily of lower quality than rated securities, but
they may not be attractive to as many buyers.
Issuers of 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 such obligations is generally greater than
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 these periods,
such issuers may not have sufficient cash flow to meet their interest payment
obligations. Specific developments affecting the issuer, such as the
inability to meet projected business forecasts, or the unavailability of
additional financing, may adversely affect the issuer's ability to service
its debt obligations. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yielding obligations because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer.
High yielding debt obligations frequently have call or buy-back features
which 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, when calls are exercised by the issuer
during periods of declining interest rates, the Manager may find it necessary
to replace such obligations with lower yielding obligations which could
result in less net investment income to the Fund. The premature disposition
of a high yielding obligation due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for a Fund to manage the timing of its receipt of income,
which may have tax implications. A Fund may be required under the Code and
U.S. Treasury regulations to accrue income for income tax purposes on
defaulted obligations and to distribute such income to the Fund's
shareholders even though the Fund is not currently receiving interest or
principal payments on such obligations. In order to generate cash to satisfy
any or all of these distribution requirements, 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 the sale of Fund shares.
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 the secondary
trading market for a particular high yielding, debt obligation 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, a Fund's ability to dispose of particular issues,
when necessary, to meet the Fund's liquidity needs or in response to a
specific economic event, such as a deterioration in the creditworthiness of
the issuer. Reduced liquidity 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 values 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 "Additional Information Regarding
Valuation and Redemption of Shares of the Funds," in the SAI.
Some high yielding, debt obligations are sold without registration under the
federal securities laws and therefore carry restrictions on resale. While
many 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 under the
Securities Act of 1933, which entails special responsibilities and
liabilities. A 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.
Some high yielding debt obligations may involve special risks because they
are new issues. The Funds have no arrangement with the securities
underwriters or any other person concerning the acquisition of such
securities, and the Manager will carefully review the credit and other
characteristics pertinent to such new issues.
The high yield securities market is relatively new and much of its growth
prior to 1990 paralleled a long economic expansion. The recession that began
in 1990 disrupted the market for high yielding securities and adversely
affected the value of outstanding securities and the ability of issuers of
such securities to meet their obligations. Although the economy has improved
considerably and high yielding securities have performed more consistently
since that time, there is no assurance that the adverse effects previously
experienced will not reoccur. For example, the highly publicized defaults of
some high yield issuers during 1989 and 1990 and concerns regarding a
sluggish economy which continued into 1993, depressed the prices for many of
these securities. While market prices may be temporarily depressed due to
these factors, the ultimate price of any security will generally reflect the
operating results of the issuer. 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 holdings. 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 rating
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.
DEFAULTED DEBT OBLIGATIONS. 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. In general,
a Fund will purchase a defaulted debt obligation only if, in the opinion of
the Manager, the issuer is expected to resume interest payments or other
advantageous developments appear likely in the near future.
A Fund may also invest in debt obligations which are in default or about to
default, where the Manager believes that the debt obligation's price is less
than its intrinsic value, due to a recent or pending restructuring of the
issuer or other factors.
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 imputed 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.
At December 31, 1996, the High Income and Income Securities Funds each held
one position in obligations which were in default on their contractual
provisions.
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only
the safety of principal and interest of debt obligations, and does not
consider the market value risk associated with an investment in such an
obligation. The table below shows the percentage of Global Income, High
Income and Income Securities Funds' assets invested in debt securities rated
in each of the specific rating categories shown and those that are not rated
by the rating agency but deemed by the Manager to be of comparable credit
quality. The information was prepared based on a 12 month weighted average of
the respective portfolio compositions in the fiscal year ended December 31,
1995. No other Fund had a 12-month weighted average of more than 5% of its
assets in debt obligations rated below investment grade or determined by the
Manager to be of comparable credit quality. The Appendix to this Prospectus
includes a description of each rating category.
Income
Securities
Moody's Fund
Aaa........................... 5.60%
Aa............................ 1.02%
A............................. 0.00%
Baa........................... 3.84%
Ba............................ 5.43%
B............................. 29.91%
Caa........................... 5.17*
Ca............................ 0.51%
C............................. 0.15%
*1.02% of these securities, which are unrated by Moody's, have been included
in the Caa rating category.
High Global
Income Income
S&P Fund Fund
AAA................. 87.25%***
AA+................. 0.0%
AA.................. 0.0%
A................... 0.44%***
BBB+................ 0.386%
BBB................. 1.571% 0.24%***
BBB-................ 3.923% 0.00%
BB+................. 5.250% 0.00%
BB.................. 5.909% 12.07%
BB-................. 12.161% 0.00%
B+.................. 13.441% 0.00%
B................... 28.537% 0.00%
B-............. 15.020%** 0.00%
CCC+................ 1.695% 0.00%
CCC-................ 1.046% 0.00%
CC.................. .016% 0.00%
**1.971% of these securities, which are unrated by S&P, have been included in
the B- rating category.
***.36% of these securities, which are unrated by S&P, have been rated as
follows: .08% AAA, .04% in A, and .24% in BBB.
It should be noted that the above ratings are not necessarily indicative of
ratings of bonds at the time of purchase.
INVESTMENT METHODS AND RISKS
COMMON TO MORE THAN ONE FUND
Certain types of investments and investment techniques authorized for more
than 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 unless otherwise noted.
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 methods will be used at
all times. See "Table of Contents" in front for a complete listing and page
numbers.
BORROWING
As a matter of fundamental policy, all of the Funds except the Asset
Allocation, Developing Markets, International Smaller Companies, Mutual
Discovery, Mutual Shares 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, International
Smaller Companies, Mutual Discovery, Mutual Shares and Small Cap Funds may
borrow up to 33 1/3% 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, each 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 a 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 to facilitate redemptions.
CONCENTRATION
The Real Estate Fund, Utility Equity Fund, and the Natural Resources Fund
will concentrate in a particular industry or U.S. Government Securities, as
indicated in the separate discussions above for each respective Fund. The
other Funds will not invest more than 25% of the value of their respective
total assets in any one particular industry (excluding the U.S. government).
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 preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or
a different issuer. A convertible security provides a fixed-income stream and
the opportunity, through its conversion feature, to participate in the
capital appreciation resulting from a market price advance in its underlying
common stock. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Similar to a common stock, the
value of a convertible security tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both
interest rate and market movements, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The convertible debt obligations in which a Fund may invest are subject to
the same rating criteria and investment policies as that Fund's investments
in debt obligations. The issuer of a convertible security may be important in
determining the security's market value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only
after a specified date and under circumstances established at the time the
security is issued.
However, unlike convertible debt obligations, convertible preferred stocks
are equity securities. As with 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. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes. For
these reasons, convertible preferred stocks are treated as preferred stocks
for each Fund's financial reporting, credit rating, and investment limitation
purposes.
Certain Funds, consistent with their investment policies, may also invest in
enhanced or synthetic convertible securities. A detailed discussion of these
securities appears in the SAI. None of the Funds currently expect to make
significant use of these securities.
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.
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. Government. 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.
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,
Deferred Interest and Pay-In-Kind Bonds," below.
U.S. Government Securities include 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 GNMA pools will be prepaid thus
reducing the effective yield. For more information, See "U.S. Government
Securities Fund," above.
Small Business Administration ("SBA") securities are pools of loans to small
businesses which are guaranteed as to principal and interest by the SBA, and
supported by the full faith and credit of the U.S. Government. SBA loans
generally have variable interest rates which are set at a premium above the
prime rate, and generally have no interest rate caps or floors. The terms on
SBA loans currently range from 7 to 25 years at the time of issue. As with
mortgage-backed securities such as GNMAs, prepayments can greatly change
realized yields. While the prepayment rate of mortgage-backed securities has
generally been a function of market interest rates, the prepayment rate of
SBA securities has historically depended more on the purpose and term of the
loan and the rate of borrower default. Shorter-term SBA loans have had the
highest prepayment rates, particularly if the loans were for working capital;
long-term, real-estate backed SBA loans prepay much more slowly. SBA
securities are sometimes offered at a premium above their principal amount,
which increases the risks posed by prepayment.
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 "Investment Methods and Risks."
ZERO COUPON BONDS. 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.
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 Agency
Securities.
The credit risk factors pertaining to lower rated debt obligations also apply
to lower rated zero coupon bonds. Such bonds carry an additional risk in
that, unlike bonds which pay interest throughout the period to maturity, the
Fund will realize no cash until the cash payment date and, if the issuer
defaults, the Fund may obtain no return at all on its investment.
DEFERRED INTEREST AND PAY-IN-KIND BONDS. 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.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. A Fund will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received
by the Fund until the cash payment date or until the bonds mature.
Accordingly, during periods when a Fund receives no cash interest payments on
its zero coupon securities or deferred interest or pay-in-kind bonds, it may
be required to dispose of portfolio securities to meet the distribution
requirements.
Lower-rated deferred interest and pay-in-kind bonds also share the special
credit risk considerations described under "Zero Coupon Bonds," above.
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; re-securitized government project loans; 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 diversified Fund may not, with
respect to 75% of its total assets, purchase the securities of any one issuer
(except U.S. Government Securities) if more than 5% of the value of the
Fund's assets would be invested in such issuer.
In order to comply with the diversification requirements under section 851 of
the Code, each Fund will limit its investments so that, at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of
each Fund's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and each Fund will not own more than 10% of
the outstanding voting securities of a single issuer. A Fund's investments in
U.S. Government Securities are not subject to these limitations.
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 non-fundamental 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, and trade
at discounts to par value, 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. Many loan participations are illiquid
and such participations will be included in a fund's percentage limitation
for illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions, such as banks or insurance companies, or by
governmental institutions, such as the Resolution Trust Corporation or the
Federal Deposit Insurance Corporation or the Pension Benefit Guaranty
Corporation or may include supranational organizations such as the World
Bank. When a Fund purchases a participation interest it assumes the credit
risk associated with the bank or other financial intermediary as well as the
credit risk associated with the issuer of any underlying debt instrument.
LOANS OF PORTFOLIO SECURITIES
Consistent with procedures approved by the Board of Trustees and subject to
certain 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 the Fund's total assets at the
time of the most recent loan (one-third of the Fund's assets in the case of
the Asset Allocation, Developing Markets, International Equity, Mutual
Discovery, Mutual Shares and Pacific Funds), and further provided that the
borrower deposits and maintains, with the Fund's custodian bank 100%
collateral consisting of cash, U.S. Government Securities, or irrevocable
letters of credit. The lending of securities is a common practice in the
securities industry. A Fund may engage in security loan arrangements with the
primary objective of increasing the Fund's income either through investing
the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities loan
agreement, a Fund continues to be entitled to all dividends or interest on
any loaned securities. As with any extension of credit, there are risks of
delay in recovery and loss of rights in the collateral should the borrower of
the security fail financially.
OPTIONS AND FUTURES CONTRACTS
Certain Funds may invest in options and futures contracts and any limitations
noted in this section are qualified by the Funds' individual policies as
stated in the individual descriptions of each of the Funds. 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 THE FUND. NOR WILL A FUND PURCHASE PUT OR CALL OPTIONS IF THE
AGGREGATE PREMIUMS PAID FOR SUCH OPTIONS WOULD EXCEED 5% OF ITS TOTAL ASSETS
AT THE TIME OF PURCHASE.
UNLESS OTHERWISE NOTED IN A FUND'S POLICIES, NONE OF THE FUNDS PERMITTED TO
INVEST 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 FUND. See the "Investment Objectives and Policies" of
the specific Fund and the SAI for a discussion of whether, and to what
extent, the Fund may purchase these investments.
In general, a Fund will use futures and options primarily for hedging
purposes, that is, in an attempt to reduce or control certain types of risks.
There is no guarantee, however, that these transactions will be successful.
In addition, these transactions may expose a Fund to risks related to
counterparty creditworthiness, illiquidity, and increased expenses. A
detailed discussion of these transactions and their risks appears in the SAI.
None of the Funds currently expect to make significant use of these
transactions, except to manage currency risk. See "Highlighted Risk
Considerations, Foreign Transactions."
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.
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.
It is anticipated that each Fund's annual turnover rate generally will not
exceed 100% except for the Templeton Global Income Securities Fund which may
exceed 100% per year.
The Templeton Global Income Securities Fund's turnover rate of 140.96% in
1996 was due to bond maturities, and the rebalancing of the portfolio to keep
interest rate risk and country allocations at desired levels. In addition the
Fund experienced net redemptions in 1995 which resulted in higher turnover.
The Natural Resources Securities Fund will probably experience higher
portfolio turnover, which may exceed 100%, as the portfolio managers sell
precious metals securities and purchase securities in the broader natural
resources sector. After that, it is not expected that the Natural Resources
Securities Fund will have portfolio turnover exceeding 100%. Higher
portfolio turnover rates generally increase transaction costs, which are fund
expenses, but would not create capital gains for investors because of the
tax-deferred status of variable annuity and variable life insurance
investments.
Portfolio turnover rates for recent years are shown in the "Financial
Highlights." More information is in the SAI.
REPURCHASE AND REVERSE 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 upon price and date. The transaction requires the
collateralization of the seller's obligation by U.S. Government Securities
held with a custodian of the Fund, 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.
Certain Funds authorized to do so may also enter into reverse repurchase
agreements which may involve additional risks. See the SAI, "Common
Investment Methods and Risks."
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, except that the International
Smaller Companies, Mutual Discovery and Mutual Shares Funds may invest up to
15% in such investments. Illiquid investments include 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.
For additional details, see the SAI.
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
the 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 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 net asset value of a Fund 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 ("benchmark"). 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. IF PERMITTED BY A FUND'S INVESTMENT POLICIES, THE
TEMPLETON MANAGERS MAY OCCASIONALLY INVEST UNDER 5% OF THEIR RESPECTIVE
FUND'S ASSETS IN STRUCTURED NOTES THAT ARE LINKED TO A BENCHMARK, 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 Instruments. 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, Developing Markets, Global Income, Global Growth,
International Equity, International Smaller Companies, Mutual Discovery,
Mutual Shares, and Pacific 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 and International Smaller
Companies Funds 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 securities and 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 segregate cash or liquid 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 BOARD. The Board oversees the management of the Trust and elects its
officers. The officers are responsible for each Fund's day-to-day operations.
MANAGERS
The Manager for all series of the Trust, except the Asset Allocation,
Developing Markets, Global Growth, International Smaller Companies, Mutual
Discovery, Mutual Shares and Rising Dividends 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
Equity Fund, the Pacific Fund, and the Global Income Fund.
Franklin Advisory Services, Inc., One Parker Plaza, Sixteenth Floor, Fort
Lee, New Jersey, 07024 ("Franklin New Jersey") replaced Advisers as the
Manager for the Rising Dividends Fund on July 1, 1996. Advisers and Franklin
New Jersey are both direct wholly owned subsidiaries of Franklin Resources,
Inc. There is no change in the individuals primarily responsible for the
day-to-day operations of the Fund, and the material terms of the Fund's
management agreement with Franklin New Jersey, including fees, are the same
as those of the prior management agreement with Advisers.
The Manager for the Mutual Discovery and the Mutual Shares Funds is Franklin
Mutual Advisers, Inc. ("Franklin Mutual") 51 John F. Kennedy Parkway, Short
Hills, New Jersey, 07078.
The Manager for the Asset Allocation and Global Growth Funds is Templeton
Global Advisors Limited ("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 the Developing Markets Fund is Templeton Asset Management
Ltd.("Templeton Singapore") 7 Temasek Boulevard, # 38-03, Suntec Tower One,
Singapore, 038987.
The Manager for the International Smaller Companies Fund is Templeton Florida.
Advisers, Franklin Mutual, Franklin New Jersey, Templeton Nassau, Templeton
Singapore, and Templeton Florida may be referred to as the "Manager" or
"Managers" throughout the prospectus and SAI. The Managers also perform
similar services for other funds. The Managers are wholly owned by Resources,
a publicly owned company engaged in the financial services industry through
its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources. Together the Managers and their
affiliates manage over $179 billion in assets. The Templeton organization has
been investing globally since 1940, with offices in Argentina, Australia,
Bahamas, Canada, France, Germany, Hong Kong, India, Italy, Luxembourg,
Poland, Russia, Scotland, Singapore, South Africa, U.S., and Vietnam. Please
see "Investment Management and Other Services" and "Policies Regarding
Brokers Used on Securities Transactions" in the SAI for information on
securities transactions and a summary of the Fund's Code of Ethics.
PORTFOLIO TRANSACTIONS. Each Manager tries to obtain the best execution on
all transactions. If a Manager believes more than one broker or dealer can
provide the best execution, consistent with internal policies it may consider
research and related services and the sale of Fund shares, as well as shares
of other funds in the Franklin Templeton Group of Funds, when selecting a
broker or dealer. Please see "Brokerage Allocation" in the SAI for more
information.
MANAGEMENT FEES. The management agreements provide for the management of each
Fund's portfolio and, except for Funds which directly employ the Fund
Administrator as described below, 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.
Any of the Managers may determine in advance 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.
During 1996, Advisers agreed to limit its management fees for the Money Fund
and the three Zero Coupon Funds as indicated in the right-hand column of the
table below; no other Funds were subject to fee reductions. In addition,
until at least December 31, 1997, Advisers has agreed to keep the total
expenses of each Zero Coupon Fund to a maximum of 0.40% of each Zero Coupon
Fund's average monthly net assets.
The Management and Fund Administration fees in the table below represent the
fees for each Fund based on a percentage of that Fund's net assets under
management that were paid to the Managers and Fund Administrator for the 1996
fiscal year (with the exception of the four newer Funds whose fee
arrangements are discussed in the next paragraph). Fund Administration fees
may be paid directly by the Fund or indirectly by the Managers through the
management fees. See "Fund Administrators," below.
1996 MANAGEMENT AND FUND ADMINISTRATION FEES
Before After
Fund Reduction Reduction*
Asset Allocation Fund.. .80% N/A
Developing Markets Fund 1.25% N/A
Global Growth Fund..... .88% N/A
Global Income Fund..... .55% N/A
Government Fund........ .49% N/A
Growth and Income Fund. .48% N/A
High Income Fund....... .52% N/A
Income Securities Fund. .56% N/A
International Equity Fund .81% N/A
Natural Resources
(formerly Metals Fund). .60% N/A
Money Fund............. .51% .41%
Pacific Fund........... .89% N/A
Real Estate Fund....... .55% N/A
Rising Dividends Fund.. .75% N/A
Small Cap Fund......... .75% N/A
Utility Fund........... .47% N/A
Zero Coupon Fund - 2000 .60% .38%
Zero Coupon Fund - 2005 .63% .38%
Zero Coupon Fund - 2010 .63% .38%
*N/A means "not applicable," that is, the Fund's fees were not reduced.
The Mutual Discovery and Mutual Shares Funds are each obligated to pay
Franklin Mutual a monthly fee computed at the annual rate of 0.80% and 0.60%
respectively, of the value of the average daily net assets of each Fund. The
Capital Growth Fund is obligated to pay Advisers a monthly fee computed at
the annual rate of 0.75% of the Fund's average daily net assets up to and
including $500 million, plus 0.625% of the value of average daily net assets
up to and including $1 billion, plus 0.50% of the value of average daily net
assets over $1 billion. Under a management agreement with Templeton Florida,
the International Smaller Companies Fund is obligated to pay the Manager a
monthly fee equal to an annual rate of 0.85% of the value of the Fund's
average daily net assets up to and including $200 million, 0.765% of the
value of the Fund's average daily net assets over $200 million up to and
including $1.3 billion; and 0.68% of the value of the Fund's average daily
net assets over $1.3 billion.
In general, the fees which the Funds investing substantially 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.
Please refer to the SAI for further details regarding management fees. Also
see the "Financial Highlights" table for information on the expense ratios of
each Fund.
OPERATING EXPENSES. Each Fund pays its own operating expenses. These expenses
include, but may not be limited to: the Managers' management fees; fund
administration fees where they are separate from the management fee; taxes,
if any; custodian, legal, and auditing fees; the 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. Expenses incurred
jointly by more than one Fund will be apportioned on a pro rata basis.
SUBADVISOR
Templeton Florida is paid a fee by Advisers with respect to the Global
Income, International and Pacific Funds, and by Templeton Nassau with respect
to the Asset Allocation Fund, based on a percentage of each Fund's average
daily net assets. 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. Templeton Florida will pay all expenses incurred by it in
connection with its activities under the subadvisory agreements with the
Managers, other than the cost of securities purchased for the Funds and
brokerage commissions in connection with such purchases.
FUND ADMINISTRATOR
Franklin Templeton Services, Inc. ("FT Services"), 777 Mariners Island
Boulevard, San Mateo, California 94404, provides certain administrative
facilities and services for the Funds, including preparation and maintenance
of books and records, preparation of tax reports, preparation of financial
reports, and monitoring compliance with regulatory requirements.
FT Services is employed directly by the Asset Allocation, International
Smaller Companies, Mutual Discovery and Mutual Shares Funds, and through
subcontracts by the Managers of all the other Funds.
Where FT Services is employed directly by a Fund, it receives a monthly fee
equivalent on an annual basis to 0.15% of the 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. Where it is employed through a subcontract with the Manager,
its fees are not separate expenses of the Fund but are paid by the Manager
from the management fees received from the Fund.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-day management
of each Fund's portfolio, other than the Money Fund.
CAPITAL GROWTH FUND
Conrad B. Herrmann
Vivian J. Palmieri
Kei Yamamoto
Kevin Carrington
GROWTH AND INCOME FUND
Frank Felicelli
Douglas Barton
Ernst Schleimer
HIGH INCOME FUND
Betsy Hofman-Schwab
Chris Molumphy
R. Martin Wiskemann
INCOME SECURITIES FUND
Charles B. Johnson
Matt Avery
MUTUAL DISCOVERY SECURITIES AND
MUTUAL SHARES SECURITIES FUNDS
Michael F. Price
Peter Langerman
Jeffrey Altman
Robert Friedman
Raymond Garea
Lawrence Sondike
NATURAL RESOURCES SECURITIES FUND
(FORMERLY PRECIOUS METALS FUND)
Suzanne Willoughby Killea
Ed Perks
REAL ESTATE SECURITIES FUND
Matt Avery
Tom Branch
RISING DIVIDENDS FUND
Donald G. Taylor
Bruce C. Baughman
Margaret McGee
William Lippman
SMALL CAP FUND
Edward B. Jamieson
Michael McCarthy
TEMPLETON DEVELOPING MARKETS EQUITY FUND
J. Mark Mobius, Ph.D.
H. Allan Lam
Tom Wu
Dennis Lim
Eddie Chow
Tek-Khoan Ong
TEMPLETON GLOBAL ASSET ALLOCATION FUND
Jeffrey A. Everett
Thomas J. Dickson
Sean Farrington
TEMPLETON GLOBAL GROWTH FUND
Sean Farrington
Jeffrey A. Everett
Mark G. Holowesko
TEMPLETON GLOBAL INCOME SECURITIES FUND
Neil S. Devlin
Thomas J. Dickson
Ronald A. Johnson, Ph.D.
TEMPLETON INTERNATIONAL EQUITY FUND
Marc S. Joseph
Mark Beveridge
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
Marc S. Joseph
Mark Beveridge
Gary Clemons
TEMPLETON PACIFIC GROWTH FUND
William T. Howard
Mark Beveridge
Gary Clemons
U.S. GOVERNMENT SECURITIES FUND
Jack Lemein
David Capurro
Roger Bayston
Tony Coffey
UTILITY EQUITY FUND
Gregory E. Johnson
Sally Edwards-Haff
Ian Link
ZERO COUPON FUNDS
David Capurro
Jack Lemein
Tony Coffey
BIOGRAPHICAL INFORMATION
Jeffrey Altman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
October 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine Securities Corporation, an investment adviser acquired by Resources,
for at least 5 years. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
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 the Franklin Templeton Group since
1987. Mr. Avery has 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 the Franklin Templeton Group in July 1988 and has managed the
Growth and Income Fund since May 1995.
Bruce C. Baughman
Portfolio Manager
Franklin Advisory Services, 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 the Franklin Templeton Group 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 the Franklin Templeton Group in 1991. Mr. Bayston has managed 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 the Franklin Templeton Group in 1985 and has managed the International
and Pacific Growth Funds since January 1994 and has managed the Templeton
International Smaller Companies Fund from inception.
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 the Franklin Templeton Group in July 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 the Franklin Templeton Group in 1983 and has managed the
Government Fund and the Zero Coupon Funds since inception.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington is a Charter Financial Analyst and holds a Bachelor of Science
degree in business administration from California State University at Chico.
He has been with the Franklin Templeton Group since 1992 and has managed the
Capital Growth Fund from inception.
Eddie Chow
Investment Analyst
Templeton Asset Management Ltd.
Mr. Chow holds a Master of Business Administration degree from the University
of Wisconsin-Milwaukee. Prior to joining the Franklin Templeton Group in,
1994, he worked for many years in the finance and banking industry. He has
managed the Fund since February 1996.
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 the Franklin
Templeton Group in 1990 and has managed the Pacific Fund since 1994 and has
managed the Templeton International Smaller Companies Fund from inception.
T. Anthony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey 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 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 the
Franklin Templeton Group in 1989. He has managed the Zero Coupon Funds since
August 1989 and the U.S. Government Securities Fund since 1996.
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 the Franklin Templeton Group 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 Templeton Global Income Securities Fund (formerly the "Global
Income Fund") since 1993.
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 the Franklin
Templeton Group in 1992. He has managed the Templeton Global Income
Securities Fund (formerly the "Global Income Fund") since 1994, and has
managed the Asset Allocation Fund from inception.
Jeffrey A. Everett
Senior Vice President and Portfolio Manager
Templeton Global Advisors Limited
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 the
Franklin Templeton Group in 1990, has managed the Global Growth the Asset
Allocation Funds 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 the Franklin Templeton Group in 1986 and has managed
the Utility Fund since October 1990.
Sean Farrington
Vice President and Portfolio Manager
Templeton Global Advisors Limited
Mr. Farrington, a Chartered Financial Analyst, has a Bachelor of Arts degree
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 degree 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 the Franklin Templeton Group since
1986. He has managed the Growth and Income Fund since May 1995.
Robert Friedman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Friedman has a Bachelor of Arts degree in humanities from the John
Hopkins University and a Masters in Business Administration from the Wharton
School, University of Pennsylvania. Prior to November 1996, Mr. Friedman was
a Research Analyst for Heine Securities Corporation, an investment adviser
acquired by Resources, for at least 5 years. He joined the Franklin Templeton
Group in November 1996 and will manage the Mutual Discovery Securities Fund
and Mutual Shares Securities Fund from inception.
Raymond Garea
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Garea has a Bachelor of Science degree in engineering from Case Institute
of Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. Mr. Garea has also been a Manager (Director) of MB Metroplis
L.L.C. since 1994. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities Fund from inception.
Conrad B. Herrmann
Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann holds a Master of Business Administration degree from Harvard
University and a Bachelor of Arts degree from Brown University. Mr. Herrmann
is a Chartered Financial Analyst has been with the Franklin Templeton Group
since 1989 and prior thereto was Vice President and General Manager of Aquila
Management. He has managed the Capital Growth Fund from inception.
Betsy Hofman-Schwab
Portfolio Manager
Franklin Advisers, Inc.
Ms. Hofman-Schwab is a Chartered Financial Analyst candidate and holds a
Master of Business Administration degree from the College of Notre Dame in
California. She earned her Bachelor of Science degree in finance at the
College of Notre Dame in California. She is a member of several securities
industry associations. She has been with the Franklin Templeton Group 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 Global Advisors Limited.
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 the Franklin Templeton Group 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 the Franklin Templeton Group,
Mr. Howard was the international portfolio manager and analyst with the State
of Tennessee Consolidated Retirement System. He has managed the Pacific Fund
since 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 the Franklin Templeton Group
since 1987. He is a member of several securities industry-related committees
and associations. He has managed 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 the Franklin Templeton Group
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 the Franklin
Templeton Group in 1986. Mr. Johnson is a member of several securities
industry committees and associations. He has managed the Utility Fund since
its inception.
Ronald A. Johnson Ph.D.
Vice President and Emerging Markets Strategist
Templeton Investment Counsel Inc.
Dr. Johnson holds a Ph.D. and MA in economics from Stanford University, an
MBA in finance and a Bachelor of Arts degree in economics from Adelphi
University. Prior to joining the Franklin Templeton Group, Dr. Johnson was
chief strategist and head of research for JPBT Advisers, Inc. Dr. Johnson has
managed the Templeton Global Income Securities Fund (formerly the "Global
Income Fund") since 1995.
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 the Franklin Templeton Group, in 1993, Mr.
Joseph was a vice president with Pacific Financial Research and a management
consultant at McKinsey Co. He has managed the International Equity Fund since
1993 and has managed the Templeton International Smaller Companies Fund from
inception.
Suzanne Willoughby Killea
Portfolio Manager
Franklin Advisers, Inc.
Ms. Willoughby 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 the Franklin Templeton Group, in
1991, Ms. Willoughby 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. Willoughby Killea
has managed the Natural Resources Fund (formerly the Precious Metals Fund)
since 1994.
H. Allan Lam
Portfolio Manager and Analyst
Templeton Asset Management Ltd.
Mr. Lam holds a Bachelors of Arts degree in accounting from Rutgers
University. He has had extensive auditing experience with Deloitte Touche &
Tohmatsu and KPMG Peat Marwick. He joined the Franklin Templeton Group in
1987 and has managed the Developing Markets Fund from inception.
Peter Langerman
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters
in Science from New York University Graduate School of Business and a Juris
Doctor from Stanford University Law School. Prior to November 1996, he was a
Research Analyst for Heine Securities Corporation, an investment adviser
acquired by Resources, for at least 5 years. Mr. Langerman is also a Director
of Sunbeam Oster since 1990, Lancer Industries since 1994 and N.M.M.S.p.A.
since 1995 and Manager (Director) of MB Motori, L.L.C. since 1994 and MWCR
L.L.C. since 1995. He joined the Franklin Templeton Group in November 1996
and will manage the Mutual Discovery Securities Fund and Mutual Shares
Securities 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 the Franklin Templeton Group in 1984 and has managed the
Government Fund, and the Zero Coupon Funds since their inception.
Dennis Lim
Vice President and Portfolio Manager
Templeton Asset Management Ltd.
Mr. Lim holds a Master of Science degree in Management (Finance Analysis),
from the University of Wisconsin-Milwaukee, (Beta Gamma Sigma, Delta Chapter
of Wisconsin). He earned a Bachelor of Science degree in building engineering
from the National University of Singapore. Prior to joining the Franklin
Templeton Group, in 1990, he worked for the Government of Singapore's
Ministry of National Development. He has managed the Fund since February 1996.
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 the Franklin Templeton Group in 1989, and has managed the Utility Fund
since March 1995.
William Lippman
Senior Vice President and Portfolio Manager
Franklin Advisory Services, 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 the Franklin Templeton Group since 1988. He has managed the Rising
Dividends Fund since 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 the Franklin Templeton Group
since 1992. He has managed the Small Cap Fund from inception.
Margaret McGee
Portfolio Manager
Franklin Advisory Services, Inc.
Ms. McGee holds a Bachelor of Arts degree from William Paterson College. She
has been in the securities industry since 1985 and with the Franklin
Templeton Group since 1988. Ms. McGee is a member of several securities
industry-related committees and associations. She has managed the Rising
Dividends Fund since inception.
J. Mark Mobius, Ph.D.
Managing Director and Portfolio Manager
Templeton Asset Management Ltd.
Dr. 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. Dr. Mobius joined the Franklin
Templeton Group 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
the Franklin Templeton Group in 1988 and has managed the High Income Fund
since its inception.
Tek-Khoan Ong
Portfolio Manager
Templeton Asset Management Ltd.
Mr. Ong holds a Masters of Business Administration degree from the Wharton
School, graduating with honors and on the director's list. He earned a
Bachelor of Science degree in computing science and a Bachelor of Science
degree, with honors, both from Imperial College, University of London, UK.
Prior to joining the Franklin Templeton Group, in 1993, he worked for the
Monetary Authority of Singapore (Singapore's central bank)for five years. He
has managed the Fund since February 1996.
Vivian J. Palmieri
Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams
College. He has been with the Franklin Templeton Group since 1965. Mr.
Palmieri has managed the Capital Growth Fund from inception.
Michael F. Price
Chief Executive Officer and President
Franklin Mutual Advisers, Inc.
Mr. Price has a Bachelor of Arts degree in business administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine Securities Corporation, an investment adviser acquired by
Resources, for at least 5 years. He became Chief Executive Officer of
Franklin Mutual in November 1996 and will manage the Mutual Discovery
Securities Fund and Mutual Shares Securities Fund from inception.
Ernst Schleimer
Portfolio Manager
Franklin Advisers, Inc.
Mr. Schleimer holds a Master of Business Administration degree from the
Stanford School of Business and a Bachelor of Arts degree from Tufts
University. Mr. Schleimer has been with the Franklin Templeton Group since
1994, and prior thereto worked as a consultant at KPMG Peat Marwick. He has
managed the Growth and Income Fund since 1995.
Lawrence Sondike
Senior Vice President
Franklin Mutual Advisers, Inc.
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a
Masters in Business Administration from New York University Graduate School
of Business. Prior to November 1996, he was a Research Analyst for Heine
Securities Corporation, an investment adviser acquired by Resources, for at
least 5 years. He joined the Franklin Templeton Group in November 1996, and
will manage the Mutual Discovery Securities Fund and Mutual Shares Securities
Fund from inception.
Donald G. Taylor
Portfolio Manager
Franklin Advisory Services, Inc.
Mr. Taylor holds a Bachelor of Science degree in Economics from the Wharton
School of the University of Pennsylvania. Mr. Taylor has been in the
securities industry for over ten years. He joined the Franklin Templeton
Group in June 1996 and has managed the Rising Dividends Fund since 1996.
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 the Franklin Templeton
Group in 1972 and has managed the High Income Fund and the Metals Fund since
their inception.
Tom Wu
Director, Portfolio Manager, and Analyst
Templeton Asset Management Ltd.
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 the Franklin Templeton Group,
in 1987, he was a stockbroker at Vickers da Costa Hong Kong Ltd. He has
managed the Developing Markets Fund from inception.
Kei Yamamoto
Portfolio Manager
Franklin Advisers, Inc.
Ms. Yamamoto is a Chartered Financial Analyst and has a Master of Science
degree and a Bachelor of Science degree in material science and engineering
from the Massachusetts Institute of Technology. Prior to joining the Franklin
Templeton Group in 1994, Ms Yamamoto worked at Goldman Sachs & Co. as a
financial analyst and at Wasserstein Perella & Co. as an associate and vice
president. Ms Yamamoto has managed the Capital Growth 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 the Insurance Companies, to fund the benefits under
their Policies.
The Trust serves as an investment vehicle for both variable annuity and
variable life insurance contracts. Therefore, the Trust's Board of Trustees
monitors events in order to identify any material conflicts between variable
annuity contract owners and variable life contract owners and will determine
what action, if any, should be taken in the event of such a conflict.
Although the Trust does not currently foresee any disadvantages to contract
owners, an irreconcilable material conflict may conceivably arise between
contract owners of different separate accounts investing in the Fund due to
differences in tax treatment, the management of investments, or other
considerations. If such a conflict were to occur, one of the Variable
Accounts might withdraw its investment in a Fund. This might force the Fund
to sell portfolio securities at disadvantageous prices.
The applicable Insurance Company Variable Account purchases shares of each
Fund using purchase payments allocated to one or more of the Sub-Accounts of
each Variable Account, as selected by the Contract Owners. Shares are
purchased by the Variable Accounts at the net asset value of each respective
Fund next determined after the Fund receives the purchase payment in good
order and are credited to each Sub-Account in the form of full and fractional
shares (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
Contracts issued by the Insurance Company.
REDEMPTIONS OF SHARES
Each Insurance Company redeems shares of the applicable Fund to make benefit
or surrender payments under the terms of its Contracts. 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 Fund receives the appropriate order from the
Variable Accounts.
Payment for redeemed shares will be made within seven days after receipt of
the redemption order in proper form. However, under unusual circumstances,
the Trust may suspend redemptions or postpone payment for more than seven
days as permitted by federal securities law. 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.
If a substantial portion of any Fund's shares should be redeemed within a
short period, the Fund might have to liquidate portfolio securities it might
otherwise hold and also incur the additional costs related to such
transactions.
EXCHANGES OF SHARES
Shares of any one Fund may be exchanged for shares of any other Funds in the
Trust, all of which are described in this Prospectus, subject to the terms
of the Contract 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, other entities, or individuals using programmed,
large and/or 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. Accounts under common ownership or
control may be aggregated for purposes of the transfer limits. 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 the Insurance Companies.
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.
Any distributions made by the Funds will be automatically reinvested in
additional Shares of that Fund, unless an election is made on behalf of a
Shareholder to receive distributions in cash. Dividends or distributions by
the Fund s will reduce the per share net asset value by the per share amount
so paid.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the scheduled
close of the New York Stock Exchange generally 4:00 p.m., Eastern time. To
calculate the Net Asset Value per share of each Fund, the assets of each Fund
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares outstanding. The assets in
each Fund's portfolio are valued as described 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 intends to qualify or continue to qualify for treatment
as a regulated investment company under Subchapter M of the Code. By
distributing all of its income, and meeting certain other requirements
relating to the sources of its income and diversification of its assets, each
Fund will not be subject to federal income taxes.
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.
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 securities that meet the definition in the Code of a Passive Foreign
Investment Company (a "PFIC") may subject a Fund to an income tax and
interest charge with respect to such investments. To the extent possible, the
Fund will avoid such treatment by not investing in PFIC securities or by
adopting other strategies for any PFIC securities it does purchase.
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.
HOW THE TRUST MEASURES PERFORMANCE
Advertisements, Sales literature, hypothetical personalized illustrations,
and communications with Contract Owners and others may cite a Fund's
performance calculated on a total return, current yield or current
distribution rate basis. Total return figures show the change in value of a
hypothetical past investment as a percentage of the investment, assuming any
dividends and capital gains are reinvested. Total return figures will
indicate the time periods used, whether figures are cumulative or annualized
and whether the effects of sales charges are included. Current yield for each
Fund (except the Money Fund) shows the an annualization of income per share
earned by that Fund over a recent 30 day period, and is shown as a percentage
of the investment. The current distribution rate for a Fund (other than the
Money Fund)is usually computed by annualizing the dividends paid per share
during the most recent preceding fiscal quarter and dividing that amount by
the net asset value at the end of the period. Unlike current yield, the
current distribution rate may include income distributions from sources other
than dividends and interest received by each Fund. Performance data will
include uniformly computed performance figures for comparative purposes.
From time to time, the Money Fund may advertise its current and effective
yield. The Money Fund's current yield refers to an annualization of the
income generated by an investment over a stated seven-day period, and is
shown as a percentage of the investment. The Money Fund's effective yield is
calculated similarly but, when annualized, the income earned is assumed to be
reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Each Fund's investment results will vary. Performance figures are always
based on past performance and do not indicate future results. Hypothetical
performance information may also be prepared for sales literature or
advertisements. For additional information, see the SAI "How the Trust
Measures Performance" and the appropriate insurance company separate account
prospectus and SAI.
GENERAL INFORMATION
CUSTODY OF ASSETS
Under a custody agreement with the Trust, the Bank of New York serves as the
custodian of the assets of all the Funds, except those for which Chase
Manhattan Bank and State Street Bank serve as custodian. The Chase Manhattan
Bank currently serves as custodian for the Asset Allocation, Developing
Markets, Global Growth and International Smaller Companies Funds. State
Street Bank and Trust Company serves as the custodian of the Mutual Discovery
and Mutual Shares 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 Contract Owners whose purchase payments have indirectly been
invested in each Fund. For further details of these Plans, 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
Contract Owners, 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, a wholly-owned subsidiary of
Franklin Resources, Inc. and a transfer agent 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 voting rights 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. The Trust has noncumulative voting
rights. This gives holders of more than 50% of the shares voting the ability
to elect all of the Trustees. If this happens, holders of the remaining
shares voting will not be able to elect any Trustees. The Trust does not
intend to hold annual shareholder meetings. It may hold a special meeting,
however, for matters requiring shareholder approval under the 1940 Act. A
meeting may also be called by the trustees, at their discretion, or by
shareholders holding at least 10% of the outstanding shares of any Fund. The
Trust is required to help a shareholder communicate with other shareholders
in connection with removing trustees. For information regarding voting
privileges of Contract Owners, see the accompanying insurance company
separate account Prospectus, under "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 rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be 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, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Description of Commercial Paper Ratings
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
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 changes in circumstances than obligations carrying the higher designations.
FRANKLIN
VALUEMARK FUNDS
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/342-3863
MAY 1, 1997
Franklin Valuemark Funds (the "Trust") is an investment company, organized as
a Massachusetts business trust, and consisting of twenty-three 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 for the specific
insurance product that accompanies the Trust prospectus for information on
any applicable restrictions or limitations with respect to a separate
account's investments in the Funds.
A Prospectus for the Trust, dated May 1, 1997, 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 Risk
Considerations" in the Prospectus)
Foreign Securities..............
Currency Management Techniques..
Zero Coupon Funds -
Special Considerations...........
INVESTMENT METHODS AND RISKS
COMMON TO MORE THAN ONE FUND
(See also "Investment Methods and
Risks Common to More than One
Fund" in the Prospectus).........
Convertible Securities..........
Illiquid Securities.............
Interest Rate Swaps.............
Inverse Floaters................
Mortgage and Asset-Backed Securities
Municipal Securities ...........
Options and Futures.............
Portfolio Turnover..............
Real Estate Fund................
Repurchase Agreements...........
Reverse Repurchase Agreements...
Short Sales.....................
When-Issued Securities..........
FUNDAMENTAL INVESTMENT RESTRICTIONS
NON-FUNDAMENTAL INVESTMENT
RESTRICTIONS.....................
OFFICERS AND TRUSTEES.............
INVESTMENT MANAGEMENT AND
OTHER SERVICES (See also
"Management" in the Prospectus)..
Fund Administrator .............
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)...............
Calculation of Net Asset Value..
Funds Other than Money Fund.....
Money Market Fund...............
ADDITIONAL INFORMATION............
Additional Information
Regarding Taxation...............
How the Trust Measures Performance
Miscellaneous Information.......
Fund Similarity ................
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, or its wholly
owned subsidiary Preferred Life Insurance Company of New York, or their
affiliates ("Insurance Companies") to fund the benefits under variable life
insurance policies and variable annuity contracts (collectively the
"Contracts") issued by the Insurance Companies. 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 Contracts, by the owners of the respective Contracts issued by
the Insurance Companies (collectively the "Contract Owners"). 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 Contract or in a particular state. Contract owners should consult
the insurance product prospectus accompanying the Trust prospectus which
describes the specific Contract or the appropriate Insurance Company 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 objective 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
their 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 OBJECTIVES
FUND 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.
FUNDS SEEKING CURRENT INCOME
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.
TEMPLETON GLOBAL INCOME SECURITIES FUND ("Global Income Fund")1 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. Prior to May 1, 1996 the Fund was known as the Global
Income Fund.
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.
ZERO COUPON FUNDS, 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.
FUNDS SEEKING GROWTH AND INCOME
GROWTH AND INCOME FUND1 seeks capital appreciation, with current income
return as a secondary objective, by investing primarily in U.S. common
stocks, securities convertible into common stocks, and preferred stocks.
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.
MUTUAL SHARES SECURITIES FUND ("Mutual Shares Fund")1,2 seeks capital
appreciation, with income as a secondary objective. The Fund invests
primarily in domestic and foreign equity securities trading at prices below
their intrinsic values. The Fund may also invest in securities of companies
involved in corporate restructuring, mergers, bankruptcies, and liquidations
as well as debt securities of any quality including "junk bonds," and
defaulted securities, all of which involve increased risks related to the
creditworthiness of their issuers. Foreign investing involves special risks.
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.
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, including up to 25% in high yield, high risk,
lower rated debt obligations (commonly referred to as "junk bonds"), 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
CAPITAL GROWTH FUND ("Growth Fund") seeks capital appreciation, with current
income as a secondary consideration. The Fund invests primarily in equity
securities, including common stocks and securities convertible into common
stocks.
MUTUAL DISCOVERY SECURITIES FUND ("Mutual Discovery Fund")1,2 seeks capital
appreciation. The Fund invests primarily in domestic and foreign equity
securities, including securities of small capitalization companies, trading
at prices below their intrinsic values. The Fund may also invest in
securities of companies involved in corporate restructuring, mergers,
bankruptcies, and liquidations as well as debt securities of any quality
including "junk bonds," and defaulted securities, all of which involve
increased risks related to the creditworthiness of their issuers. Foreign
investing involves special risks.
NATURAL RESOURCES SECURITIES FUND (NATURAL RESOURCES 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. Prior to May 1, 1997 the Natural
Resources Fund was known as the Precious Metals Fund and had different
investment objectives and policies.
SMALL CAP FUND1 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 Equity 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. Prior to October 15, 1993, the Templeton International Equity
Fund was known as the International Equity Fund.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND ("International Smaller
Companies Fund")1 seeks long-term capital appreciation. The Fund seeks to
achieve this objective by investing primarily in equity securities of smaller
companies outside the U.S., including developing markets. Foreign investing
involves special risks and smaller company investments may involve higher
volatility. An investment in the Fund should not be considered a complete
investment program.
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 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. Prior to October 15, 1993, the Templeton Pacific Growth Fund was
known as the Pacific Growth Fund.
1THE ASSET ALLOCATION, CAPITAL GROWTH, DEVELOPING MARKETS, GLOBAL GROWTH,
GLOBAL INCOME, GROWTH AND INCOME, INCOME SECURITIES, INTERNATIONAL EQUITY,
INTERNATIONAL SMALLER COMPANIES, MONEY MARKET, MUTUAL DISCOVERY, MUTUAL
SHARES, PACIFIC, NATURAL RESOURCES, SMALL CAP AND UTILITY 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, INCOME SECURITIES, MUTUAL DISCOVERY AND MUTUAL SHARES 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."
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, derivative instruments or complex securities. These and
other types of investments and investment techniques common to more than one
Fund, as stated in the individual Fund descriptions in the Trust Prospectus,
are described in greater detail, including the risks of each and any
limitations, in the Trust Prospectus, this section of the SAI and in
"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 emerging 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. Certain Funds may invest in 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.
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.
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.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The communist
governments of a number of Eastern European countries expropriated large
amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that 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.
Investing in securities of Russian issuers, for the Funds that are permitted
to invest in Russia, involves a high degree of risk and special
considerations not typically associated with investing in the United States
securities markets, and should be considered highly speculative. Such risks
include: (a) delays in settling portfolio transactions and risk of loss
arising out of Russia's unique system of share registration and custody; (b)
the risk that it may be impossible or more difficult than in other countries
to obtain and/or enforce a judgment; (c) pervasiveness of corruption and
crime in the Russian economic system; (d) currency exchange rate volatility
and the lack of available currency hedging instruments; (e) higher rates of
inflation (including the risk of social unrest associated with periods of
hyperinflation); (f) controls on foreign investment and local practices
disfavoring foreign investors and limitations on repatriation of invested
capital, profits and dividends, and on a Fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support
the economic reform programs implemented since the dissolution of the Soviet
Union and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies such as
the support of certain industries at the expense of other sectors or
investors, or a return to the centrally planned economy that existed prior to
the dissolution of the Soviet Union; (h) the financial condition of Russian
companies, including large amounts of intercompany debt which may create a
payments crisis on a national scale; (i) dependency on exports and the
corresponding importance of international trade; (j) the risk that the
Russian tax system will not be reformed to prevent inconsistent, retroactive
and/or exorbitant taxation; and (k) possible difficulty in identifying a
purchaser of securities held by a Fund due to the underdeveloped nature of
the securities markets.
There is little historical data on Russian securities markets because they
are relatively new and a substantial proportion of securities transactions in
Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped
state of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that
meet the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register
or by formal share certificates. However, there is no central registration
system for shareholders and these services are carried out by the companies
themselves or by registrars located throughout Russia. These registrars are
not necessarily subject to effective state supervision and it is possible for
a Fund to lose its registration through fraud, negligence or even mere
oversight. While a Fund investing in Russian securities will endeavor to
ensure that its interest continues to be appropriately recorded either itself
or through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent
illegal amendment or other fraudulent act may deprive the Fund of its
ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract
out the maintenance of its shareholder register to an independent entity that
meets certain criteria, in practice this regulation has not always been
strictly enforced. Because of this lack of independence, management of a
company may be able to exert considerable influence over who can purchase and
sell the company's shares by illegally instructing the registrar to refuse to
record transactions in the share register. This practice may prevent a Fund
from investing in the securities of certain Russian companies deemed suitable
by the Manager. Further, this also could cause a delay in the sale of Russian
company securities by a Fund if a potential purchaser is deemed unsuitable,
which may expose the Fund to potential loss on the investment.
CURRENCY 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
canceling the contract is more favorable to the Fund than completing the
contract.
To complete or close a forward contract, a Fund may either accept or make
delivery of the currency specified in the contract at maturity, or enter into
a closing purchase transaction on or before the maturity date, which involves
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 may 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 segregate cash or liquid securities, as permitted
by applicable regulations, 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 segregated
securities declines, additional cash or securities will be segregated on a
daily basis so that the value of the segregated securities will equal the
amount of the Fund's commitments with respect to such contracts. The
segregated securities 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.
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 Funds' 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).
TOTAL ENDING VALUE ON A $1,000 INVESTMENT
COUPON INITIAL YIELD (REALIZED
YIELD) IF REINVESTMENT RATES ARE:
INTEREST MATURITY TO MATURITY 3% 5% 7% 9% 11%
7% 10 Years 7% $1,809 $1,894 $1,990 $2,098 $2,220
(6.11%) (6.60%) (7.12%) (7.69%) (8.30%)
0% 10 Years 7% $1,990 $1,990 $1,990 $1,990 $1,990
(7.12%) (7.12%) (7.12%) (7.12%) (7.12%)
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 Contract owners 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.
INVESTMENT METHODS AND RISKS
COMMON TO MORE THAN ONE FUND
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 UNLESS
OTHERWISE NOTED. 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.
CONVERTIBLE SECURITIES
ENHANCED CONVERTIBLE SECURITIES. Consistent with their respective investment
policies, certain Funds 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 a 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.
Certain Funds may also invest in other classes of enhanced convertible
securities. These include but are not limited to ACES (Automatically
Convertible Equity Securities), PEPS (Participating Equity Preferred Stock),
PRIDES (Preferred Redeemable Increased Dividend Equity Securities), SAILS
(Stock Appreciation Income Linked Securities), TECONS (Term Convertible
Notes), QICS (Quarterly Income Cumulative Securities), and DECS (Dividend
Enhanced Convertible Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS,
and DECS all have the following features: they are issued by a company, the
common stock of which will be received in the event the convertible preferred
stock is converted; unlike PERCS, they do not have a capital appreciation
limit; they seek to provide the investor with high current income with some
prospect of future capital appreciation; they are typically issued with three
to four-year maturities; they typically have some built-in call protection
for the first two to three years; 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 an
operating company whose common stock is to be acquired in the event the
security is converted or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically, they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture. There may be additional types of
convertible securities not identified here which are also similar to those
described above 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 risk to a Fund. A Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and a Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for a Fund to obtain market quotations based on
actual trades for purposes of valuing the Fund's portfolio. Each Fund,
however, intends to acquire liquid securities, though there can be no
assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. Certain Funds may invest a portion of their assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
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 a 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.
ILLIQUID SECURITIES
The Funds reserve the right to invest up to 10% of their net assets in
illiquid securities, except that the International Smaller Companies, Mutual
Discovery and Mutual Shares Funds reserve the right to invest up to 15% in
such investments. 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 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 Managers to treat a
restricted security as liquid on a regular basis, including the Managers'
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly
considered a liquid security, the 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 a 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.
MORTGAGE AND ASSET-BACKED SECURITIES
This section contains additional information about adjustable rate mortgage
securities ("ARMS"), collateralized mortgage obligations ("CMOs"), which may
have "caps and floors" and "resets," asset-backed securities, and stripped
mortgage-backed securities.
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 Funds invest 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.
Unlike fixed-rate mortgages, which generally decline in value during periods
of rising interest rates, adjustable rate mortgage securities may allow a
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, a Fund generally will be able to reinvest such
amounts in securities with a higher current rate of return. A 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.
The adjustable interest rate feature of the underlying mortgages generally
will act as a buffer to reduce sharp changes in the ARMS value in response to
normal interest rate fluctuations. As the coupon rates on the mortgages
underlying the ARMSare reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates and should
cause the ARMS' values to fluctuate less dramatically than those of 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 lower ARMS values until the coupon resets to market
rates. Since most mortgage securities in the Funds' 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.
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
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"). 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, a 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.
RESETS. The interest rates paid on ARMS and CMOs generally are readjusted at
intervals of one year or less to an increment over some predetermined
interest rate index. There are several main categories of indices: those
based on U.S. Treasury securities, those based on the London Interbank Offer
Rate ("LIBOR"), 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 ARMS and CMOs
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 a Fund's share price.
ASSET-BACKED SECURITIES. 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.
Like mortgage-backed securities, 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 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 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 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
a Fund's yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a 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.
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.
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.
OPTIONS AND FUTURES
Certain Funds, as described in the Trust's Prospectus, may write covered put
or call options, purchase put and call options, or engage in futures
transactions.
WRITING OPTIONS. 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 segregates cash and
liquid securities, as permitted by applicable regulations, with a value equal
to the exercise price 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 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.
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. 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.
PURCHASING 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.
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. 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.
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. 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 segregate cash or liquid securities, as permitted by applicable
regulations, with its custodian in an amount at least equal to the market
value of the option and will continue this segregation while the option is
open or will otherwise cover the transaction.
Combining Option Transactions. Certain Funds may also (i) buy puts and write
calls on the same portfolio security in "forward conversion" transactions;
(ii) engage in "spread" transactions in which a Fund purchases and writes a
put or call option on the same security with the options having different
exercise prices and/or expiration dates; (iii) engage in "straddles" in which
the Fund may purchase or write combinations of put and call options on the
same security; and (iv) purchase a security and then write a call option
against that security in a "buy-and-write" transaction. Spread and straddle
transactions may involve a limited degree of investment leverage, and a Fund
will not engage in spreads or straddles if, as a result, more than 5% of its
net assets will be invested in such option transactions.
SPECIAL RISKS ASSOCIATED WITH OPTIONS. 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.
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.
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.
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.
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.
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, each 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.
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.
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. These assets will
consist of cash, cash equivalents or high quality debt obligations from the
Fund's 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.
Any Fund's investment in options, futures contracts, forward contracts,
options on futures contracts or stock indices, and foreign currencies and
securities may be limited by the requirements of the Code for qualification
as a regulated investment company. These securities require the application
of complex and special rules and elections, more information about which is
included below under "Additional Information Regarding Taxation."
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. Global or
international fixed income securities funds may have higher turnover rates
because of maturing debt securities, rebalancing of the portfolio to keep
interest rate risk at desired levels and the rebalancing of the portfolio to
keep country allocations at desired levels; if the Manager's allocation
target changes, additional turnover may result.
In addition, redemptions or exchanges by investors may require the
liquidation of portfolio securities. 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 AGREEMENTS
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.
REVERSE REPURCHASE AGREEMENTS
Certain Funds may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by a Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive dividend payments on these
securities.
When effecting reverse repurchase transactions, each Fund will establish a
segregated account with its custodian bank in which it will maintain cash,
U.S. Government securities or other liquid high grade debt obligations equal
in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by a Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, a Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements are considered
borrowings by the Funds and as such are subject to the investment limitations
discussed below under "Fundamental Investment Restrictions" or in the
prospectus under "Investment Methods and Risks, Common to More Than One Fund."
These transactions may increase the volatility of a Fund's income or net
asset value. The Fund carries the risk that any securities purchased with the
proceeds of the transaction will depreciate or not generate enough income to
cover the Fund's obligations under the reverse repurchase transaction. These
transactions also increase the interest and operating expenses of a fund.
SHORT SALES
Certain Funds may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. Each Fund
expects to make short sales as a form of hedging to offset potential declines
in long positions in similar securities, in order to maintain portfolio
flexibility and for profit.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed.
The Fund will also be required to deposit similar collateral with its
custodian to the extent, if any, necessary so that the value of both
collateral deposits in the aggregate is at all times equal to at least 100%
of the current value of the security sold short.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Mutual Discovery and Mutual Series Funds may make short sales, but will
not make a short sale if, after giving effect to such sale, the market value
of all securities sold short exceeds 5% of the value of the Fund's total
assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. These
Funds may also make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the sale, the Funds
own or have the immediate and unconditional right to acquire at no additional
cost the identical security.
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, except for the Global Income
Fund, 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, International Smaller Companies, Mutual Discovery, Mutual Shares and
Small Cap Funds). The Asset Allocation, Developing Markets, International
Smaller Companies, Mutual Discovery, Mutual Shares and Small Cap Funds may
borrow money from banks in an amount not exceeding 331/3% 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 any 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 (not
applicable to the International Smaller Companies, Mutual Discovery or Mutual
Shares Funds);
6. invest in securities for the purpose of exercising management or control
of the issuer (not applicable to the Mutual Discovery or Mutual Shares Funds);
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 Natural
Resources Fund, the Utility Equity Fund, or the Real Estate Securities 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 Real Estate Fund, the Capital Growth Fund, the Growth and
Income Fund, the Global Income Fund, the International Equity Fund, the
Pacific Fund, the Global Growth Fund, and the Developing Markets Fund may
invest up to 5% of their respective assets in such companies, the Natural
Resources Fund may invest up to 10% of its assets in such companies, and
such limitation shall not apply to the Asset Allocation Fund, International
Smaller Companies Fund, Mutual Discovery Fund, Mutual Shares Fund or Small
Cap Fund;
9. maintain a margin account with a securities dealer or effect short sales,
with the exceptions that (i) the Growth and Income Fund and the Income
Securities Fund may effect short sales if the Fund owns securities equivalent
in kind and amount to those sold, (ii) Mutual Discovery and Mutual Shares
Funds may engage in short sales to the extent described in the Prospectus and
SAI, and (iii) the Natural Resources Fund, the Global Income Fund, the Global
Growth Fund, the Developing Markets Fund, the Asset Allocation Fund, the
International Equity Fund, the International Smaller Companies Fund, the
Pacific Fund, the Mutual Discovery Fund, the Mutual Shares 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 International Smaller Companies Fund, the
Pacific Growth Fund, the Global Growth Fund, the Developing Markets Fund, the
Asset Allocation Fund, the Mutual Discovery Fund, the Mutual Shares Fund and
the Small Cap Fund may enter into Futures Contracts and may invest in foreign
currency and (iii) the Natural Resources Fund may invest in commodities and
commodity futures contracts with respect to commodities related to the
natural resources sector as defined in the prospectus. Securities or other
instruments backed by commodities are not considered commodities or commodity
contracts for the purpose of this restriction;
11. invest directly in real estate, although certain Funds may invest in real
estate investment trusts or other publicly traded securities engaged in the
real estate industry. First mortgage loans or other direct obligations
secured by real estate are not considered real estate for purposes of this
restriction;
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).
This restriction is not applicable to the Capital Growth Fund, International
Equity Fund, the International Smaller Companies Fund, the Mutual Discovery
Fund, the Mutual Shares Fund, the Pacific Fund, the Asset Allocation Fund, or
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, Mutual Discovery or
Mutual Shares Funds);
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. invest more than 10% of its assets in illiquid securities (including
illiquid equity securities, repurchase agreements of more than seven days
duration, over-the-counter options and assets used to cover such options, and
other securities which are not readily marketable), as more fully described
in the prospectus and SAI. This policy shall not apply to the International
Smaller Companies, Mutual Discovery or Mutual Shares Funds.
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 Funds 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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to these fundamental policies, it is the present policy of each
Fund, except the Mutual Discovery and Mutual Shares Funds, (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 (including the
Mutual Discovery and Mutual Shares Funds) may participate with other
investment companies in the Franklin Group of Funds(R) 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 their 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.
The International Smaller Companies Fund may not invest more than 5% of its
respective assets in warrants, whether or not listed on the New York or
American Exchange, including no more than 2% of its 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.
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(*).
<TABLE>
<CAPTION>
POSITION OCCUPATION FOR THE
NAME, AGE AND ADDRESS WITH TRUST LAST FIVE YEARS
<S> <C> <C>
Frank H. Abbott, III (76) TRUSTEE President and Director,
1045 Sansome St. Abbott Corporation (an
San Francisco, CA 94111 investment company); and
director, trustee or
managing general partner,
as the case may be, of 32
of the investment
companies in the Franklin
Templeton Group of Funds.
*Lowell C. Anderson (60) TRUSTEE Chairman, President and
Allianz Life Insurance Chief Executive Officer,
Company of North America Allianz Life Insurance
1750 Hennepin Avenue South Company of North America
Minneapolis, MN 55403-2195 (privately owned company
formerly North American
Life & Casualty
Company);trustee of one
investment company in the
Franklin Templeton Group
of Funds.
Harris J. Ashton (64) TRUSTEE President, Chief Executive
General Host Corporation Officer and Chairman of
Metro Center, 1 Station the Board, General Host
Place Corporation (nursery and
Stamford, CT 06904-2045 craft centers); Director,
RBC Holdings, Inc. (a bank
holding company) and Bar-S
Foods (a meat packing
company); 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 (52) VICE PRESIDENT Executive Vice President,
777 Mariners Island Blvd. Secretary and Director,
San Mateo, CA 94404 Franklin Resources, Inc.;
Executive Vice President
and Director, Franklin
Templeton Distributors,
Inc.; Executive Vice
President, Franklin
Advisers, Inc. and
Franklin Templeton
Services, Inc.; Director,
Franklin/Templeton
Investor Services, Inc.;
officer and/or director,
as the case may be, of
most of the other
subsidiaries of Franklin
Resources, Inc.; and
officer and/or director or
trustee of 61 of the
investment companies in
the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (64) TRUSTEE Member of the law firm of
Park Avenue at Morris County Pitney, Hardin, Kipp &
P. O. Box 1945 Szuch; Director of General
Morristown, NJ 07962-1945 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 (82) TRUSTEE Private Investor;
111 New Montgomery St., #402 Assistant
San Francisco, CA 94105 Secretary/Treasurer and
Director, Berkeley Science
Corporation (a venture
capital company); and
director, trustee or
managing general partner,
as the case may be, of 31
of the investment
companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (64) CHAIRMAN OF THE BOARD AND President and Director,
777 Mariners Island Blvd. TRUSTEE Franklin Resources, Inc.;
San Mateo, CA 94404 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 (40) PRESIDENT AND TRUSTEE Senior Vice President and
500 East Broward Blvd. Director, Franklin
Fort Lauderdale, FL Resources, Inc.; Senior
33394-3091 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 39 the
investment companies in
the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (56) VICE PRESIDENT AND TRUSTEE Executive Vice President
777 Mariners Island Blvd. and Director, Franklin
San Mateo, CA 94404 Resources, Inc. and
Franklin Templeton
Distributors, Inc.;
President and Director,
Franklin Advisers, Inc.;
Senior Vice President and
Director, Franklin
Advisory Services, Inc.
and Franklin Investment
Advisory Services, Inc.;
Director,
Franklin/Templeton
Investor Services, Inc.;
and officer and/or
director, trustee or
managing general partner,
as the case may be, of
most of the other
subsidiaries of Franklin
Resources, Inc. and of 61
of the investment
companies in the Franklin
Templeton Group of Funds.
Frank W. T. LaHaye (68) TRUSTEE General Partner, Peregrine
20833 Stevens Creek Blvd. Associates and Miller &
Suite 102 LaHaye, which are General
Cupertino, CA 95014 Partners of Peregrine
Ventures and Peregrine
Ventures II (venture
capital firms); Chairman
of the Board and Director,
Quarterdeck Office
Systems, Inc. (software
firm); Director,
FischerImaging Corporation
(medical imaging systems);
and director or trustee,
as the case may be, of 27
of the investment
companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (68) TRUSTEE Chairman, White River
8212 Burning Tree Road Corporation (information
Bethesda, MD 20817 and financial services);
Director, Fund American
Enterprises Holdings,
Inc.(financial services),
MCI Communications
Corporation, CCC
Information Services
Group, Inc. (information
services), MedImmune, Inc.
(biotechnology), Source
One Mortgage Services
Corporation (financial
services), Shoppers
Express (home shopping),
Spacehab, Inc. (aerospace
services); 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; formerly
Chairman, Hambrecht and
Quist Group (venture
capital and investment
banking); Director, H & Q
Healthcare Investors
(investment trust); and
President, National
Association of Securities
Dealers, Inc.
Martin L. Flanagan (36) VICE PRESIDENT AND CHIEF Senior Vice President,
777 Mariners Island Blvd. FINANCIAL OFFICER Chief Financial Officer
San Mateo, CA 94404 and Treasurer, Franklin
Resources, Inc.;
President, Franklin
Templeton Services, 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.;
Treasurer, Franklin
Advisory Services, Inc.
and Franklin Investment
Advisory Services, Inc.;
officer of most of the
other subsidiaries of
Franklin Resources, Inc.;
and officer, director
and/or trustee of 61 of
the investment companies
in the Franklin Templeton
Group of Funds.
Deborah R. Gatzek (48) VICE PRESIDENT AND SECRETARY Senior Vice President and
777 Mariners Island Blvd. General Counsel, Franklin
San Mateo, CA 94404 Resources, Inc.; Senior
Vice President,Franklin
Templeton Services,
Inc.and Franklin Templeton
Distributors, Inc.; Vice
President, Franklin
Advisers, Inc., Franklin
Advisory Services, Inc.,
Franklin Investment
Advisory Services, Inc.,
and officer of 61 of the
investment companies in
the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (58) TREASURER AND PRINCIPAL Employee of Franklin
777 Mariners Island Blvd. ACCOUNTING OFFICER Advisers, Inc.; and
San Mateo, CA 94404 officer of 38 of the
investment companies in
the Franklin Templeton
Group of Funds.
Edward V. McVey (59) VICE PRESIDENT Senior Vice
777 Mariners Island Blvd. President/National Sales
San Mateo, CA 94404 Manager, Franklin
Templeton Distributors,
Inc.; and officer of 33 of
the investment companies
in the Franklin Templeton
Group of Funds.
</TABLE>
The preceding table also indicates those officers and trustees who are also
affiliated persons of the Managers or the Insurance Companies.
Trustees not affiliated with the Managers or the Insurance Companies ("non
affiliated trustees") are currently paid fees of $550 per month plus $183 per
meeting attended. As indicated above, certain of the nonaffiliated trustees
serve as directors, trustees or managing general partners of other investment
companies in the Franklin Group of FundsAE and the Templeton Group of Funds
("Franklin Templeton Funds").
The following table shows the total fees paid, for the fiscal year ended
December 31, 1996, to non affiliated trustees by the Trust and by other
Franklin Templeton Funds.
AGGREGATE NUMBER OF FRANKLIN TOTAL COMPENSATION FROM
COMPENSATION TEMPLETON FUNDS BOARDS FRANKLIN TEMPLETON FUNDS,
NAME FROM TRUST ON WHICH EACH SERVES** INCLUDING THE TRUST
Frank H. Abbott...... $8,617 32 $165,236
Harris Ashton........ 8,617 56 343,591
S. Joseph Fortunato.. 8,617 58 360,411
David Garbellano..... 8,617 31 148,916
Frank W.T. LaHaye.... 8,433 27 139,233
Gordon Macklin....... 8,617 53 335,541
UFigures rounded to the nearest dollar.
**We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 62 registered investment companies, with
approximately 171 U.S. based funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or
indirectly from the Fund or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
As of February 15, 1997, 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.
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, International Smaller Companies Fund, Developing Markets
Fund, Mutual Discovery Fund, Mutual Shares Fund and the Rising Dividends 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 Equity Fund, the Pacific Fund, and the Global Income Fund.
The Manager for the Rising Dividends Fund is Franklin Advisory Services, Inc.
("Franklin New Jersey"), One Parker Plaza, Sixteenth Floor, Ft. Lee, New
Jersey 07024. The Manager for the Mutual Discovery and Mutual Shares Funds is
Franklin Mutual Advisers, Inc. ("Franklin Mutual") 51 John F. Kennedy
Parkway, Short Hills, New Jersey 07078. The Manager of the International
Smaller Companies Fund is Templeton Florida. The Manager for the Asset
Allocation and Global Growth Funds is Templeton Global Advisers Limited,
formerly known as Templeton, Galbraith & Hansberger, Ltd. ("Templeton
Nassau"), Lyford Cay Nassau, N.P. Bahamas. The Manager for Developing Markets
Fund is Templeton Asset Management Ltd. ("Templeton Singapore"), 7 Temasek
Boulevard, #38-03, Suntec Tower One, Singapore. Templeton Nassau employs
Templeton Florida to act as subadviser to the Asset Allocation Fund.
Advisers, Templeton Nassau, Templeton Singapore, Templeton Florida, Franklin
New Jersey and Franklin Mutual may be referred to as the "Manager" or
"Managers" throughout the SAI and Prospectus.
The Managers also provide management services to numerous other investment
companies or funds and other accounts pursuant to management agreements with
each fund or other account. The Managers may give advice and take action with
respect to any of the other funds or accounts they manage, or for their own
accounts, which may differ from action taken by the Managers on behalf of the
Funds. Similarly, with respect to the Funds, the Managers are not obligated
to recommend, purchase or sell, or to refrain from recommending, purchasing
or selling any security that the Managers and access persons, as defined by
the 1940 Act, may purchase or sell for their own accounts or for the accounts
of any other fund or account. Furthermore, the Managers are not obligated to
refrain from investing in securities held by the Fund or other funds or
accounts which they manage or administer. Of course, any transactions for the
accounts of the Managers and other access persons will be made in compliance
with the Fund's Code of Ethics.
Each Fund, except the International Equity Fund, the Pacific Fund, the Rising
Dividends Fund, the Small Cap Fund, the International Smaller Companies Fund,
the Capital Growth Fund, the Mutual Discovery Fund, the Mutual Shares 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.
Templeton Florida, as subadviser for the Global Income Fund under a contract
with Advisers, receives a monthly fee from Advisers at the annual rate of
0.35% of the value of average daily net assets up to and including $100
million; 0.25% of average daily net assets over $100 million up to and
including $250 million; 0.20% of the value of net assets over $250 million.
The International Equity 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 Equity 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 Capital Growth Fund, and the Small Cap Fund are each obligated to pay
Advisers a monthly fee, based upon each Fund's average daily net assets,
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 Rising Dividends Fund is obligated to pay Franklin New Jersey a monthly
fee, based upon each Fund's average daily net assets, 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 Mutual Discovery Fund and Mutual Shares Fund are obligated to pay
Franklin Mutual a monthly fee, based upon each Fund's average daily net
assets, computed at the annual rate of .80 and .60, of 1%, respectively of
average daily net assets.
Under the management agreement with Templeton Nassau, 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 Singapore, the Developing
Markets Fund is obligated to pay Templeton Singapore a monthly fee equal to
an annual rate of 1.25% of the value of the Fund's average daily 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.
Templeton Florida, as subadviser for the Asset Allocation Fund under a
contract with Templeton Nassau, receives a monthly fee from Templeton Nassau
at the annual rate of 0.25% of the value of 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; 0.20% of the value of net assets
over $1.3 billion.
Under a management agreement with Templeton Florida, the International
Smaller Companies Fund is obligated to pay the Manager a monthly fee equal to
an annual rate of 0.85% of the value of the Fund's average daily net assets
up to and including $200 million, 0.765% of the value of the Fund's average
daily net assets over $200 million up to and including $1.3 billion; and
0.68% of the value of the Fund's average daily net assets over $1.3 billion.
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, 1997,
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. With respect to the Money Fund, during 1996, Advisors limited its
management fees such that aggregate expenses, including management fees of
0.41%, represented 0.43% of the Money Fund's average daily net assets.
Expense reductions have not been necessary based on state requirements.
Except as indicated below, the management and subadvisory agreements with the
Managers are in effect until April 30, 1997, 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 Small Cap (dated July 19, 1995), Capital
Growth (dated January 18, 1996), and International Smaller Companies (dated
January 18, 1996), Funds, are in effect for an initial period of one year.
The management agreements for the Mutual Discovery and Mutual Shares Funds
are in effect for an initial period of two years. These management agreements
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 Templeton Florida as subadviser
to certain Funds is subject to the overview of each Fund's respective
Manager, to whom the Managers render periodic reports of each Fund's
investment activities. The Managers, or in certain cases, the Fund
Administrator, provide each Fund with executive and administrative personnel,
office space and facilities, and pay 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 or Fund
Administrator. The Managers are covered by fidelity insurance on their
officers, directors and employees for the protection of the Trust. 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 Fund Administrators and the management
fees actually paid by the Funds for the fiscal years ended December 31, 1996,
1995 and 1994.
Management Management
and Fund and Fund
Administration Administration
FEES ACCRUED FEES PAID
1996
Money Market Fund.................................. $2,225,389 $1,781,802
Templeton Global Income Securities Fund .... 1,262,055 1,262,055
High Income Fund................................... 1,985,566 1,985,566
Government Fund.................................... 3,162,073 3,162,073
Zero Coupon Fund - 2000............................ 790,492 494,949
Zero Coupon Fund - 2005............................ 503,611 299,714
Zero Coupon Fund - 2010............................ 490,108 291,798
Income Securities Fund............................. 6,130,804 6,130,804
Rising Dividends Fund.............................. 3,785,807 3,785,807
Utility Equity Fund................................ 6,097,507 6,097,507
Growth and Income Fund............................. 4,643,546 4,643,546
Natural Resources Fund
(formerly the Precious Metals Fund)................ 754,383 754,383
Real Estate Fund................................... 1,335,653 1,335,653
Small Cap Fund..................................... 694,975 694,975
International Equity Fund.......................... 7,945,053 7,945,053
Pacific Fund....................................... 3,343,850 3,343,850
Global Asset Allocation Fund....................... 272,732 272,732
Developing Markets................................. 2,887,400 2,887,400
Global Growth...................................... 4,016,061 4,016,061
International Smaller Companies Fund............... 56,389 56,389
Capital Growth Fund................................ 86,028 86,028
Mutual Discovery Fund.............................. 11,033 11,033
Mutual Shares Fund................................. 11,822 11,822
1995
Money Market Fund.................................. $2,295,252 $1,700,943
Templeton Global Income Securities Fund ........... 1,354,128 1,354,128
High Income Fund................................... 1,700,257 1,700,257
Government Fund.................................... 3,038,772 3,038,772
Zero Coupon Fund - 2000............................ 721,943 439,204
Zero Coupon Fund - 2005............................ 425,696 249,803
Zero Coupon Fund - 2010............................ 398,959 233,644
Income Securities Fund............................. 5,335,780 5,335,780
Rising Dividends Fund.............................. 2,858,740 2,858,740
Utility Equity Fund................................ 6,002,369 6,002,369
Growth and Income Fund............................. 3,283,721 3,283,721
Natural Resources Fund
(formerly the Precious Metals Fund)................ 702,034 702,034
Real Estate Fund................................... 1,110,433 1,110,433
Small Cap Fund..................................... 9,054 9,054
International Equity Fund.......................... 6,748,353 6,748,353
Pacific Fund....................................... 3,148,402 3,148,402
Global Asset Allocation Fund....................... 52,421 52,421
Developing Markets................................. 1,636,864 1,636,864
Global Growth...................................... 2,309,970 2,309,970
1994
Money Market Fund.................................. 1,970,057 1,652,138
Templeton Global Income Securities Fund............ 1,404,652 1,404,652
High Income Fund................................... 1,264,737 1,264,737
Government Fund.................................... 3,100,250 3,100,250
Zero Coupon Fund - 2000............................ 522,841 301,577
Zero Coupon Fund - 2005............................ 281,657 158,311
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
Natural Resources Fund
(formerly the Precious Metals Fund)................ 644,295 644,295
Real Estate Fund................................... 932,770 932,770
International Equity Fund.......................... 5,356,301 5,356,301
Pacific Fund....................................... 3,057,140 3,057,140
Developing Markets................................. 511,882 511,882
Global Growth Fund................................. 578,011 578,011
Please refer to the "Officers and Trustees" table which indicates officers
and trustees who are affiliated persons of the Trust, the Managers and the
Insurance Companies.
FUND ADMINISTRATOR
Franklin Templeton Services, Inc. ("FT Services"), 777 Mariners Island
Boulevard, San Mateo, California 94404 serves as Fund Administrator. It
provides certain administrative facilities and services for the Funds,
including preparation and maintenance of books and records, preparation of
tax reports, preparation of financial reports, and monitoring compliance with
regulatory requirements.
FT Services is employed directly by the Asset Allocation, International
Smaller Companies, Mutual Discovery and Mutual Shares Funds, and through
subcontracts by the Managers of all the other 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
The Bank of New York, Mutual Funds Division, 90 Washington Street, New York,
New York 10286, acts as custodian of the securities and other assets of the
Trust, except for assets held by the other custodians named herein. Bank of
America NT & SA, 555 California Street, 4th Floor, San Francisco, California
94104, acts as custodian for cash received in connection with the purchase of
Fund shares. In addition, Chase Manhattan Bank, Chase MetroTech Center,
Brooklyn, New York 11245, also acts as custodian for the Global Growth,
Developing Markets, Asset Allocation, and International Smaller Companies
Funds. The State Street Bank and Trust Company, Atlantic Division, 225
Franklin Street, Boston, MA 02110 acts as custodian for the Mutual Discovery
and Mutual Shares 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, 1996, 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
net price and 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 based on 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 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 felt that several brokers are equally able to provide the best net
price and execution, the Managers may decide to execute transactions through
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 through brokers who supply research, statistical
and other data to the Funds and the Managers in such amount of total
brokerage as may reasonably be required.
Since most purchases by certain of the Funds are principal transactions at
net prices, these Funds incur little or no brokerage costs. The Funds deal
directly with the selling or purchasing principal or market maker without
incurring charges for the services of a broker on their behalf, unless it is
determined that a better price or execution may be obtained by utilizing the
services of a broker. Purchases of portfolio securities from underwriters
will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The Funds seek to obtain prompt execution of orders at the
most favorable net price. Transactions may be directed to dealers in return
for research and statistical information, as well as for special services
rendered by such dealers in the execution of orders.
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 Contracts 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 of Funds, 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 certain of the Funds and 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.
During the past three fiscal years ended December 31, 1996, or since
inception, each Series paid brokerage commissions as follows:
FUND 1994 1995 1996
Money Market Fund............................... $ 0 $ 0 $ 0
Templeton Global Income Securities Fund......... 0 0 0
High Income Fund................................ 0 0 0
Government Fund................................. 0 0 0
Zero Coupon Fund - 2000......................... 0 0 0
Zero Coupon Fund - 2005......................... 0 0 0
Zero Coupon Fund - 2010......................... 0 0 0
Growth and Income Fund.......................... 1,466,719 2,368,736 848,162
Income Securities Fund.......................... 273,276 175,429 211,977
Real Estate Fund................................ 211,890 182,818 89,985
Rising Dividends Fund........................... 220,185 272,848 485,120
Global Asset Allocation Fund.................... -- 24,490 62,209
Utility Fund.................................... 442,406 652,221 1,277,007
Natural Resources Fund
(formerly the Precious Metals Fund)............. 150,503 111,982 149,263
Small Cap Fund.................................. -- 9,622 183,601
Templeton Developing Markets Equity Fund........ 419,518 589,426 604,200
Global Growth Fund.............................. 206,009 956,434 --
International Equity Fund....................... 1,541,506 824,409 1,015,004
Pacific Growth Fund............................. 961,503 1,040,361 487,464
International Smaller Companies Fund............ -- -- 10,847
Capital Growth Fund............................. -- -- 44,722
Mutual Discovery Fund........................... -- -- 20,812
Mutual Shares Fund.............................. -- -- 31,174
As of December 31, 1996, the Money Market Fund owned securities issued by
Goldman Sachs Group, Merrill Lynch & Company, Morgan Stanley Group, Inc., and
Prudential Funding Corp., the Templeton Global Growth Fund owned securities
issued by A.G. Edwards, Inc., and Merrill Lynch & Co., Inc., and the
Templeton Global Asset Allocation Fund owned securities issued by A.G.
Edwards, Inc., and Merrill Lynch & Co., Inc., which were valued in the
aggregate at $14,841,729, $18,855,796, $14,856,655,$19,942,483, $3,275,075,
$3,423,000, $36,987 and $163,000 respectively. Except as stated above, no
Fund owned any securities issued by its regular broker-dealers as of the end
of such fiscal year.
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.
FUNDS OTHER THAN MONEY FUND
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 receivable 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 Funds' net asset value are 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.
Generally, trading in corporate bonds, U.S. government securities and Money
Market Instruments is substantially completed each day at various times prior
to the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Funds' shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled close of the
Exchange which will not be reflected in the computation of the Funds' net
asset values. If events materially affecting the values of these securities
occur during such period, then the securities will be valued at their fair
value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board of Trustees, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
All Money Market Instruments owned by Funds other than the Money Market Fund
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 MARKET FUND
The net asset value per share of the Fund is calculated by adding the value
of all securities and other assets in the Fund's portfolio (i.e., share of
the Portfolio), deducting the Fund's liabilities, and dividing by the number
of shares outstanding.
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 opposite 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 this rule 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.
Any Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules.
For example, over-the-counter options on debt securities and equity options,
including options on stock and on narrow-based stock indexes, will be subject
to tax under Section 1234 of the Code, generally producing a long-term or
short-term capital gain or loss upon exercise, lapse, or closing out of the
option or sale of the underlying stock or security. By contrast, the Fund
treatment of certain other options, futures and forward contracts entered
into by a Fund is generally governed by Section 1256 of the Code. These
"Section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options
on futures contracts, regulated futures contacts and certain foreign currency
contacts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by a Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain foreign currency gain or loss
covered by Section 988 of the Code) will generally be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. The
effect of Section 1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on Section 1256 positions
may require the Fund to accrue taxable income without the corresponding
receipt of cash. In order to generate cash to satisfy the distribution
requirements of the Code, the Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash
flows from other sources such as the sale of Fund shares. In these ways, any
or all of these rules may affect both the amount, character and timing of
income distributed to shareholders by the Fund.
When a Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, resulting in possible deferral of
losses, adjustments in the holding periods of Fund securities and conversion
of short-term capital losses into long-term capital losses. Certain tax
elections exist for mixed straddles (i.e., straddles comprised of at least
one Section 1256 position and at least one non-Section 1256 position) which
may reduce or eliminate the operation of these straddle rules.
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 not 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.
HOW THE TRUST MEASURES PERFORMANCE
From time to time, the "yield" and "effective yield" of the Money Fund may be
advertised. 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 current yields and total returns of the other Funds
may be published in advertisements and communications to Contract Owners. The
current yield for each Fund will be calculated by dividing the annualization
of the income earned by the Fund during a recent 30-day period by the net
asset value per share at the end of such period. 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. Aggregate and
average total return information for each Fund over different periods of time
may also be advertised.
A distribution rate for each Fund may also be published in Contract Owners
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. Uniformly computed
yield and total return figures for each Fund will also be published 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
(which may be pro-rated as appropriate) for the applicable time period. In
addition, yield or total return performance information computed on a
different basis may be advertised or presented. 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. Hypothetical performance information may
also be prepared for sales literature or advertisements. See "Performance
Data" in the appropriate insurance company separate account prospectus and
"Calculation of Performance Data" in the appropriate insurance company
separate account SAI.
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. Contract owners
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
bearing such expenses during the amortization period only as such charges are
accrued daily against the investment income of that Fund.
As of October 15, 1996, Allianz Life Variable
Account A, Allianz Life Variable Account B and Preferred Life Variable
Account C owned, .14%, 91.66%, and 8.20% respectively, of the issued and
outstanding shares of the Trust.
Contract owners will be informed of each Fund's progress through periodic
reports. Financial statements certified by independent public auditors will
be available at least annually.
Employees of Resources or its subsidiaries who are access persons under the
1940 Act are permitted to engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed
within 24 hours after clearance; (ii) copies of all brokerage confirmations
must be sent to a 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; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and
inform the compliance officer (or other designated personnel) if they own a
security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
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.
FUND SIMILARITY
The investment objectives and policies of certain Funds are similar but not
identical to those of certain public Franklin Templeton Funds indicated in
the table below. BECAUSE OF DIFFERENCES IN PORTFOLIO SIZE, THE INVESTMENTS
HELD, THE TIMING OF PURCHASES OF SIMILAR INVESTMENTS, CASH FLOWS, MINOR
DIFFERENCES IN CERTAIN INVESTMENT POLICIES, INSURANCE PRODUCT RELATED TAX
DIVERSIFICATION REQUIREMENTS, STATE INSURANCE REGULATIONS, AND ADDITIONAL
ADMINISTRATIVE AND INSURANCE COSTS ASSOCIATED WITH INSURANCE COMPANY SEPARATE
ACCOUNTS, THE INVESTMENT PERFORMANCE OF THE FRANKLIN VALUEMARK FUNDS WILL
DIFFER FROM THE PERFORMANCE OF THE CORRESPONDING FRANKLIN TEMPLETON FUNDS.
FRANKLIN VALUEMARK FUNDS FRANKLIN TEMPLETON FUNDS
Franklin Custodian Funds, Inc.:
Capital Growth Fund - Growth Series
High Income Fund AGE High Income Fund, Inc.
Franklin Custodian Funds, Inc.:
Income Securities Fund - Income Series
Money Market Fund Franklin Money Fund
Franklin Mutual Series Fund Inc.:
Mutual Shares Securities Fund Mutual Shares Fund
Mutual Discovery Securities Fund Mutual Discovery Fund
Franklin Strategic Series:
Natural Resources Fund -Franklin Natural Resources Fund
Franklin Real Estate Securities
Trust:
Real Estate Securities Fund - Franklin Real Estate Securities
Fund
Franklin Managed Trust:
Rising Dividends Fund - Franklin Rising Dividends Fund
Franklin Strategic Series:
Small Cap Fund - Franklin Small Cap Growth Fund
Templeton Developing Markets Equity Fund Templeton Developing Markets Trust
Templeton Variable Products Series
Fund:
Templeton Global Asset Allocation Fund - Templeton Asset Allocation Fund
Templeton Global Growth Fund Templeton Growth Fund, Inc.
Franklin Investors Securities Trust:
Templeton Global Income Securities Fund - Franklin Global Government Income
Fund
(formerly "Global Income Fund")
Franklin Templeton International
Trust:
Templeton Pacific Growth Fund - Templeton Pacific Growth Fund
Franklin Custodian Funds, Inc.:
U.S. Government Securities Fund U.S. Government Securities Series
FINANCIAL STATEMENTS
(To be added in a later filing)
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:
(To be supplied in a future amendment)
(b) Exhibits:
The following exhibits where applicable, are herewith incorporated by
reference to the filings as noted with the exception of Exhibits 5(x);
5(xiii); 5(xvii); 5(xviii), which are attached.
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated April 20, 1988
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment to Agreement and Declaration
of Trust dated October 21, 1988
Filing: Post Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(2) copies of the By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of By-Laws dated May 16,
1995.
Filing: Post Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 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:
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Addendum to Investment Management Agreement dated
March 14, 1989
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Management Agreement between Registrant, on behalf
of International Equity Fund and Pacific Growth
Fund, and Franklin Advisers, Inc. dated January
27, 1992
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Subadvisory Agreement dated between Franklin
Advisers, Inc. and Templeton Investment Counsel,
Inc. January 1, 1993
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Management Agreement between Registrant on behalf
of Franklin Rising Dividends Fund, and Franklin
Advisory Services, Inc. dated July 1, 1996
Filing: Post-Effective Amendment No. 20 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(vi) Investment Management Agreement between the Trust,
on behalf of the Templeton Global Growth Fund,
and Templeton, Galbraith & Hansberger Ltd. dated
March 15, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(vii) Subadvisory Agreement between Franklin Advisers,
Inc. and Templeton Investment Counsel, on behalf
of Global Income Fund dated August 1, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(viii) Investment Management Agreement between
Registrant, on behalf of Templeton Global Asset
Allocation Fund, and Templeton Galbraith &
Hansberger, Ltd. dated April 19, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ix) Subadvisory Agreement between Templeton Galbraith
& Hansberger, Ltd. and Templeton Investment
Counsel, Inc., on behalf of Templeton Global
Asset Allocation Fund dated April 19, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(x) Business Management Agreement between Registrant,
on behalf of Templeton Global Asset Allocation
Fund, and Franklin Templeton Services, Inc.,
dated October 1, 1996.
(xi) Management Agreement between Registrant, on behalf
of Small Cap Fund dated October 11, 1995
Filing: Post-Effective Amendment No. 20 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xii) Investment Management Agreement between
Registrant, on behalf of Templeton Developing
Markets Equity Fund dated October 1, 1995.
Filing: Post-Effective Amendment No. 17
to Registration Statement of Registrant
on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xiii) Business Management Agreement between
Registrant, on behalf of International Smaller
Companies Fund and Franklin Templeton Services,
Inc., dated October 1, 1996.
(xiv) Investment Management Agreement between
Registrant, on behalf of International Smaller
Companies Fund and Templeton Investment Counsel,
Inc. dated January 18, 1996.
Filing: Post-Effective Amendment No. 18
to Registration Statement of Registrant
on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xv) Management Agreement between Registrant, on
behalf of Capital Growth Fund and Franklin
Advisers dated January 18, 1996.
Filing: Post-Effective Amendment No. 18
to Registration Statement of Registrant
on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xvi) Amendment to Management Agreement between
Registrant and Franklin Advisers, Inc. dated
August 1, 1995
Filing: Post-Effective Amendment No. 20 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xvii) Management Agreement between Registrant, on behalf
of Mutual Discovery Securities Fund and Mutual
Shares Securities Fund and Franklin Mutual Advisers,
Inc., dated October 18, 1996.
(xviii) Fund Administration Agreement between Registrant, on
behalf of Mutual Discovery Securities Fund and
Mutual Shares Securities Fund, and Franklin
Templeton Services, Inc., dated October 18, 1996.
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
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(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
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(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
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(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
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Master Custody Agreement between the Registrant,
the Bank of New York, dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(vi) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(vii) Form of Amendment to Global Custody Agreement
between Franklin Valuemark Funds and The Chase
Manhattan Bank, N.A. dated April 1, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(viii) Form of Amendment to Master Custody Agreement
between Franklin Valuemark Funds and the Bank Of
New York, dated April 1, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(ix) Letter Agreement between Franklin Valuemark Funds
and the Bank Of New York, dated April 22, 1996.
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(x) Form of Custody Agreement between the Trust, on
behalf of Mutual Discovery Securities Fund and
Mutual Shares Securities Fund, and the State
Street Bank and Trust
Filing: Post-Effective Amendment No. 21
to Registration Statement of Registrant on
Form N-1A
File No. 33-23493
File Date: October 31, 1996
(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 16, 1987
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(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;
(To be supplied in a future amendment)
(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.
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Letter of Understanding dated September 12,
1995.
Filing: Post-Effective Amendment No. 17 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: October 27, 1996
(iii) Letter of Understanding dated April 4, 1996
Filing: Post-Effective Amendment No. 19 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iv) Letter of Understanding dated October 21, 1996
(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 hereby incorporates by reference the Plans of
Distribution included in the management agreements which are
exhibits 5(i); 5(iii); 5(v); 5(vi); 5(viii); 5(xi); 5(xii);
5(xiv); 5(xv) and; 5(xvii).
(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
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Secretary dated July 18, 1995
Filing: Post-Effective Amendment No. 16 to
Registration Statement of Registrant on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
Item 25 Persons Controlled by or under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of February 28, 1997, 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 16 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 adviser to the International Smaller
Companies Fund and as sub-adviser to certain of the Funds, furnishing to
Advisers and to Templeton Global Advisers Limited 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 Global Advisers Limited, formerly known as Templeton
Galbraith and Hansberger Ltd.
Templeton Global Advisers Limited ("Templeton Nassau"), 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 Templeton
Nassau (SEC File 801-42343), incorporated herein by reference, which set forth
the officers and directors of Templeton Nassau 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 Asset Management Ltd., formerly known as Templeton
Investment Management (Singapore) Pte Ltd.
Templeton Asset Management ("Templeton Singapore"), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to Templeton Developing
Markets Equity Fund. For information please see Part B and Schedules A and D of
Form ADV of Templeton Singapore (SEC File 801-46997), incorporated herein by
reference, which set forth the officers and directors of Templeton Singapore and
information as to any business, profession, vocation of employment of a
substantial nature engaged in by those officers and directors during the past
two years.
(e) Franklin Advisory Services, Inc.
Franklin Advisory Services, Inc. ("Franklin New Jersey"), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to the Rising
Dividends Fund. For information please see Part B and Schedules A and D of Form
ADV of Franklin New Jersey (SEC File 801-51967), incorporated herein by
reference, which set forth the officers and directors of Franklin New Jersey 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.
(f) Franklin Mutual Advisers, Inc.
Franklin Mutual Advisers, Inc. ("Mutual Advisers"), an indirect, wholly owned
subsidiary of Resources, will serve as investment manager to the Mutual
Discovery Growth Fund and the Mutual Series Securities Fund. For information
please see Part B and Schedules A and D of Form ADV of Mutual Advisers (SEC File
801-53068), incorporated herein by reference, which set forth the officers and
directors of Mutual Advisers and information as to any business, profession,
vocation of employment of a substantial nature engaged in by those officers and
directors during the past two years.
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, Mutual Discovery Growth Fund (Effective
November 8, 1996), and Mutual Shares Securities Fund (effective date
November 8, 1996) 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 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 28th day of February, 1997.
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: February 28, 1997
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: February 28, 1997
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 28, 1997
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: February 28, 1997
Lowell C. Anderson Trustee
Lowell C. Anderson Dated: February 28, 1997
Harris J. Ashton* Trustee
Harris J. Ashton Dated: February 28, 1997
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: February 28, 1997
David W. Garbellano Trustee
David W. Garbellano Dated: February 28, 1997
Charles B. Johnson Trustee
Charles B. Johnson Dated: February 28, 1997
Rupert H. Johnson Trustee
Rupert H. Johnson Dated: February 28, 1997
*By
/s/Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN VALUEMARK FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
PAGE NO.
EXHIBIT NO. DESCRIPTION IN SEQUENTIAL
NUMBERING
SYSTEM
EX-99.B1(i) Agreement and Declaration of Trust dated *
April 20, 1988
EX-99.B1(ii) Certificate of Amendment to Agreement and *
Declaration of Trust dated October 21, 1988
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Certificate of Amendment of By-Laws dated *
May 16, 1995
EX-99.B5(i) Management Agreement between Registrant *
and Franklin Advisers, Inc. dated January
24, 1989
EX-99.B5(ii) Addendum to Investment Management *
Agreement dated March 14, 1989
EX-99.B5(iii) Management Agreement between Registrant 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 *
Advisers, Inc. and Templeton Investment
Counsel, Inc. dated January 1, 1993
EX-99.B5(v) Management Agreement between Registrant on *
behalf of Franklin Rising Dividends, and
Franklin Advisory Services, Inc. dated
July 1, 1996
EX-99.B5(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
EX-99.B5(vii) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, on behalf of the Global Income Fund dated
August 1, 1994 Investment Management Agreement *
the Trust on behalf of the Templeton Global Growth
Fund and Templeton, Galbraith & Hansberger Ltd.
dated March 15, 1994
EX-99.B5(viii) Investment Management Agreement between *
Registrant, on behalf of Templeton Global
Asset Allocation Fund, and Templeton
Galbraith & Hansberger, Ltd. dated April
19, 1995
EX-99.B5(ix) Subadvisory Agreement between Registrant, *
on behalf of Templeton Global Asset Allocation
Fund, and Templeton Galbraith & Hansberger,
Ltd. dated April 19, 1995.
EX-99.B5(x) Business Management Agreement between Attached
Registrant, on behalf of Templeton Global
Asset Allocation Fund, and Franklin Templeton
Services dated October 1, 1996
EX-99.B5(xi) Business Management Agreement between *
Registrant, on behalf of Small Cap Fund
dated October 11, 1995
EX-99.B5(xii) Investment Management Agreement between *
Registrant, on behalf of Developing
Markets Equity Fund dated October 1, 1995
EX-99.B5(xiii) Business Management Agreement between Attached
Registrant, on behalf of International
Smaller Companies Fund dated October 1, 1996
EX-99.B5(xiv) Investment Management Agreement between *
Registrant, on behalf of International
Smaller Companies Fund dated January 18, 1996
EX-99.B5(xv) Management Agreement between Registrant, on *
behalf of Capital Growth Fund dated January 18,
1996
EX-99.B5(xvi) Amendment to Management Agreement between *
Registrant and Franklin Advisers, Inc. dated
August 1, 1995
EX-99.B5(xvii) Management Agreement between Registrant on Attached
behalf of Mutual Discovery Securities Fund
and Mutual Shares Securities Fund and
Franklin Mutual Advisers, Inc., dated
October 18, 1996
EX-99.B5(xviii) Fund Administration Agreement between Attached
Registrant, on behalf of Mutual Discovery
Securities Fund and Mutual Shares
Securities Fund and Franklin Templeton
Services, Inc., dated October 18, 1996
EX-99.B8(i) Custodian Agreement between Registrant and *
Bank of America NT & SA dated September
17, 1991
EX-99.B8(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
EX-99.B8(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
EX-99.B8(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
EX-99.B8(v) Master Custody Agreement between the *
Registrant, and the Bank Of New York,
dated February 16, 1996
EX-99.B8(vi) Terminal Link Agreement between Registrant *
and the Bank Of New York dated February
16, 1996
EX-99.B8(vii) Form of Amendment to Global Custody *
Agreement between the Registrant and The
Chase Manhattan Bank, N.A. dated April 1,
1996
EX-99.B8(viii) Form of Amendment to Master Custody *
Agreement between Franklin Valuemark Funds
and the Bank Of New York, dated April 1,
1996
EX-99.B8(ix) Letter of Agreement between Registrant *
and the Bank Of New York, dated April 22, 1996
EX-99.B8(x) Form of Custody Agreement between the *
Trust, on behalf of Mutual Discovery
Securities Fund and Mutual Shares
Securities Fund and State Street Bank and
Trust, dated (), 1996
EX-99.B10(i) Opinion and consent of counsel dated *
September 16, 1987
EX-99.B11(i) Consent of Independent Auditors **
EX-99.B13(i) Letter of Understanding dated April 11, *
1995.
EX-99.B13(ii) Letter of Understanding dated September *
12, 1995
EX-99.B13(iii) Letter of Understanding dated April 4, 1996 *
EX-99.B13(iv) Letter of Understanding dated October 21, *
1996
EX-99.B17(i) Power of Attorney dated July 18, 1995 *
EX-99.B17(ii) Certificate of Secretary dated July 18, *
1995
*Incorporated by Reference
**To be Supplied in a Future Amendment
BUSINESS MANAGEMENT AGREEMENT BETWEEN
FRANKLIN VALUEMARK FUNDS
(TEMPLETON GLOBAL ASSET ALLOCATION FUND)
AND
FRANKLIN TEMPLETON SERVICES, INC.
AGREEMENT dated as of October 1, 1996, 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 Franklin Templeton Services, Inc. ("FTS").
In consideration of the mutual promises herein made, the
parties hereby agree as follows:
(1) FTS 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 FTS 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,
1997 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 FTS, or of reckless disregard of its duties and obligations
hereunder, FTS 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/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By:
/s/Harmon E. Burns
Executive Vice President
- -----------------------------------------------------------------
Termination of Agreement
Franklin Valuemark Funds and Templeton Global Investors, Inc., hereby agree that
the Business Management Agreement between them dated April 19, 1995, regarding
the Templeton Global Asset Allocation Fund, is terminated effective as of the
date of the Business Management Agreement above.
FRANKLIN VALUEMARK FUNDS
By: /s/Deborah R. Gatzek
Vice President & Secretary
TEMPLETON GLOBAL INVESTORS, INC.
By: /s/Martin L. Flanagan
President & CEO
BUSINESS MANAGEMENT AGREEMENT BETWEEN
FRANKLIN VALUEMARK FUNDS
(TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND)
AND
FRANKLIN TEMPLETON SERVICES, INC.
AGREEMENT dated as of October 1, 1996, between Franklin
Valuemark Funds, a Massachusetts business trust (the "Trust"), on behalf of
the
Templeton International Smaller Companies Fund (the "Fund"), a separate series
of the Trust, and Franklin Templeton Services, Inc. ("FTS" or
"Administrator").
In consideration of the mutual promises herein made, the
parties hereby agree as follows:
(1) FTS 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 periodic 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, public accounting firms, law firms, printers
and other third party service providers;
(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, supervising compliance with
recordkeeping requirements imposed by state laws or regulations, and
maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(i) preparing and filing of tax reports including the Fund's income tax
returns, and monitoring the Fund's compliance with subchapter M of the
Internal Revenue Code, provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;
(j) monitoring the Fund's compliance with: the 1940 Act and rules and
regulations thereunder; state and foreign laws and regulations applicable
to the operation of investment companies funding variable insurance
products; the Fund's investment objectives, policies and restrictions; and
the Code of Ethics and other policies adopted by the Fund's Board of
Trustees or by the Adviser and applicable to the Fund;
(k) providing executive, clerical and secretarial personnel needed to carry
out the above responsibilities; and
(l) preparing regulatory reports, including without limitation NSARs,
proxy statements and U.S. and foreign ownership reports.
(2) The Trust agrees, during the life of this Agreement, to pay to FTS
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, 1997 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 FTS, or of reckless disregard of its duties and
obligations hereunder, FTS 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/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/Harmon E. Burns
Executive Vice President
- ----------------------------------------------------------------
Termination of Agreement
Franklin Valuemark Funds and Templeton Global Investors, Inc., hereby agree
that the Business Management Agreement between them dated January 18, 1996,
regarding the Templeton International Smaller Companies Fund, is terminated
effective as of the date of the Business Management Agreement above.
FRANKLIN VALUEMARK FUNDS
By: /s/Deborah R. Gatzek
Vice President & Secretary
TEMPLETON GLOBAL INVESTORS, INC.
By: /s/Martin L. Flanagan
President & CEO
FRANKLIN VALUEMARK FUNDS
on behalf of its series
MUTUAL DISCOVERY SECURITIES FUND and
MUTUAL SHARES SECURITIES FUND
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT made between FRANKLIN VALUEMARK FUNDS, a
Massachusetts business trust (the "Trust"), on behalf of MUTUAL DISCOVERY
SECURITIES FUND and MUTUAL SHARES SECURITIES FUND (each, a "Fund"), series of
the Trust, and FRANKLIN MUTUAL ADVISERS, INC., a Delaware corporation, (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 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 Fund; 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, counseling and supervisory services to
investment companies and other investment counseling clients, and desires to
provide these services to each Fund.
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, 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 or the Trust 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. Investment Management Services.
(a) The Manager shall manage each Fund's assets subject to and in
accordance with the investment objectives and policies of the 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 each Fund's assets and the purchase and
sale of its 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 each Fund's
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 each Fund's assets and the purchase and sale of its
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 each Fund, orders for the execution of the Fund's securities
transactions. When placing such orders, the Manager shall seek to obtain
the best net price and execution for each Fund, 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 accordance 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 each Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and other
services to the Fund, specifically including the quotations necessary
to determine the Fund's 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 Fund, or which place the Manager in a better
position to make decisions in connection with the management of the
Fund's 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 Fund may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
(c) When the Manager has determined that a Fund should tender securities
pursuant to a "tender offer solicitation," Franklin/Templeton 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 Trust on behalf of a 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, on behalf of each Fund, 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 Fund.
B. 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 each Fund in the preparation of registration statements, reports and
other documents required by federal and state securities laws and with such
information as the Fund 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 Fund's shares.
C. 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 each
Fund and its investment activities.
3. Expenses of the Fund. 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 Fund 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 its shares;
D. Expenses of obtaining quotations for calculating the value of the 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 Fund;
G. Brokerage fees and commissions in connection with the purchase and sale
of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and shareholders of
the Fund, reports to the Fund's shareholders, the filing of reports with
regulatory bodies and the maintenance of the Fund's and the Trust's legal
existence;
J. Legal fees, including the legal fees related to the registration and
continued qualification of the 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
Fund and its shares under federal and any applicable state laws; including
the printing and mailing of prospectuses to its shareholders;
M. Trade association dues; and
N. The Fund's pro rata portion of fidelity bond, errors and omissions, and
trustees and officer liability insurance premiums.
However, nothing in this Agreement shall obligate the Trust or any Fund to
pay any compensation to the officers of the Trust.
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 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.
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 Fund shall be calculated at the
following annual rates:
(a) For the Mutual Discovery Securities Fund, 0.80% of the value of the
Fund's net assets; and
(b) For the Mutual Shares Securities Fund, 0.60% of the value of the Fund's
net assets.
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 and to the extent necessary to comply with the
limitations on expenses which may be borne by the Fund as set forth in the
laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. With respect to any Fund, the
Manager may waive all or a portion of its fees provided for herein, and
such waiver shall be treated as a reduction in purchase price of its
services. The Manager shall be contractually bound hereunder by the terms
of any publicly announced waiver of its fees, or any limitation of a Fund's
expenses, as if such waiver or limitation were fully set forth herein.
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.
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 any Fund 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 Fund or to any shareholder of a 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 any Fund.
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 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 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 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:
(a) may at any time be terminated as to any Fund 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 on 60 days'
written notice to the Manager;
(b) shall immediately terminate with respect to any Fund in the event of
its assignment as to that Fund; and
(c) may be terminated as to any Fund by the Manager on 60 days' written
notice to the 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 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. 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
each Fund and its shareholders or policyholders investing in the Fund.
B. No additional payments are to be made by any 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 the
Transfer and Dividend Paying Agents, Fund Administrator 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 its 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 a Fund, to or by
the Manager or its affiliates, 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
Act, then such payments shall be deemed to have been made pursuant to the Plan
as set forth herein. The cost and activities, the payment of which are intended
to be within the scope of the Plan with respect to each Fund, 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 any Fund 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 any Fund in the event of any act that
constitutes an assignment of this Management Agreement as to that Fund.
(d) The Plan may not be amended to increase materially the amount deemed to
be spent for distribution without approval by a majority of each affected
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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 18th day of October, 1996.
FRANKLIN VALUEMARK FUNDS
By:/s/Deborah R. Gatzek
Vice President & Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By:/s/Leslie M. Kratter
Secretary
FUND ADMINISTRATION AGREEMENT BETWEEN
FRANKLIN VALUEMARK FUNDS
AND
FRANKLIN TEMPLETON SERVICES, INC.
AGREEMENT dated as of October 18,1996, between FRANKLIN
VALUEMARK FUNDS, a Massachusetts business trust (the "Trust"), on behalf of
MUTUAL DISCOVERY SECURITIES FUND and MUTUAL SHARES SECURITIES FUND (each, a
"Fund"), separate series of the Trust, and Franklin Templeton Services, Inc.
("FTS" or "Administrator").
In consideration of the mutual promises herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these
facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to Shareholders,
notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other
communications with individual Shareholders, other than those
handled by the Fund's shareholder servicing agent;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services
engaged by the Fund; providing fund accounting services,
including preparing and supervising publication of daily
quotations of the net asset value of the Fund's Shares, earnings
reports and other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms,
law firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the
Investment Company Act of 1940 (the "1940 Act") and the rules and
regulations thereunder, supervising compliance with recordkeeping
requirements imposed by state laws or regulations, and
maintaining books and records for the Fund (other than those
maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with
subchapter M of the Internal Revenue Code, provisions of the Code
applicable to insurance company separate accounts, and other
applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and rules and
regulations thereunder; state and foreign laws and regulations
applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives,
policies and restrictions; and the Code of Ethics and other
policies adopted by the Fund's Board of Trustees or by the
Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Trust or any Fund to pay any
compensation to the officers of the Trust. Nothing in this Agreement shall
obligate FTS to pay for the services of third parties, including attorneys,
auditors, printers, pricing services or others, engaged directly by the Fund to
perform services on behalf of the Fund.
(2) The Trust agrees, during the life of this Agreement, to pay to FTS
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 each 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%.
The Manager may waive all or a portion of its fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of its services.
The Manager shall be contractually bound hereunder by the terms of any publicly
announced waiver of its fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were full set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of 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 FTS, or of reckless disregard of its duties and
obligations hereunder, FTS 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 FRANKLIN TEMPLETON SERVICES, INC.
By: /s/Deborah R. Gatzek By: /s/Leslie M. Kratter
