As filed with the Securities and Exchange Commission on February 25, 1999
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.
Post-Effective Amendment No. 27 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 (X)
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 (650) 312-2000
DEBORAH R. GATZEK, 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)
[x] on May 1, 1999 pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] 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.
Title of Securities Being Registered:
Shares of Beneficial Interest:
Money Market Fund - Class 1
Money Market Fund - Class 2
Growth and Income Fund - Class 1
Growth and Income Fund - Class 2
Natural Resources Securities Fund - Class 1
Natural Resources Securities Fund - Class 2
Real Estate Securities Fund - Class 1
Real Estate Securities Fund - Class 2
Global Utilities Securities Fund - Class 1
Global Utilities Securities Fund - Class 2
High Income Fund - Class 1
High Income Fund - Class 2
Templeton Global Income Securities Fund Class 1
Templeton Global Income Securities Fund Class 2
Income Securities Fund Class 1
Income Securities Fund Class 2
U.S. Government Securities Fund - Class 1
U.S. Government Securities Fund - Class 2
Zero Coupon Fund - 2000 - Class 1
Zero Coupon Fund - 2000 - Class 2
Zero Coupon Fund - 2005 - Class 1
Zero Coupon Fund - 2005 - Class 2
Zero Coupon Fund - 2010 - Class 1
Zero Coupon Fund - 2010 - Class 2
Rising Dividend Fund - Class 1
Rising Dividend Fund - Class 2
Templeton Pacific Growth Fund - Class 1
Templeton Pacific Growth Fund - Class 2
Templeton International Equity Fund - Class 1
Templeton International Equity Fund - Class 2
Templeton Developing Markets Equity Fund - Class 1
Templeton Developing Markets Equity Fund - Class 2
Templeton Global Growth Fund - Class 1
Templeton Global Growth Fund - Class 2
Templeton Global Asset Allocation Fund - Class 1
Templeton Global Asset Allocation Fund - Class 2
Small Cap Fund - Class 1
Small Cap Fund - Class 2
Capital Growth Fund - Class 1
Capital Growth Fund - Class 2
Templeton International Smaller Companies Fund - Class 1
Templeton International Smaller Companies Fund - Class 2
Mutual Discovery Securities Fund - Class 1
Mutual Discovery Securities Fund - Class 2
Mutual Shares Securities Fund - Class 1
Mutual Shares Securities Fund - Class 2
Global Health Care Securities Fund - Class 1
Global Health Care Securities Fund - Class 2
Value Securities Fund - Class 1
Value Securities Fund - Class 2
Prospectus
Franklin Valuemark Funds
CLASS 1 SHARES
MAY 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS COMPLETE
OR ACCURATE. ANYONE WHO ADVISES YOU OTHERWISE HAS COMMITTED A FEDERAL CRIME.
CONTENTS
FRANKLIN VALUEMARK FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[Insert page #] OVERVIEW
[Insert page #] INDIVIDUAL FUND DESCRIPTIONS
STABILITY OF PRINCIPAL AND INCOME
SEEKS INCOME AND STABILITY BY INVESTING IN HIGH-QUALITY, SHORT-TERM
INVESTMENTS.
[Insert page #] Money Market Fund
CURRENT INCOME
SEEKS INCOME BY INVESTING MAINLY IN BONDS.
[Insert page #] High Income Fund
[Insert page #] Templeton Global Income Securities Fund
[Insert page #] U.S. Government Securities Fund
[Insert page #] Zero Coupon Funds, 2000, 2005, 2010
GROWTH AND INCOME
Seeks growth and income by investing in stocks and bonds.
[Insert page #] Global Utilities Securities Fund
[Insert page #] Growth and Income Fund
[Insert page #] Income Securities Fund
[Insert page #] Mutual Shares Securities Fund
[Insert page #] Real Estate Securities Fund
[Insert page #] Rising Dividends Fund
[Insert page #] Templeton Global Asset Allocation Fund
[Insert page #] Value Securities Fund
CAPITAL GROWTH
SEEKS GROWTH BY INVESTING MAINLY IN STOCKS.
[Insert page #] Capital Growth Fund
[Insert page #] Global Health Care Securities Fund
[Insert page #] Mutual Discovery Securities Fund
[Insert page #] Natural Resources Securities Fund
[Insert page #] Small Cap Fund
[Insert page #] Templeton Developing Markets Equity Fund
[Insert page #] Templeton Global Growth Fund
[Insert page #] Templeton International Equity Fund
[Insert page #] Templeton International Smaller Companies Fund
[Insert page #] Templeton Pacific Growth Fund
ADDITIONAL FUND INFORMATION
[Insert page #] Important Recent Developments
[Insert page #] Distributions and Taxes
[Insert page #] Financial Highlights, All Funds
FUND ACCOUNT INFORMATION
[Begin callout]
Information about fund account transactions, and services
[End callout]
[Insert page #] Buying Shares
[Insert page #] Selling Shares
[Insert page #] Exchanging Shares
[Insert page #] Fund Account Policies
[Insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
Where to learn more about each fund
[End callout]
Back Cover
OVERVIEW
FRANKLIN VALUEMARK FUNDS
Franklin Valuemark Funds (the Trust) currently consists of twenty-five
separate funds, offering a wide variety of investment choices. Each fund has
two classes of shares, class 1 and class 2. The funds are only available as
investment options in variable annuity or variable life insurance contracts.
The accompanying contract prospectus indicates which funds and classes are
available to you.
INVESTMENT CONSIDERATIONS
Each fund has its own investment strategy and risk profile. Generally, the
higher the expected rate of return, the greater the risk of loss. No single
fund can be a complete investment program; consider diversifying your fund
choices. You should evaluate each fund in relation to your personal
financial situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
All securities markets, interest rates, and currency valuations move up and
down, sometimes dramatically, and mixed with the good years can be some bad
years. Since no one can predict exactly how financial markets will perform,
you may want to exercise patience and focus not on short-term market
movements, but on your long-term investments goals.
RISKS
There can be no assurance that any fund will achieve its investment goal.
Because you could lose money by investing in a fund, take the time to read
each fund description and consider all risk disclosure before investing.
Fund shares are not deposits or obligations of, or guaranteed or endorsed
by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency of the U.S. government. Fund shares involve investment
risks, including the possible loss of principal.
MORE DETAILED INFORMATION ABOUT EACH FUND, ITS POLICIES (INCLUDING TEMPORARY
INVESTMENTS) AND INVESTMENTS, AND ITS PARTICULAR, RISKS CAN BE FOUND IN THE
TRUST'S STATEMENT OF ADDITIONAL INFORMATION (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $217 billion
in assets. Franklin Templeton is one of the largest mutual fund organizations
in the United States, and offers money management expertise spanning a
variety of investment objectives. In 1992, Franklin, recognized as a leader
in managing domestic mutual funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later.
FUND SEEKING STABILITY OF PRINCIPAL AND INCOME
MONEY MARKET FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's goal is high current income, consistent with liquidity and
capital preservation. The fund also tries to maintain a stable share price of
$1.00.
PRINCIPAL INVESTMENTS The fund invests exclusively in U.S. dollar denominated
money market debt securities, including those issued by:
the U.S. government, its agencies or instrumentalities;
U.S. and foreign banks;
U.S. or foreign corporations; and
foreign governments or multinational organizations such as the World Bank.
[Begin callout]
The fund invests exclusively in money market securities.
[End callout]
A debt security obligates the issuer to the note holders, both to repay a
loan of money at a future date and generally to pay interest. Money market
securities are high-quality, short-term (maturing in 13 months or less) debt
obligations that may have fixed, floating or variable interest rates. U.S.
Treasury bills, commercial paper (unsecured promissory note issued by large
companies or financial firms), repurchase agreements, short-term corporate
obligations, bankers acceptances (credit instruments guaranteed by a bank),
and bank certificates of deposit are common money market securities.
Under the SEC's money fund rules, the fund maintains a dollar-weighted average
portfolio maturity of 90 days or less and only buys securities: with remaining
maturities of 397 days or less, and that the fund's Board of Trustees determines
present minimal credit risks, and are rated in the top two short-term rating
categories (AAA to AA) by independent by rating agencies or, if unrated,
determined by the fund's Board of Trustees to be comparable.
No more than 25% of the fund's total assets may be invested in obligations
[or commercial paper] issued by foreign banks or foreign branches of U.S.
banks [unless these obligations are backed by the U.S. parent bank]. No more
than 5% of assets may be invested in securities rated in the second highest
category (or comparable unrated). The fund may acquire securities on a
when-issued or delayed delivery basis, lend portfolio securities, and invest
up to 10% of its assets in illiquid investments.
PORTFOLIO SELECTION In selecting investments for the fund, the manager uses
a conservative investment approach, focusing on the highest quality and
liquid securities. The manager assesses the relative value of each security
meeting its stringent credit criteria in order to find the best combination
of assets that it believes will maximize the fund's yield relative to its
investment environment expectations. The manager also monitors short-term
interest rates, economic conditions, and Federal Reserve monetary policy to
determine the portfolio maturity it believes will provide a high overall
return to the fund.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. A sub category of interest rate risk is REINVESTMENT RISK,
which is the risk that interest rates will be lower when the fund seeks to
reinvest the proceeds from a matured debt security. In that case, the fund
would receive less income, resulting in lower total return. Since the fund
limits its investments to high-quality, short-term securities, it will
generally earn lower yields than a fund with lower-quality, longer-term
securities subject to more risk.
CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. government depend on the ability of the issuer
to meet interest or principal payments. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value. Even
securities supported by credit enhancements have the credit risk of the
entity providing credit support. Securities, or credit support, issued by a
foreign entity are subject to possible adverse foreign economic, political or
legal developments that may affect the ability of that entity to meet its
obligations.
[Begin callout]
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund tries
to keep a $1 share price, it is possible to lose money by investing in the
fund.
[End callout]
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Securities purchased on a
when-issued or delayed delivery basis are subject to market fluctuations and
their value at delivery may be higher or lower than the purchase price.
SEE ALSO "Important Recent Developments," for Year 2000 discussion, and any
potential impact on the fund's portfolio and operations. More detailed
information about the fund, its policies and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows the fund's average annual
total returns. Of course, past performance cannot predict or guarantee future
results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
MONEY MARKET FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] `9[ ]+[ ]%
WORST QUARTER:
[ ] `9[ ] - [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(01/24/89)
Money Market Fund -
Class 1(1)
1. All fund performance assumes reinvestment of dividends. Past expense
reductions by the manager increased returns.
To obtain the fund's current yield information, please call 1-800/342-3863.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The fund pays the manager a fee for managing the fund's assets, making its
investment decisions, and providing certain administrative facilities and
services for the funds. For the fiscal year ended December 31, 1998,
management fees, before any advance waiver, were 0.51% of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the
fund paid 0.43% of its average daily net assets to the manager. The manager
ended its fee waiver limitation beginning January 1, 1999.
FUNDS SEEKING CURRENT INCOME
HIGH INCOME FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to earn a high level of
current income. Its secondary goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in debt securities. The fund seeks to invest
in debt securities that are offering the highest yield and expected total
return. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Bonds,
including those convertible into common stock and unsecured, zero coupon
bonds, notes, and short-term investments, are common debt securities. While
the fund may also invest in dividend-paying common or preferred stocks, it
more typically holds equity as a result of receiving those securities in a
corporate restructuring. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stock.
[Begin callout]
The fund invests primarily in high yield, lower rated bonds.
[End callout]
The fund may invest up to 100% of its assets in high yield, lower quality
debt securities ("junk bonds"). These securities are either rated below
investment grade (below the top four rating categories) by independent rating
organizations such as Standard & Poor's Corporation (S&P) and Moody's
Investors Service, Inc. (Moody's), or unrated securities the manager
determines are comparable. Nevertheless, the fund generally invests in
securities rated at least Caa by Moody's or CCC by S&P or unrated securities
the fund's manager determines are comparable. Generally, lower rated
securities pay higher yields than more highly rated securities to compensate
investors for the higher risk. As of December 31, 1998, about 95% of the
fund's portfolio were invested in lower rated and comparable quality unrated
debt securities.
The fund may also invest up to 20% of its total assets in foreign securities,
including up to 10% in emerging markets, and will typically focus on
dollar-denominated corporate debt. Many debt securities of non-U.S. issuers,
and especially emerging market issuers, are rated below investment grade or
are unrated so that their selection depends on the manager's internal
analysis.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION Yield and expected return are the primary criteria used
by the manager in selecting securities. The manager searches for securities
it believes offer opportunities for income today and growth tomorrow. It
performs independent analysis of the corporate debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In its analysis, the manager considers
a variety of factors, including:
a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
the experience and managerial strength of the company;
responsiveness to changes in interest rates and business conditions;
debt maturity schedules and borrowing requirements; and
the company's changing financial condition and market recognition of
the change.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities. A sub
category of interest rate risk is REINVESTMENT RISK, which is the risk that
interest rates will be lower when the funds seek to reinvest the proceeds
from a matured debt security, resulting in less income received by the fund.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of all the fund's debt securities will fall and so too
will the fund's share price. This means you could lose money.
[End callout]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares. Securities rated below investment grade,
sometimes called "junk bonds," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially as those with higher credit ratings. These companies
are more likely to encounter financial difficulties and are more vulnerable
to changes in the economy, such as a recession or a sustained period of
rising interest rates, that could prevent them from making interest and
principal payments.
DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose the entire
investment.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
ratings organizations. Prices are often closely linked with the company's
stock prices and typically rise and fall in response to factors that affect
stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, stock market activity, large sustained sales by major investors,
a high-profile default, or other factors. High yield securities are also
generally less liquid than higher-quality bonds. Many of these securities do
not trade frequently, and when they do trade their prices may be
significantly higher or lower than expected. At times, it may be difficult to
sell these securities promptly at an acceptable price, which may limit the
fund's ability to sell securities in response to specific economic events or
to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the possibility of currency devaluations, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on
removal of currency or other assets, nationalization of assets, punitive
taxes and certain custody and settlement risks. Non-U.S. companies are not
subject to the same disclosure, accounting, auditing and financial reporting
standards and practices as U.S. companies and their stocks may not be as
liquid as stocks of similar U.S. companies. Non-U.S. stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S.
Emerging market countries have additional risks due to a lack of established
legal, business and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks, and bond ratings, can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
HIGH INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89 )
High Income Fund - Class 11 []% []% []%
First Boston High Yield2 []% []% []%
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The unmanaged First Boston High Yield
is a trader-priced portfolio constructed to mirror the public high yield debt
market. The Consumer Price Index, a commonly used measure of inflation,
measures the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the U.S. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
JEFF HOLBROOK, CFA Mr. Holbrook has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1997. He joined the Franklin
Templeton Group in 1992.
CHRIS MOLUMPHY, CFA Mr. Molumphy has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1988.
R. MARTIN WISKEMANN Mr. Wiskemann has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1989. Mr.
Wiskemann has more than 30 years'
experience in the securities industry.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON GLOBAL INCOME SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high current income. Capital appreciation
is a secondary consideration.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the debt securities of governments and
their political subdivisions and agencies, supranational organizations, and
companies located anywhere in the world, including emerging markets. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Bonds, including those
convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities.
[Begin callout]
The fund invests primarily in bonds of governments located around the world
[End callout]
The fund focuses on "investment grade" debt securities. These are issues
rated in the top four rating categories (AAA to BBB) by independent rating
agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors
Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to
be comparable. The fund may also invest up to 30% of its net assets in high
yield, lower rated debt securities ("junk bonds") that are rated at least B,
including emerging market debt, or if unrated, determined by the fund's
manager to be comparable. As of December 31, 1998, about 20% of the fund's
portfolio was invested in lower rated and comparable quality unrated debt
securities. Many debt securities of non-U.S. issuers, and especially emerging
market issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis. The average maturity
of debt securities in the fund's portfolio is medium-term, but will fluctuate
depending on the manager's outlook on the country and future interest rate
changes.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. In considering these factors, a country's
changing market, economic, and political conditions, such as inflation rate,
growth prospects, global trade patterns and government policies will be
evaluated. The manager intends to manage the fund's exposure to various
currencies, and may from time to time make use of forward currency exchange
contracts for hedging purposes.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
FOREIGN SECURITIES Securities of governments and companies located outside
the U.S. involve risks that can increase the potential for losses in the
fund.
Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets are generally not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities, and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer stops
paying interest, payments may never resume and the securities may become
worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
It may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep
interest rate risk and country allocations at desired levels, as well as bond
maturities, may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89 )
Templeton Global Income []% []% []%
Securities Fund - Class 11
JP Morgan Global Government Bond []% []% []%
Index2
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The unmanaged JP Morgan Global
Government. Bond Index tracks the performance of government bond markets in
13 countries. It includes issues with remaining maturities of greater than 13
months. The Consumer Price Index, a commonly used measure of inflation,
measures the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the U.S. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394,
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor. A team from Global Bond Managers provides Advisers
with investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
in a portfolio limited to U.S. government securities, primarily fixed and
variable rate mortgage-backed securities. The fund currently invests a
substantial portion of its assets in Government National Mortgage Association
obligations ("Ginnie Maes").
[Begin callout]
The fund invests primarily in mortgage-backed U.S. government securities.
[End callout]
Ginnie Maes represent an ownership interest in mortgage loans made by banks
and other financial institutions to finance purchases of homes. The
individual loans are packaged or "pooled" together for sale to investors. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments. Ginnie Maes carry a guarantee backed by the full faith and
credit of the U.S. government. The guarantee applies only to the timely
payment of principal and interest on the mortgages in the pool, and does not
apply to the market prices and yields of the Ginnie Maes or to the net asset
value or performance of the fund, which will vary with changes in interest
rates and other market conditions. Ginnie Mae yields (interest income as a
percent of price) have historically exceeded the current yields on other
types of U.S. government securities with comparable maturities, although
interest rate changes and unpredictable prepayments can greatly change
realized yields.
In addition to Ginnie Maes, the fund may invest in mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, or other U.S. government agencies. The fund
may also invest in U.S. government securities backed by other types of
assets, including business loans guaranteed by the U.S. Small Business
Administration. Finally, the fund may invest in U.S. Treasury bonds, notes
and bills, and securities issued by U.S. government agencies or
instrumentalities. While all of these securities carry the highest credit
ratings, securities issued or guaranteed by FNMA, FHLMA and certain other
entities are not backed by the full faith and credit of the U.S. government.
The fund may purchase securities on a "to-be-announced" and "delayed
delivery" basis. This means the securities will be paid for and delivered to
the fund at a future date, generally in 30 to 45 days.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goal.
PORTFOLIO SELECTION The manager generally buys, and holds, high quality
securities which pay high current interest rates. Using this
straightforward, low turnover approach, the manager seeks to produce high
current income and lower price volatility, rather than seeking capital
appreciation.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. If rates fall, mortgage holders
will refinance their mortgage loans at lower interest rates, which will
reduce the fund's interest and yield. Generally, interest rates rise during
times of inflation or a growing economy, and will fall during an economic
slowdown or recession, but rate changes can be sudden and unpredictable.
U.S. Treasury STRIPS are more sensitive to interest rate changes and their
price will fluctuate more than the prices of interest-paying Treasury bonds
or notes. Securities with longer maturities are also usually more sensitive
to interest rate changes than securities with shorter maturities. A sub
category of interest rate risk is REINVESTMENT RISK, which is the risk that
interest rates will be lower when the fund seeks to reinvest the proceeds
from a matured debt security, resulting in less income received by the fund.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money over short or even
extended periods.
[End callout]
GINNIE MAES Ginnie Maes, and other mortgage- and asset-backed securities,
differ from conventional debt securities because principal is paid back over
the life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage or other loans. During
periods of declining interest rates, the volume of principal prepayments
generally increases as borrowers refinance their mortgages at lower rates.
The fund may be forced to reinvest returned principal at lower interest
rates, reducing the fund's income. For this reason, Ginnie Maes may be less
effective than other types of securities as a means of "locking in" long-term
interest rates and may have less potential for capital appreciation during
periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the
effective maturity of Ginnie Maes making them more susceptible than other
debt securities to a decline in market value when interest rates rise. This
could increase volatility of the fund's returns and share price.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. The fund's investments in securities
which are not backed by the full faith and credit of the U.S. government
depend upon the ability of the issuing agency or instrumentality to meet
interest or principal payments.
SEE ALSO "Important Recent Developments," for Year 2000 discussion, and any
potential impact on the fund's portfolio and operations. More detailed
information about the fund, its policies, including temporary investments and
risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten years
calendar years or since the fund's inception. The table shows the fund's
average annual total returns. Of course, past performance cannot predict or
guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
U.S. GOVERNMENT SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(03/14/89 )
U.S. Government Securities []% []% []%
Fund - Class 11
Lehman Brothers Government []% []% []%
Bond Index2
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. Lehman Brothers Intermediate
Government Bond Index is an unmanaged index of fixed-rate bonds issued by the
U.S. government and its agencies that are rated investment grade or higher
and have one to ten years remaining until maturity and at least $100 million
outstanding. The Consumer Price Index, a commonly used measure of inflation,
measures the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the U.S. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
JACK LEMEIN Mr. Lemein has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1989. Mr.
Lemein has more than 30 years experience
in the securities industry.
DAVE CAPURRO Mr. Capurro has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1983.
ROGER BAYSTON Mr. Bayston has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since 1993. He joined the Franklin
Templeton Group in 1991.
TONY COFFEY, CFA Mr. Coffey has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1996. He joined the Franklin
Templeton Group in 1989.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
ZERO COUPON FUNDS: MATURING IN DECEMBER 2000, 2005, 2010
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL Each of the funds' investment goal is to provide as high an investment
return as is consistent with capital preservation.
PRINCIPAL INVESTMENTS Under normal market conditions, each fund will invest
at least 65% of its net assets in zero coupon securities, primarily U.S.
Treasury issued stripped securities and U.S. government, and its agencies and
instrumentalities, issued stripped securities. The fund may also invest a
lesser amount in zero coupon securities issued by U.S. companies and
eurodollar obligations, which are U.S. dollar denominated debt typically
issued by foreign subsidiaries of U.S. companies.
[Begin callout]
Each fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific date in the future by
investing primarily in zero coupon securities.
[End callout]
Stripped U.S. Treasury securities are backed by the full faith and credit of
the U.S. government. The guarantee applies only to the timely payment of
principal and does not apply to the market prices and yields of the zero
coupon bonds or to the net asset value or performance of the fund, which will
vary with changes in interest rates and other market conditions. Where the
fund invests in other than stripped treasuries, the zero coupon bonds will be
rated at least A by independent rating agencies such as Standard & Poor's
Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if
unrated, securities determined by the Manager to be comparable.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Zero coupon
securities are debt securities that make no periodic interest payments but
instead are sold at substantial discounts from their value at maturity. The
most common zero coupon security is the zero coupon bond which may be issued
by a government or a corporation, or may be created by a dealer firm when it
strips the coupons off a bond and sells the principal and interest payments
separately. The buyer receives the rate of return by the gradual
appreciation of the zero coupon bond, which is redeemed at face value on the
specified maturity date
As a fund approaches its Target Date, its investments will be made up of
increasingly larger amounts of short-term money market investments, including
cash and cash equivalents. Each fund reserves the right to invest up to 10%
of its total assets in foreign securities, although typically each fund
invests less, and only in dollar denominated obligations.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the funds may be unable to
pursue their investment goal.
PORTFOLIO SELECTION In selecting investments for the funds, the manager
seeks to keep the average duration of each fund to within twelve months of
each funds' maturity Target Date. Duration is a measure of the length of an
investment, taking into account the timing and amount of any interest
payments and the principal repayment. By balancing investments with slightly
longer and shorter durations, the manager believes it can reduce its unknown
"reinvestment risk."
MATURITY Each fund matures on the third Friday of December of its specific
maturity year (Target Date). On each fund's Target Date, the fund will be
converted into cash. At least 30 days prior to the Target Date, 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 the cash proceeds, the proceeds will be automatically
invested in the Money Market Fund and the contract owners will be notified of
such event.
[Insert graphic of chart with line going up and down] MAIN RISKS
If fund shares are redeemed prior to the maturity of the fund, an investor
may receive a significantly different investment return than anticipated at
the time of purchase. Therefore, the Zero Coupon Funds may not be
appropriate for contract owners who do not plan to invest for the long-term
or until maturity.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Because zero coupon securities
do not pay interest, the market value of zeros can fall more dramatically
than interest-paying securities of similar maturities when interest rates
rise. When interest rates fall, however, zeros rise more rapidly in value.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities. Thus, the Zero Coupon Fund
2010 may experience more volatility in its share price than the Zero Coupon
Fund 2000. Generally, interest rates rise during times of inflation or a
growing economy, and will fall during an economic slowdown or recession, but
rate changes can be sudden and unpredictable. A sub category of interest
rate risk is REINVESTMENT RISK, which is the risk that interest rates will be
lower when the funds seek to reinvest the proceeds from a matured debt
security, resulting in less income received by the fund.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money.
[End callout]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 discussion, and any
potential impact on the fund's portfolio and operations. More detailed
information about the fund, its policies, including temporary investments and
risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten years
calendar years or since the fund's inception. The table shows the fund's
average annual total returns. Of course, past performance cannot predict or
guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
ZERO COUPON FUND - 2000 CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
ZERO COUPON FUND - 2005 CLASS 1
Calendar Year Total Returns(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
ZERO COUPON FUND - 2010 CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(3/14/89)
Zero Coupon - 2000 []% []% []%
Class 1
Merrill Lynch Zero []% []% []%
Coupon 5-Year Bond
Total Return Index(2)
Merrill Lynch Zero []% []% []%
Coupon 1-Year Bond
Total Return Index(2)
Zero Coupon - 2005 []% []% []%
Class 1
Merrill Lynch Zero []% []% []%
Coupon 10-Year Bond
Total Return Index(2)
Zero Coupon - 2010 []% []% []%
Class 1
Merrill Lynch Zero []% []% []%
Coupon 20-Year Bond
Total Return Index(2)
CPI(2) []% []% []%
1. All fund performance assumes reinvestment of dividends. Past expense
reductions by the manager increased returns.
2. Source: Standard & Poor Micropal. The unmanaged Merrill Lynch Zero Coupon
indices include zero coupon bonds that pay no interest and are issued at a
discount from redemption price. The Consumer Price Index, a commonly used
measure of inflation, measures the average change in prices for a fixed
basket of goods and services regularly bought by consumers in the U.S.
Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
To obtain the funds' current yield information, please call 1-800/342-3863.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the funds' investment manager.
The team responsible for the funds' management is:
MANAGEMENT TEAM
DAVE CAPURRO Mr. Capurro has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1983.
JACK LEMEIN Mr. Lemein has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1989. Mr.
Lemein has more than 30 years'
experience in the securities industry.
TONY COFFEY, CFA Mr. Coffey has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1989. He joined the Franklin
Templeton Group in 1989.
Each fund pays the manager a fee for managing the fund's assets, making its
investment decisions, and providing certain administrative facilities and
services for the funds. For the fiscal year ended December 31, 1998,
management fees, before any advance waiver, were each 0.63% for the 2000
series and 2005 series and 0.62% for the 2010 series, of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the
2000 series and 2005 series each paid 0.37% and the 2010 series paid 0.36% of
average daily net assets to the manager. The manager ended its fee waiver
limitation beginning January 1, 1999.
FUNDS SEEKING GROWTH AND INCOME
GLOBAL UTILITIES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goals are capital appreciation and current
income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies in the
public utilities industry. These are companies that provide electricity,
natural gas, communications, cable and internet, satellite, wireless
telecommunications, and water services to the public and companies that
provide services to public utilities companies. The manager expects to invest
substantially in the electricity and communications sectors. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund may buy public
utilities companies anywhere in the world, including emerging markets, but
generally invests a greater percentage of its assets in U.S. companies than
any other single country.
[Begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies engaged
in the public utilities industry.
[End callout]
The fund may also invest a significant portion of its assets in smaller
capitalization companies which have market capitalization values (share price
times the number of common stock shares outstanding) of less than $1.5
billion.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy. Relying
on a team of analysts to provide in-depth industry expertise, the manager
looks for companies that will position the fund to benefit from potential
future technological advances and increasing worldwide demand in the public
utilities sector. In choosing equity investments, the fund's manager will
focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered.
[Insert graphic of chart with line going up and down] MAIN RISKS
UTILITIES INDUSTRY By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Utility companies in the U.S.
and in non-U.S. countries have generally been subject to substantial
government regulation. Major changes in government policies, ranging from
increased regulation or expropriation to deregulation, privatization or
increased competition, may dramatically increase or reduce opportunities for
companies in these industries. For example, while certain companies may
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable.
In addition, electric utility companies are subject to risks associated with
high interest costs on borrowings or reduced ability to borrow; restrictions
on operations and increased costs due to environmental and safety
regulations; regulators disallowing these higher costs in rate
authorizations; difficulties in obtaining fuel for electric generation at
reasonable prices; risks associated with the operation of nuclear power
plants; and the effects of energy conservation and other factors affecting
the level of demand for services.
Gas transmission and distribution companies continue to undergo significant
changes as well. Many companies have diversified into oil and gas exploration
and development, making returns more sensitive to energy prices. The water
supply industry is highly fragmented due to local ownership. Generally,
these companies are more mature and expect little or no per capita volume
growth. The wireless telecommunications industry is in its early
developmental stages, characterized by emerging, rapidly growing companies,
and is subject to the risk of rapidly changing technology.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, currencies and interest rate movements, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
INTEREST RATE Utility company stocks pay relatively high dividends, so they
are particularly sensitive to interest rate movements. Therefore, like bonds,
their stock prices may rise as interest rates fall or fall as interest rates
rise. Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession, but rate
changes can be sudden and unpredictable.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. involve risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can be
considered speculative. The companies may suffer significant losses, and
technology and biotechnology industry stocks, in particular, can be subject
to abrupt or erratic price movements.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
GLOBAL UTILITIES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 SINCE
YEARS INCEPTION
(01/24/89 )
- --------------------------------------------------------------------------
Global Utilities Securities Fund []% []% []%
- - Class 11
S&P Index2 []% []% []%
CPI2 []% []% []%
FT/S&P2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. The Financial Times/S&P Actuaries World
(Energy 50%/Basic Industries 50%) Composite Index is a composite of companies
of which 50% are in the energy sector and 50% are in the basic industries
sectors. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SALLY EDWARDS-HAFF Ms. Edwards-Haff has been a manager of
SENIOR VICE PRESIDENT, ADVISERS the fund since 1990. She joined the
Franklin Templeton Group in 1986.
IAN LINK, CFA Mr. Link has been a manager of the fund
VICE PRESIDENT, ADVISERS since 1995. He joined the Franklin
Templeton Group in 1989.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
GROWTH AND INCOME FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in a broadly diversified portfolio of equity
securities that the manager believes have the potential to increase in
value. To help identify undervalued financially strong companies with
attractive long-term growth prospects, the manager uses a current relative
yield analysis. Dividend yield is a stock's annual per share dividends
dividend by its per share market price. Following this strategy, the fund
will invest predominantly in common stocks that have dividend yields at least
equal to the yield of the Standard & Poor's 500 Index. The fund seeks current
income through receipt of dividends from its investments. Equities represent
ownership interests in individual companies and give shareholders a claim in
the company's earnings and assets. They include common and preferred stocks,
and securities convertible into common stock.
The fund may also invest up to 30% of its total assets, but currently intends
to limit to 20%, in foreign securities, including depositary receipts and
emerging markests. The fund may also invest to a lesser extent in equity
real estate investment trusts (REITs). REITS are usually publicly traded
companies that manage a portfolio of real estate to earn profits and tend to
pay high yields since they must distribute most of their earnings.
[Begin callout]
The fund invests primarily in common stocks offering above market current
dividend yields.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy for this
fund. The fund's manager will focus on the market price of a company's
securities relative to its evaluation of the company's long-term earnings,
asset value and cash flow potential, with an emphasis on current dividend
yield. The manager believes that high relative dividend yield is frequently a
good indicator of value.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
REITS A REIT's performance depends on the types and locations of the
properties it owns and on how well it manages those properties. The value of
a REIT may also be affected by factors that affect the underlying
properties, the real estate industry, or local or general economic
conditions.
FOREIGN SECURITIES Securities, including Depositary Receipts, of companies
and governments located outside the U.S. involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the possibility of currency devaluations, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on
removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. Non-U.S. companies are not
subject to the same disclosure, accounting, auditing and financial reporting
standards and practices as U.S. companies and their stocks may not be as
liquid as stocks of similar U.S. companies, or may become illiquid. Non-U.S.
stock exchanges, trading systems, brokers and companies generally have less
government supervision and regulation than in the U.S.
Emerging market countries have additional risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed
information about the fund, its policies, including temporary investments and
risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
GROWTH AND INCOME FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89 )
Growth and Income Fund - Class 11 []% []% []%
S&P Index2 []% []% []%
CPI2 []% []% []%
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
FRANK FELICELLI, CFA Mr. Felicelli has been a manager of
SENIOR VICE PRESIDENT, ADVISERS the fund since 1995. He jointed the
Franklin Templeton Group in 1986.
KENT SHEPHERD, CFA Mr. Shepherd has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1998. He joined the
Franklin Templeton Group in 1991.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
INCOME SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in a diversified portfolio of debt securities, equity securities,
and cash equivalents. A debt security obligates the issuer to the
bondholders, both to repay a loan of money at a future date and generally to
pay interest. Bonds, including those convertible into common stock and
unsecured, notes, and short-term investments, are common debt securities.
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock.
The fund seeks income by selecting investments such as corporate, foreign,
and long-term U.S. Treasury bonds. In its search for income-producing growth
opportunities, the fund invests in common stocks with attractive dividend
yields of companies from a variety of industries such as utilities, oil, gas,
real estate and consumer goods. From time to time the fund may invest
substantially in certain sectors, including utilities.
The fund may invest up to 100% of its total assets in debt securities that
are below investment grade, but it is not currently expected that the fund
will invest more than 50% of its assets in these securities. Investment grade
debt securities are rated in the top four rating categories by independent
rating organizations such as Standard & Poor's Corporation (S&P) and Moody's
Investors Service, Inc. (Moody's). The fund generally invests in securities
rated at least Caa by Moody's or CCC by S&P or unrated securities the fund's
manager determines are comparable; modest amounts may be invested in
defaulted debt. Generally, lower rated securities pay higher yields than more
highly rated securities to compensate investors for the higher risk. As of
December 31, 1998, about 30% of the fund's portfolio was invested in lower
rated and comparable quality unrated debt securities.
shapeType20fFlipH0fFlipV0shapePath4fFillOK0fFilled0fArrowheadsOK1The fund may
invest up to 25% of its assets in foreign securities, including emerging
markets. It ordinarily buys foreign securities that are traded in the U.S or
American Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company. Many debt securities of
non-U.S. issuers, and especially emerging market issuers, are rated below
investment grade or are unrated so that their selection depends on the
manager's internal analysis.
[Begin callout]
The fund invests primarily in a diversified portfolio of high yield lower
rated bonds, and stocks.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the manager believes the markets or the economies of countries where the fund
invests are experiencing excessive volatility or a prolonged general decline,
or other adverse conditions exist. Under these circumstances, the fund may be
unable to pursue its investment goal.
PORTFOLIO SELECTION The manager searches for undervalued or out-of-favor
securities it believes offer opportunities for income today and growth
tomorrow. It performs independent analysis of the debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In its analysis, the manager considers a
variety of factors, including:
a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
the experience and managerial strength of the company;
responsiveness to changes in interest rates and business conditions;
debt maturity schedules and borrowing requirements; and
the company's changing financial condition and market recognition of
the change.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities. A sub
category of interest rate risk is REINVESTMENT RISK, which is the risk that
interest rates will be lower when the funds seek to reinvest the proceeds
from a matured debt security, resulting in less income received by the fund.
[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with interest
rate changes and market conditions, the value of your investment in the fund
will go up and down. This means you could lose money.
[End callout]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares. Securities rated below investment grade,
sometimes called "junk bonds," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially as those with higher credit ratings. These companies
are more likely to encounter financial difficulties and are more vulnerable
to changes in the economy, such as a recession or a sustained period of
rising interest rates, that could prevent them from making interest and
principal payments.
DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose the entire
investment.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
ratings organizations. Prices are often closely linked with the company's
stock prices and typically rise and fall in response to factors that affect
stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, stock market activity, large sustained sales by major investors,
a high-profile default, or other factors. High yield securities are also
generally less liquid than higher-quality bonds. Many of these securities do
not trade frequently, and when they do trade their prices may be
significantly higher or lower than expected. At times, it may be difficult to
sell these securities promptly at an acceptable price, which may limit the
fund's ability to sell securities in response to specific economic events or
to meet redemption requests.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
Utility company stocks pay relatively high dividends, so they are
particularly sensitive to interest rate movements: like bonds, when interest
rates rise, their stock prices tend to fall.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. Because its
value can be influenced by many different factors, a convertible security is
not as sensitive to interest rate changes as a similar non-convertible debt
security, and generally has less potential for gain or loss than the
underlying stock.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country. The political, economic, and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluations, the imposition of exchange controls,
foreign ownership limitations, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. Non-U.S. companies are not subject to
the same disclosure, accounting, auditing and financial reporting standards
and practices as U.S. companies and their stocks may not be as liquid as
stocks of similar U.S. companies. Non-U.S. stock exchanges, trading systems,
brokers and companies generally have less government supervision and
regulation than in the U.S
Emerging market countries have additional risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks, and bond ratings, can be found in the SAI.
[INSERT GRAPHIC OF A BULL AND A BEAR] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
INCOME SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
-7.42% 38.73% 14.17% 18.59% -6.27% 22.40% 11.28% 17.09% 1.64%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 PAST 5 YEARS SINCE INCEPTION
YEAR (01/24/89 )
Income Securities Fund - Class 1.64% 8.73% 11.23%
11
Lehman Brothers 9.47% 7.30% 9.29%
Government/Corporate Index2
S&P 500 Index2 28.58% 24.06% 18.70%
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal: The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. Lehman
Brothers Government/Corporate Bond Index is an unmanaged index of fixed-rate
U.S. government and foreign and domestic corporate bonds that are rated
investment grade or higher and have maturities of one year or more and at
least $50 million outstanding. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CHARLES B. JOHNSON Mr. Johnson has been a manager of the
CHAIRMAN OF THE BOARD, ADVISERS fund since its inception in 1989 and
has been with the Franklin Templeton
Group since 1957.
MATTHEW F. AVERY Mr. Avery has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1987.
FREDERICK G. FROMM Mr. Fromm has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1998. He joined the
Franklin Templeton Group in 1992.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
MUTUAL SHARES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in U.S. equity and debt securities of
companies that the manager believes are available at market prices less than
their actual value based on certain recognized or objective criteria
(intrinsic value). Following this value-oriented strategy, the fund will
primarily invest in:
UNDERVALUED STOCKS Stocks trading at a discount to asset value
REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers, and
may participate in such transactions (Reorganizing Companies),
DISTRESSED SECURITIES Securities that are distressed or even in
bankruptcy, including the debt, or participation interests in the
indebtedness, of Reorganizing Companies.
[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]
While there are no set percentage targets for equities or debt, stocks tend
to be the predominant investment. The fund generally invests in large-to
medium- cap companies with market capitalization value (share price times the
number of common stock shares outstanding) greater than $1.5 billion but may
invest a small portion in smaller companies which have more risk. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and
preferred stocks, and securities convertible into common stock. While the
fund purchases securities for investment purposes, the manager may use the
fund's ownership in a company, or may buy other companies, to seek to
influence or control management when the manager believes the fund may
benefit.
The fund may invest in debt securities of any rating category by an
independent rating agency, including lower rated debt or defaulted securities
("junk bonds"), or in comparable unrated debt securities. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Bonds, including those convertible
into common stock or unsecured, notes, and short-term investments, including
cash or cash equivalents, are common debt securities.
The fund may also invest up to 20% of its total assets in foreign securities,
including American, European and Global Depositary Receipts. Depositary
receipts are certificates typically issued by a bank or trust company that
give their holders the right to receive securities issued by a foreign or
domestic company. The fund generally seeks to hedge (protect) against currency
risks largely using forward foreign currency exchange contracts
(Hedging Instruments).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value strategy. In
choosing investments, the manager focuses on the market price of a company's
securities relative to its evaluation of the company's asset value, book
value, cash flow potential, long-term earnings, and multiples of earnings of
comparable securities. Similarly, debt securities are generally selected
based on the manager's own analysis of the security's intrinsic value rather
than the coupon rate or rating. The manager believes careful research can
uncover opportunities overlooked by other investors, and that undervalued or
"special situation" securities may tend to be affected less by general market
movements than the specifics surrounding each investment. Thus, each
security is examined separately and there are no set criteria as to asset
size, earnings or industry type.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk. There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests in a Reorganizing Company will be completed on the terms
contemplated.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
INDEBTEDNESS AND PARTICIPATIONS The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the issuer and
the possibility that the investment may be lost. There are no established
markets for indebtedness, making them less liquid than other securities, and
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness.
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities, and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country. The political, economic, and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluations by a country's government or banking
authority, the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S.
HEDGING INSTRUMENTS Considered derivative investments, the success of
Hedging Instruments will depend on the manager's ability to predict market
movements, and losses from their use can be greater than if they had not been
used. Hedging Instruments risks include a loss to the fund due to the
imposition of controls by a government on the exchange of foreign currencies,
delivery failure, default by the other party, or inability to close out its
position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities which are securities with a limited trading market.
There is a possible risk that the securities cannot be readily sold or can
only be resold at a price significantly lower than their value.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the Statement of Additional
Information. SEE ALSO, "Important Recent Developments," for Year 2000 and
euro discussion and any potential impact on the fund's portfolio and
operations.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR
SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND
IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE
LOWER.
MUTUAL SHARES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION (11/08/96)
Mutual Discovery []% []%
Securities Fund - Class 1(1)
S&P 500(R) Index(2) []% []%
Lipper Income Average []% []%
Index(2)
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard and Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Lipper Growth & Income Funds Objective Average Index consists of 30 funds
that combine earnings growth with an income requirement. Indices include
reinvested dividends and/or interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER LANGERMAN Mr. Langerman has been a manager of the
PRESIDENT AND fund since its inception in 1996. Before
CHIEF EXECUTIVE OFFICER joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
ROBERT L. FRIEDMAN Mr. Friedman has been a manager of the
CHIEF INVESTMENT OFFICER fund since its inception in 1996. Before
SENIOR VICE PRESIDENT joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
LAWRENCE N. SONDIKE Mr. Sondike has been a manager of the
SENIOR VICE PRESIDENT fund since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
DAVID E. MARCUS Mr. Marcus has been a manager of the
SENIOR VICE PRESIDENT fund since 1998. Before joining the
FRANKLIN MUTUAL Franklin Templeton Group in 1996, he was
a research analyst for Heine Securities
Corporation, the predecessor of Franklin
Mutual.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
REAL ESTATE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is to earn current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in securities of companies operating in the
real estate industry, primarily equity real estate investment trusts (REITs).
Real estate companies include:
companies qualifying under federal tax law as REITs,
real estate operating companies, real estate services, homebuilders and
developers that have at least half of their assets or revenues from the
ownership, construction, management or other services, or sale of
residential, commercial or industrial real estate.
[Begin callout]
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
[End callout]
REITs are real estate investment trust companies, usually publicly traded,
that manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and shareholders receive income from the
rents received, and receive capital gains on the buildings sold at a profit.
Other types, for example, mortgage REITs specialize in lending money to
developers and pass interest income on to shareholders. Still others are
hybrid REITs, having a mix of equity and debt investments. The fund may
invest a significant portion of its assets in smaller capitalization REITs.
In addition to its principal investments, the fund may invest in equity or
debt securities of issuers engaged in businesses whose products and services
are closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but who have very
significant real estate holdings believed to be undervalued relative to the
company's securities. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Bonds, including
those convertible into common stock or unsecured, notes, and short-term
investments, including cash or cash equivalents, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy for this
fund. In choosing equity investments, the fund's manager will focus on the
market price of a company's security relative to its evaluation of the
company's long-term earnings, asset value, and cash flow potential. Using
both qualitative and quantitative analysis and on-site visits, the manager
evaluates security characteristics, the strength and quality of management,
and underlying properties. In addition, the manager may consider other
factors, such as the supply and demand outlook for various property types and
regional markets.
[Insert graphic of chart with line going up and down] MAIN RISKS
REAL ESTATE SECURITIES By concentrating in a single industry sector, the
fund carries much greater risk of adverse developments in that sector than a
fund that invests in a wide variety of industries. Real estate values rise
and fall in response to a variety of factors, including local, regional and
national economic conditions, the strength of specific industries renting
properties, and other factors affecting the supply and demand for properties.
When economic growth is slowing, demand for property decreases and prices may
decline. Rising interest rates, which drive up mortgage and financing costs,
can restrain construction and buying and selling activity and make other
investments more attractive. Property values could decrease because of
overbuilding, increases in property taxes and operating expenses, changes in
zoning laws, environmental regulations or hazards, uninsured casualty or
condemnation losses, or a general decline in neighborhood values.
REITS Equity REITs can be affected by any changes in the value of the
properties owned, while mortgage REITs can be affected by the quality of any
credit extended. A REIT's performance depends on the types and locations of
the properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to
pay rent or poor management. A REIT's performance also depends on the
company's ability to finance property purchases and renovations and manage
its cash flows. Because REITs are typically invested in a limited number of
projects or in a particular market segment, they are more susceptible to
adverse developments affecting a single project or market segment than more
broadly diversified investments. Loss of status as a qualified REIT or
changes in the treatment of REITs under the federal tax law, could adversely
affect the value of a particular REIT or the market for REITs as a whole and
the fund's performance.
[Begin callout]
Because the securities the fund holds fluctuate in price with real estate
market conditions, the value of your investment in the fund will go up and
down. This means you could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further.
SMALLER COMPANIES . Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, their securities are less liquid, and can be considered
speculative. These companies may suffer significant losses. Small cap REITs
can be subject to greater risks than mid or large cap issuers due to greater
regional concentration and less diversification in terms of the regions,
clients and types of properties available for investment.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten years or
since the fund's inception. The table shows how the fund's average annual
total returns compare to those of a broad-based securities index. Of course,
past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
REAL ESTATE SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS SINCE
INCEPTION
(01/24/89 )
- --------------------------------------------------------------------------
Real Estate Securities Fund - []% []% []%
Class 11
S&P Index2 []% []% []%
FT/S&P2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Wilshire Real Estate Securities Index is a market-cap weighted index of
publicly traded real estate securities. Indices include reinvested dividends
and/or. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
MATTHEW F. AVERY Mr. Avery has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISERS since its inception in 1989. He joined
the Franklin Templeton Group in 1987.
DOUGLAS BARTON, CFA Mr. Barton has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1998. He joined the Franklin
Templeton Group in 1988.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
RISING DIVIDENDS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the securities of companies that have:
consistently increased dividends in at least 8 out of the last 10 years
and have not decreased dividends during that time;
increased dividends substantially (at least 100%) over the past ten years;
reinvested earnings, paying out less than 65% of current earnings in
dividends (except for utility companies);
strong balance sheets, with long-term debt representing no more than 30%
of total capitalization (except for utility companies); and
attractive prices, either in the lower half of the stock's price/earnings
ratio range for the past 10 years or less than the average current market
price/earnings ratio of the stocks comprising the Standard & Poor's(R) 500
Stock Index (this criterion applies only at the time of purchase).
[Begin callout]
The fund will invest primarily in the common stocks of financially sound
companies that have paid consistently rising dividends.
[End callout]
The fund typically invests the rest of its assets in equity securities of
companies that pay dividends but do not meet all of these criteria. Following
these policies, the fund typically invests predominantly in equity securities
issued by large-cap and mid-cap U.S. companies, which generally have market
capitalization values (share price times the number of common stock shares
outstanding) of $1.5 billion or more. It may also invest to a lesser extent
in small-cap companies which generally have lower market capitalizations.
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined "growth but at a reasonable
price" strategy for this fund. Using both qualitative and quantitative
analysis, the manager evaluates companies for historical and potential growth
in revenues and earnings, in particular a strong dividend record, and also
considers anticipated price/earning ratios, return on shareholder's equity,
and quality of management, all factors the manager believes point to steady
growth over time potential. Moreover, since capital preservation is an
important consideration, the manager generally reviews a company's stability
and the strength of its balance sheet in selecting among eligible growth
companies.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALL AND MID-SIZE COMPANIES While smaller companies, and to a lesser extent
mid-size companies, may offer greater opportunities for capital growth than
larger, more established companies, they also have more risk. Historically,
small company securities, and to a lesser extent mid-size company securities,
have been more volatile in price and fluctuated independently from larger
company securities, especially over the shorter-term. Smaller or relatively
new companies can be particularly sensitive to changing economic conditions,
and their growth prospects are less certain. For example, smaller companies
may have limited financial resources for growth or development and limited
product lines or market share; they may lack depth of management; they may be
in new industries; or they may not find an established market for their
products or services, or their products or services may become quickly
obsolete. Small companies may suffer significant losses, their securities
can be less liquid, and investments in these companies may be speculative.
Technology and biotechnology industry stocks, in particular, can be subject
to abrupt or erratic price movements.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
RISING DIVIDENDS FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/27/92 )
- --------------------------------------------------------------------------
Rising Dividends Fund - Class 11 []% []% []%
Wilshire MidCap Growth Index2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The Wilshire MidCap Growth Index iS
an unmanaged group of securities of companies selected based on growth
characteristics from among the middle capitalization universe of the Wilshire
5000. It includes reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, Inc. (Advisory Services), One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
DONALD TAYLOR Mr. Taylor has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISORY since 1996. Before joining the Franklin
SERVICES Templeton Group in 1996, he was a Portfolio
Manager for Fidelity Management & Research Co.
WILLIAM LIPPMAN Mr. Lippman has been a manager of the fund
PRESIDENT, ADVISORY SERVICES since its inception in 1996. He has more than
30 years' experience in the securities
industry and joined the Franklin Templeton
Group in 1988.
BRUCE BAUGHMAN Mr. Baughman has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISORY since its inception in 1996. He joined the
SERVICES Franklin Templeton Group in 1988.
GERARD P. SULLIVAN Mr. Sullivan has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISORY since its inception in 1998. Before joining
SERVICES the Franklin Templeton Group 1998, he was a
portfolio manager for SunAmerica Asset
Management and for Texas Commerce Investment
Management & Co.
MARGARET MCGEE Ms. McGee has been a manager of the fund
VICE PRESIDENT, ADVISORY SERVICES since its inception in 1996. She joined the
Franklin Templeton Group in 1988.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON GLOBAL ASSET ALLOCATION FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
in equity and debt securities of any nation, including emerging markets, and
in money market instruments. The mix of investments will be adjusted to
capitalize on total return potential produced by changing economic conditions
throughout the world. While there are no minimum or maximum percentage
targets for each asset class, historically stocks have been the predominant
investment. Equities represent ownership interests in individual companies
and give shareholders a claim in the company's earnings and assets. They
include common and preferred stocks, securities convertible into common
stock, and American, European and Global Depositary Receipts. Depositary
Receipts are certificates issued by a bank or trust company that give their
holders the right to receive securities issued by a foreign or domestic
company. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Bonds,
including those convertible into common stock and unsecured, notes, and
short-term investments, are common debt securities.
[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]
The fund may invest in high yield, medium and lower quality debt securities
("junk bonds") as rated by independent rating agencies such as Standard &
Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or
comparable. As a Board set policy, however, the fund may invest no more than
25% of its total assets in securities rated BBB (the lowest category of
investment grade) or lower, including up to 10% in defaulted securities, or
if unrated, securities determined by the manager to be comparable. Many debt
securities of non-U.S. issuers, and especially emerging market issuers, are
rated below investment grade or are unrated so that their selection depends
on the manager's internal analysis.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes
in interest rates, and credit risks. The manager intends to manage the fund's
exposure to various geographic regions and their currencies based on its
assessment of changing market and political conditions; with respect to debt
securities, the manager may also from time to time make use of forward
currency exchange contracts for hedging purposes.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with foreign
market conditions and currencies, the value of your investment in the fund
will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are
not as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher quality securities. Prices are especially sensitive to
developments affecting the company's business and to rating changes, and
typically rise and fall in response to factors that affect the company's
stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, market activity, large sustained sales, a high-profile default,
or other factors. High yield securities are also generally less liquid than
higher-quality bonds, and infrequent trades can make accurate pricing more
difficult. At times, it may be difficult to sell these securities promptly
at an acceptable price, which may limit the fund's ability to sell these
securities.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks, and bond ratings, can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []%
96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 SINCE INCEPTION
YEARS (05/01/95 )
Templeton Global Asset []% []% []%
Allocation Fund - Class 11
MSCI World Index(R)2 []% []% []%
JP Morgan Global Government Bond []% []% []%
Index(R)2
1.All fund performance assumes reinvestment of dividends and capital gains.
2. The unmanaged Morgan Stanley Capital International(R) World Index includeS
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
unmanaged JP Morgan Global Gov. Bond Index tracks the performance of
government bond markets in 13 countries. It includes issues with remaining
maturities of greater than 13 months. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Global Advisors Limited (TGAL), Lyford Cay Nassau, N.P. Bahamas, is
the fund's investment manager.
Under an agreement with TGAL, Templeton Investment Counsel, Inc. (Investment
Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394, through its
Templeton Global Bond Managers division (Global Bond Managers), is the fund's
sub-advisor.
The team responsible for managing the equity portion of the fund is:
MANAGEMENT TEAM
DALE WINNER Mr. Winner has been a manager of the
PORTFOLIO MANAGER, TGAL fund since 1997. He joined the
Franklin Templeton Group in 1995.
Previously he was a trust officer at
J.P. Morgan for two years.
JEFFREY A. EVERETT, CFA Mr. Everett has been a manager of the
EXECUTIVE VICE PRESIDENT, TGAL fund since its inception in 1995. He
joined the Franklin Templeton Group in
1990.
SEAN FARRINGTON, CFA Mr. Farrington has been a manager of
VICE PRESIDENT, TGAL the fund since its inception in 1995.
He joined the Franklin Templeton Group
in 1991.
A team from Global Bond Managers is responsible for managing the debt portion
of the fund's investments.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
VALUE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies of various
sizes that the fund's manager believes are selling substantially below the
underlying value of their assets or their private market value (what a
sophisticated investor would pay for the entire company). Following this
strategy, the fund will invest in companies with, for example, low prices
relative to book value, cash flow, or earnings (of the market, industry group
or earnings growth); valuable intangibles not reflected in the stock price
such as franchises, trademarks, distribution channels or market share for
particular products or services; underused or understated assets or cash; or
strong balance sheets. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
They include common and preferred stocks, and securities convertible into
common stock.
[Begin callout]
The fund invests primarily in the common stocks of companies the manager
believes are significantly undervalued.
[End callout]
The fund may invest significantly in securities of small capitalization
companies, which have market capitalization values (share price times the
number of common stock shares outstanding) of less than $1.5 billion, at the
time of purchase. The fund may also invest up to 25% of its total assets in
foreign securities, including emerging markets, but has no current intention
of investing more than 15%.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where
the fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy for this
fund. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. The
manager seeks bargains among the "under researched and unloved" - out of
favor companies that offer, in the manager's opinion, excellent long-term
potential that might include former growth companies that have stumbled
recently, dropping sharply in price, but with significant potential ("fallen
angels") or companies that are a potential turnaround or takeover target.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can
be considered speculative. These companies may suffer significant losses,
and technology and biotechnology industry stocks, in particular, can be
subject to abrupt or erratic price movements.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
It may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
FOREIGN SECURITIES Securities of non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase
or decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their stocks may not
be as liquid. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear PERFORMANCE
Because the fund started May 1, 1998, performance for a full calendar year is
not yet available.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, LLP. (Advisory Services), One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
WILLIAM LIPPMAN Mr. Lippman has been a manager of the
PRESIDENT, ADVISORY SERVICES fund since its inception in 1998. He
has more than 30 years' experience in
the securities industry and joined the
Franklin Templeton Group in 1988.
BRUCE BAUGHMAN Mr. Baughman has been a manager of the
SENIOR VICE PRESIDENT, ADVISORY SERVICES fund since its inception in 1998. He
joined the Franklin Templeton Group in
1988.
GERARD P. SULLIVAN Mr. Sullivan has been a manager of the
SENIOR VICE PRESIDENT, ADVISORY fund since its inception in 1998.
Services Before joining the Franklin Templeton
Group 1998, he was a portfolio manager
for SunAmerica Asset Management and for
Texas Commerce Investment Management &
Co.
MARGARET MCGEE Ms. McGee has been a manager of the
VICE PRESIDENT, ADVISORY SERVICES fund since its inception in 1998. She
joined the Franklin Templeton Group in
1988.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
0.60% of the value of net assets up to an including $200 million;
0.50% of the value of net assets up to $1.3 billion; and
0.40% of value of net assets over $1.3 billion.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies believed
to be globally competitive, to offer favorable opportunities for capital
appreciation, and to be suitable for a buy-and-hold strategy. Following this
policy, the fund will typically invest predominantly in established, large
and mid capitalization companies. The fund may also invest, to a lesser
extent, in smaller companies, and in new and emerging industries where growth
is expected to be above average. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stocks.
[Begin callout]
The fund invests primarily in the common stocks of established companies.
[End callout]
From time to time the fund may have a significant portion of its assets
invested in cash or cash equivalents. The fund generally invests less than
15% of its assets in foreign securities, including depositary receipts and
emerging markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined long-term growth strategy.
Relying on a team of analysts to provide in-depth industry expertise, the
manager chooses companies that it believes are leaders in their industries,
and are positioned for rapid growth in revenues, earnings or assets. Using
both qualitative and quantitative analysis, the manager evaluates companies
for historical and potential growth in revenues and earnings, strength and
quality of management, and strategic positioning in its industry, all factors
the manager believes point to steady growth over time potential. The manager
diversifies the fund's assets across many industries, and from time to time
may invest substantially in certain sectors, including technology and
biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can be
considered speculative. The companies may suffer significant losses, and
technology and biotechnology industry stocks, in particular, can be subject
to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their stocks may not
be as liquid. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
CAPITAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(05/01/96)
Capital Growth Fund - []% []%
Class 11
S&P 500 Index(R)2 []% []%
Russell 1000 Index(R)2 []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal: The S&P 500(R) Index is an unmanagEd
group of widely held common stocks. The Russell 1000 Index measures the 1,000
largest companies in the Russell 3000 Index. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CONRAD B. HERRMANN, CFA Mr. Herrmann has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1996. He
joined the Franklin Templeton Group in
1989.
KEVIN CARRINGTON, CFA Mr. Carrington has been a manager of
VICE PRESIDENT, ADVISERS the fund since its inception in 1996.
He joined the Franklin Templeton Group
in 1992
VIVIAN J. PALMIERI Mr. Palmieri has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1996. He
joined the Franklin Templeton Group in
1965.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
GLOBAL HEALTH CARE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 70% of its total assets in equity securities of companies in the
health care industry. These are companies are principally engaged in
research, development, production or distribution of products and services in
industries such as pharmaceutical; biotechnology; health care facilities,
information systems and personal products; medical supplies, technology and
services; and managed care companies. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's
earnings and assets. They include common and preferred stocks, and securities
convertible into common stock.
[Begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
health care industry.
[End callout]
The fund may buy health care companies anywhere in the world, but generally
invests predominantly in U.S. companies. The fund may also invest a
substantial portion of its assets in smaller companies which have market
capitalization values (share price times the number of common stock shares
outstanding) of less than $1.5 billion.
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of U.S. or non U.S. issuers. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Bonds, including those
convertible into common stock or unsecured, notes, and short-term
investments, including cash or cash equivalents, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, combining both growth and value strategies. Relying on
a team of analysts to provide in-depth industry expertise, the manager
chooses companies that fill particular health care niches and that it
believes are positioned for rapid growth in revenues, earnings or assets,
and/or are selling at reasonable prices using a company's historical value
measures. Using both qualitative and quantitative analysis, the manager
looks for companies that will position the fund to benefit from potential
future technological advances and increasing worldwide demand in the health
care sector. In addition, the manager evaluates companies on factors such as
strength and quality of management, strategic positioning in its industry and
globally competitive advantages.
[Insert graphic of chart with line going up and down] MAIN RISKS
HEALTH CARE COMPANIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Government actions may affect
health care companies in many ways. For example, foreign, U.S. federal or
state governments could discontinue subsidies of certain research or other
activities of some companies. Stocks held by the fund may also be affected
by government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, or legislative reform of a health care
system. Health care companies are also subject to the risks of product
liability lawsuits and the risk that their products and services may rapidly
become obsolete.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from fact affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further. Growth stock prices
reflect projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have securities have been
more volatile in price and fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
their growth prospects are less certain, their securities are less liquid,
and can be considered speculative. These companies may suffer significant
losses, and technology and biotechnology industry stocks, in particular, can
be subject to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
It may invest a greater portion of its assets in one issuer and have a
similar number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started May 1, 1998, performance for a full calendar year is
not yet available.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Mariners Island Blvd., San Mateo,
CA 94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
KURT VON EMSTER, CFA Mr. Von Emster has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1998. He
joined the Franklin Templeton Group in
1989.
RUPERT H. JOHNSON, JR. Mr. Johnson has been a manager of the
PRESIDENT, ADVISERS fund since its inception in 1998. He
joined the Franklin Templeton Group in
1965.
EVAN MCCULLOCH, CFA Mr. McCulloch has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1998. He
joined the Franklin Templeton Group in
1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
0.60% of the value of net assets up to an including $200 million;
0.50% of the value of net assets up to $1.3 billion; and
0.40% of value of net assets over $1.3 billion.
MUTUAL DISCOVERY SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity and debt securities of companies
of any nation that the manager believes are available at market prices less
than their actual value based on certain recognized or objective criteria
(intrinsic value). Following this value-oriented strategy, the fund will
primarily invest in:
UNDERVALUED STOCKS Stocks trading at a discount to asset value,
REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers, and
may participate in such transactions (Reorganizing Companies), and
DISTRESSED SECURITIES Securities that are distressed or even in
bankruptcy, including the debt, or participation interests in the
indebtedness, of Reorganizing Companies.
[Begin callout]
The fund invests primarily in common stocks of non U.S. and U.S. companies
the manager believes are significantly undervalued.
[End callout]
While there are no set percentage targets for equities or debt, stocks tend
to be the predominant investment. The fund invests significantly in smaller
companies with market capitalization value (share price times the number of
common stock shares outstanding) less than $1.5 billion. Equities represent
ownership interests in individual companies and give shareholders a claim in
the company's earnings and assets. They include common and preferred stocks,
and securities convertible into common stock. While the fund purchases
securities for investment purposes, the manager may use the fund's ownership
in a company, or may buy other companies, to seek to influence or control
management when the manager believes the fund may benefit.
The fund may invest 50% or more of its total assets in foreign equity
and debt securities, which may include sovereign debt and participation in
foreign government debt, and American, European and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or domestic company. The fund generally seeks to hedge (protect)
against currency risks largely using forward foreign currency exchange
contracts (Hedging Instruments).
The fund may invest in debt securities of any rating category by an
independent rating agency, including lower rated debt or defaulted securities
("junk bonds"), or in comparable unrated debt securities. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Bonds, including those convertible
into common stock or unsecured, notes, and short-term investments, including
cash or cash equivalents, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of the countries in
which the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value strategy. In
choosing investments, the manager focuses on the market price of a company's
securities relative to its evaluation of the company's asset value, book
value, cash flow potential, long-term earnings, and multiples of earnings of
comparable securities. Similarly, debt securities are generally selected
based on the manager's own analysis of the security's intrinsic value rather
than the coupon rate or rating. The manager believes careful research can
uncover opportunities overlooked by other investors, and that undervalued or
"special situation" securities may tend to be affected less by general market
movements than the specifics surrounding each investment. Thus, each
security is examined separately and there are no set criteria as to asset
size, earnings or industry type.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk. There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests in a Reorganizing Company will be completed on the terms
contemplated.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance. The political, economic and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluation by a country's government or banking
authority, the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks. In addition, political or economic conditions can cause
previously established securities markets to become limited trading markets,
or even illiquid, particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluation. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile
in price and fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, and their growth
prospects are less certain. For example, smaller companies may have limited
financial resources for growth or development and limited product lines or
market share; they may lack depth of management; they may be in new
industries; or they may not find an established market for their products or
services, or their products or services may become quickly obsolete. Small
companies may suffer significant losses, their securities can be less liquid,
and investments in these companies may be speculative. Technology and
biotechnology industry stocks, in particular, can be subject to abrupt or
erratic price movements.
INDEBTEDNESS AND PARTICIPATIONS The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the issuer and
the possibility that the investment may be lost. There are no established
markets for indebtedness, making them less liquid than other securities, and
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness.
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities, and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
HEDGING INSTRUMENTS Considered derivative investments, the success of
Hedging Instruments will depend on the manager's ability to predict market
movements, and losses from their use can be greater than if they had not been
used. Hedging Instruments risks include a loss to the fund due to the
imposition of controls by a government on the exchange of foreign currencies,
delivery failure, default by the other party, or inability to close out its
position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities which are securities with a limited trading market.
Illiquid securities have the risk that the securities cannot be readily sold
or can only be resold at a price significantly lower than their value.
SEE ALSO, "Important Recent Developments," for Year 2000 and euro discussion
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
MUTUAL DISCOVERY SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION (11/08/96)
Mutual Discovery []% []%
Securities Fund - Class 1(1)
S&P 500(R) Index(2) []% []%
Lipper Income Average []% []%
Index(2)
1. All fund performance assumes reinvestment of dividends and capital
gains.
2. The S&P 500(R) Index is an unmanaged group of widely held common stockS
covering a variety of industries. The Lipper Income Average Index consists
of 21 equity funds that seek a high level of current income through investing
in income-producing stocks, bonds, and money market instruments. Indices
include reinvested dividends and/or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER LANGERMAN Mr. Langerman has been a manager of the fund since its
PRESIDENT inception in 1996. Before joining the Franklin
CHIEF EXECUTIVE OFFICER Templeton Group in 1996, he was a research analyst for
FRANKLIN MUTUAL Heine Securities Corporation, the predecessor of
Franklin Mutual.
ROBERT L. FRIEDMAN Mr. Friedman has been a manager of the fund since its
CHIEF INVESTMENT OFFICER inception in 1996. Before joining the Franklin
SENIOR VICE PRESIDENT Templeton Group in 1996, he was a research analyst for
FRANKLIN MUTUAL Heine Securities Corporation, the predecessor of
Franklin Mutual
DAVID E. MARCUS Mr. Marcus has been a manager of the fund since 1998.
SENIOR VICE PRESIDENT Before joining the Franklin Templeton Group in 1996, he
FRANKLIN MUTUAL was a research analyst for Heine Securities
Corporation, the predecessor of Franklin Mutual.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
NATURAL RESOURCES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is to provide current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies
principally engaged in the natural resources sector. These are companies that
own, produce, refine, process or market natural resources. They may also
provide support services for natural resources companies, for example,
develop technologies or provide services, supplies or equipment related to
natural resources. The natural resources sector includes industries such as
integrated oil; oil and gas exploration and production; gold and precious
metals; steel, iron ore, and aluminum production; forest, farming, and paper
products; chemicals; building materials; energy services and technology; and
environmental services. The manager expects to invest substantially in the
energy industries, because of its larger weighting in the natural resources
sector itself.
The fund may invest a significant portion of its assets in mid-capitalization
companies, and small cap companies of less than $1.5 billion market
capitalization value (share price times the number of common stock shares
outstanding). The fund will not invest in companies with less than three
years of continuous operations. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stock. The fund also invests in American, European,
and Global Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company.
[Begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
natural resources sector.
[End callout]
The fund may buy natural resource companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than any other single country. In addition, the fund will be
exposed to emerging markets through developed market companies, which often
own or depend on natural resource assets in countries with emerging markets.
In addition to its principal investments, and depending upon market
conditions, the fund may invest significantly in equity or debt securities of
U.S. or non-U.S. issuers outside the natural resources sector. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Bonds, including those
convertible into common stock or unsecured, notes, and short-term
investments, including cash or cash equivalents, are common debt securities.
The fund may also invest up to 10% of its assets in real estate investment
trusts and up to 5% in commodities (including gold bullion or gold coins) or
futures on commodities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined, "growth at a reasonable price"
strategy. Relying on a team of analysts to provide in-depth industry
expertise, the manager looks for companies it believes are positioned for
rapid growth in revenues, earnings or assets, and are selling at reasonable
prices. Using both qualitative and quantitative analysis, the manager chooses
companies it believes are highly profitable with skilled management, and that
have strong growth profiles and solid financials, as well as companies with
sustainable competitive advantages either through strategic asset bases or
technological expertise. These are all factors the manager believes point to
strong long-term growth potential.
[Insert graphic of chart with line going up and down] MAIN RISKS
NATURAL RESOURCES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. The securities of companies in
the natural resources sector may experience more price volatility than
securities of companies in other industries. For example, commodity prices
and the supply or demand for commodities change dramatically for reasons
beyond a company's control. In addition, supply and demand factors may
dictate the prices at which a company acquires raw materials or sells its
products or services. These factors can affect the profitability of companies
in the natural resources sector and, as a result, the value of their
securities.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can be
considered speculative.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
NATURAL RESOURCES SECURITIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89)
Natural Resources Securities []% []% []%
Fund - Class 11
S&P Index2 []% []% []%
FT/S&P2 []% []% []%
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Financial Times/S&P Actuaries World (Energy 50%/Basic Industries 50%)
Composite Index is a composite of companies of which 50% are in the energy
sector and 50% are in the basic industries sectors. Indices include
reinvested dividends and/or interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SUZANNE WILLOUGHBY KILLEA, CFA Ms. Killea has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1994.
She joined the Franklin Templeton Group
in 1991.
ED PERKS, CFA Mr. Perks has been a manager of the fund
VICE PRESIDENT, ADVISERS since 1997. He joined the Franklin
Templeton Group in 1992.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
SMALL CAP FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of small capitalization (small cap) growth
companies. Small cap companies are generally those with market cap values
(share price times the number of common stock shares outstanding) of less
than $1.5 billion, at the time of purchase. Equities represent ownership
interests in individual companies and give shareholders a claim in the
company's earnings and assets. They include common and preferred stocks, and
securities convertible into common stock.
[Begin callout]
The fund invests primarily in common stocks of small cap companies.
[End callout]
Although the fund's policies permit greater investment, currently, it will not
invest more than 10% of its total assets in foreign securities. The fund may
also invest, to a limited extent, in real estate investment trusts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined "growth at a reasonable price"
strategy. Relying on a team of analysts to provide in-depth industry
expertise, the manager chooses small cap companies that it believes are
positioned for rapid growth in revenues, earnings or assets, and are selling
at reasonable prices. Using both qualitative and quantitative analysis, the
manager evaluates companies for distinct and sustainable competitive
advantages, such as a particular marketing or product niche, proven
technology, and industry leadership - all factors the manager believes point
to strong long-term growth potential. The manager diversifies the fund's
assets across many industries, and from time to time may invest substantially
in certain sectors, including technology and biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, and their growth
prospects are less certain. For example, smaller companies may have limited
financial resources for growth or development and limited product lines or
market share; they may lack depth of management; they may be in new
industries; or they may not find an established market for their products or
services, or their products or services may become quickly obsolete. Small
companies may suffer significant losses, their securities can be less liquid,
and investments in these companies may be speculative. Technology and
biotechnology industry stocks, in particular, can be subject to erratic or
abrupt price movements.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their stocks may not
be as liquid or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
SEE ALSO, "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
SMALL CAP FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []%
96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 YEARS SINCE INCEPTION
(11/01/95)
Small Cap Fund - Class 11 []% []% []%
S&P 500 Index(R)2 []% []% []%
Russell 2500 Index(R)2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's(R) Micropal: The S&P 500(R) Index is an unmanagEd
group of widely held common stocks, whereas the Russell 2500 is an index of
2,500 companies with small market capitalizations, both covering a variety of
industries. Indices include reinvested dividends and/or. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
EDWARD JAMIESON Mr. Jamieson has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1995. He
joined the Franklin Templeton Group in
1987.
MICHAEL MCCARTHY Mr. McCarthy has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1995. He
joined the Franklin Templeton Group in
1992.
AIDAN O'CONNELL Mr. O'Connell has been a manager of
PORTFOLIO MANAGER, ADVISERS the fund since September 1998. Before
joining Franklin Templeton in May
1998, Mr. O'Connell was a research
analyst and a corporate financial
analyst at Hambrecht & Quist.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON DEVELOPING MARKETS EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries. Developing or emerging market countries include
those considered to be emerging by the World Bank, the International Finance
Corporation, the United Nations, or the countries' authorities. These
countries are typically located in the Asia-Pacific region, Eastern Europe,
Central and South America, and Africa. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's
earnings and assets. They include common and preferred stock, and securities
convertible into common stock. The fund also invests in American, European
and Global Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in the common stocks of companies located in
emerging market countries
[End callout]
In addition to its principal investments, the fund may invest significantly
in securities of issuers in developed market countries, and particularly
those that are linked by tradition, economic markets, geography or political
events to emerging market countries. Depending upon current market
conditions, the fund may also invest a substantial portion of its assets in
debt securities of companies and governments located anywhere in the world. A
debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Bonds, including
those convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities. The fund may also invest up to 10%
of its total assets in securities of closed-end investment companies, to
facilitate foreign investment.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual companies and
securities, the fund may from time to time have significant investments in
particular countries. The manager intends to manage the fund's exposure to
various geographic regions and their currencies based on its assessment of
changing market and political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well diversified portfolio.
[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO, "Important Recent Developments," for year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
1 YEAR 5 YEARS SINCE
INCEPTION
(03/15/94)
Templeton Developing Markets []% []% []%
Equity Fund - Class 11
MSCI World Index(R)2 []% []% []%
MSCI EMF Index2 []% []% []%
IFC Investable Composite Index2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. The unmanaged Morgan Stanley Capital International(R) World Index includeS
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
unmanaged Morgan Stanley Capital International(R) Emerging Markets Free IndeX
comprises 26 of the 48 countries in the MSCI universe. The International
Finance Corporation's Investable Composite Index is an emerging markets index
that includes 650 stocks from 18 countries including Mexico, South Korea,
Brazil, Jordan and Turkey. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Asset Management Ltd. (TAML), 7 Temasek Boulevard, #38-03, Suntec
Towner One, Singaporte, 038987, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
J. MARK MOBIUS, PH.D. Dr. Mobius has been a manager of the
MANAGING DIRECTOR, TAML fund since its inception in 1994. He
joined the Franklin Templeton Group in
1987.
H. ALLAN LAM Mr. Lam has been a manager of the fund
VICE PRESIDENT, TAML since its inception in 1994. He joined
the Franklin Templeton Group in 1987.
TOM WU Mr. Wu has been a manager of the fund
DIRECTOR, TAML since its inception in 1994. He joined
the Franklin Templeton Group in 1987.
DENNIS LIM Mr. Lim has been a manager of the fund
VICE PRESIDENT, TAML since 1996. He joined the Franklin
Templeton Group in 1990.
EDDIE CHOW Mr. Chow has been a manager of the fund
INVESTMENT ANALYST, TAML since 1996. He joined the Franklin
Templeton Group in 1994.
TEK-KHOAN ONG Mr. Ong has been a manager if the fund
PORTFOLIO MANAGER, TAML since 1996. He joined the Franklin
Templeton Group in 1993.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON GLOBAL GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund also invests
in American, European, and Global Depositary Receipts, which are certificates
typically issued by a bank or trust company that give their holders the right
to receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, to repay a loan of money at a future date and generally to pay
interest. Bonds, including those convertible into common stocks and
unsecured, notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and fall during an economic
slowdown or recession, but rate changes can be sudden and unpredictable.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 YEARS SINCE INCEPTION
(03/15/94)
Templeton Global Growth []% []% []%
Fund - Class 11
MSCI World Index(R)2 []% []% []%
MSCI AC World Free Index(R)2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. The unmanaged Morgan Stanley Capital International(R) World Index includeS
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
unmanaged Morgan Stanley Capital International(R) All Countries World Free
Index represents both developed and emerging markets around the world.
Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Global Advisors Limited (TGAL), Lyford Cay Nassau, N.P. Bahamas, is
the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SEAN FARRINGTON, CFA Mr. Farrington has been a manager of
VICE PRESIDENT, TGAL the fund since 1995. He joined the
Franklin Templeton Group in 1990.
JEFFREY A. EVERETT, CFA Mr. Everett has been a manager of the
EXECUTIVE VICE PRESIDENT, TGAL fund since its inception in 1994. He
joined the Franklin Templeton Group
since 1990
MARK G. HOLOWESKO, CFA Mr. Holowesko has been a manager of
PRESIDENT, TGAL the fund since its inception in 1994.
He joined the Franklin Templeton Group
in 1985.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON INTERNATIONAL EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities that trade in non-U.S.
markets, including emerging markets, and that are issued by companies that
have their principal activities outside the U.S. Equities represent ownership
interests in individual companies and give shareholders a claim in the
company's earnings and assets. They include common and preferred stocks, and
securities convertible into common stock. The fund also invests in American,
European, and Global Depositary Receipts, which are certificates typically
issued by a bank or trust company that give their holders the right to
receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of non-U.S. common
stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, both to repay a loan of money at a future date and generally to
pay interest. Bonds, including those convertible into common stock and
unsecured, notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, shapeType20fFlipH0fFlipV0fShadow0and the fund's share
price. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because that currency is
worth fewer U.S. dollars. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and fall during an economic
slowdown or recession, but rate changes can be sudden and unpredictable.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []% []% []%
93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 PAST 5 YEARS SINCE INCEPTION
YEAR (01/27/92)
Templeton International Equity []% []% []%
Fund - Class 11
MSCI All Country World Ex-U.S. []% []% []%
Free Index2
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. The unmanaged Morgan Stanley Capital International(R) All Countries World
Ex-U.S. Free Index comprises 48 countries around the world, except the U.S.
The Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice
and assistance.
The team responsible for the fund's management is:
MANAGEMENT TEAM
HOWARD J. LEONARD Mr. Leonard has been a manager of the
EXECUTIVE VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1989.
MARK BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since 1994. He joined the
Franklin Templeton Group in 1994
WILLIAM T. HOWARD, JR. Mr. Howard has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1993. He joined the
Franklin Templeton Group in 1993.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the equity securities of smaller
companies located outside the U.S., including emerging markets. Smaller
companies generally are those with market capitalization values (share price
times the number of common stock shares outstanding) of less than $1.5
billion, at the time of purchase. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stock. The fund also invests in American, European,
and Global Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in an internationally diversified portfolio of
smaller companies' common stocks.
[End callout]
In addition to its principal investments, the fund may invest significantly
in equity securities of larger capitalized companies located outside the
U.S., equity securities of U.S. companies (though currently not more than 5%
of its assets), and depending upon current market conditions, in debt
securities of companies and governments located anywhere in the world. A
debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Bonds, including
those convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, and their growth
prospects are less certain. For example, smaller companies may have limited
financial resources for growth or development and limited product lines or
market share; they may lack depth of management; they may be in new
industries; or they may not find an established market for their products or
services, or their products or services may become quickly obsolete. Small
companies may suffer significant losses, their securities can be less liquid,
and investment sin these companies can be speculative. Technology and
biotechnology industry stocks, in particular, can be subject to abrupt or
erratic price movements.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
INTERNATIONAL SMALLER COMPANIES FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]%
96 97
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(05/01/96)
Templeton International Smaller []% []%
Companies Fund - Class 11
Salomon Global Ex-U.S. Less Than []% []%
$1 Billion Index2
Salomon World Ex-U.S. EMI2 []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. The Salomon World Ex-U.S. Extended Market Index (EMI) tracks the
performance of every company with an investable market capitalization of over
$100 million in 22 countries, except the U.S. The Salomon Global Ex-U.S. Less
Than $1 Billion Index includes companies from developed and emerging markets,
excluding the U.S., with a market capitalization below U.S. $1 billion.
Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SIMON RUDOLPH Mr. Rudolph has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1997.
Previouly, he was an executive
director with Morgan Stanley.
GARY CLEMONS Mr. Clemons has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since its inception in 1996. He
joined the Franklin Templeton Group in
1990.
MARK BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since its inception in 1996.
He joined the Franklin Templeton Group
in 1985.
PETER NORI, CFA Mr. Nori has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1990.
JUAN BENITO Mr. Benito has been a manager of the
VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1996.
Previously he was a management
consultant and case team leader with
Monitor Company, a leading global
strategy consulting firm.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON PACIFIC GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities that trade in Pacific
Rim markets, including emerging markets, and are issued by companies that
have their principal activities in the Pacific Rim. Pacific Rim countries
include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New
Zealand, Pakistan, Philippines, Singapore, South Korea and Thailand. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund also invests
in American, European and Global Depositary Receipts, which are certificates
typically issued by a bank or trust company that give their holders the
right to receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in the common stocks of Pacific Rim companies.
[End callout]
In addition to the fund's principal investments, the fund may invest
significantly in securities of issuers domiciled outside the Pacific Rim,
including the U.S., and those that are linked by tradition, economic markets,
geography or political events to countries in the Pacific Rim. Depending upon
current market conditions, the fund may also invest in debt securities of
companies and governments located anywhere in the world. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Bonds, including those convertible
into common stock and unsecured, notes, and short-term investments, are
common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well diversified portfolio.
[Begin callout]
Because the stocks the fund holds fluctuate in price with Pacific Rim market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
Because the fund invests a significant amount of its assets in issuers
located in a particular region of the world, and because the correlation
among the Singapore, Malaysia, Thailand and Hong Kong markets is very high,
the fund is subject to greater risks and may experience greater volatility
than a fund that is more broadly diversified geographically.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
PACIFIC GROWTH FUND - CLASS 1
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []% []% []%
93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/27/92)
Templeton Pacific Growth Fund - []% []% []%
Class 11
MSCI Pacific Index2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
2. The unmanaged Morgan Stanley Capital International(R) Pacific Basin Index
includes over 400 companies and the five countries of Australia, Hong Kong,
Japan, New Zealand, and Singapore/Malaysia. This is a total return index in
U.S. dollars, with gross dividends reinvested. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice
and assistance.
The team responsible for the fund's management is:
MANAGEMENT TEAM
WILLIAM T. HOWARD Mr. Howard has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1993. He joined the
Franklin Templeton Group in 1993.
MARK BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since 1994. He joined the
Franklin Templeton Group in 1985.
GARY CLEMONS Mr. Clemons has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1994. He joined the
Franklin Templeton Group in 1990.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
ADDITIONAL FUND INFORMATION
[Insert graphic of starburst] IMPORTANT RECENT DEVELOPMENTS
YEAR 2000 PROBLEM The funds' business operations depend on a worldwide
network of
computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000
problem). In addition, the fact that the Year 2000 is a leap year may create
difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by their managers, their service providers and
other third parties they do business with are not Year 2000 ready. For
example, the funds' portfolio and operational areas could be impacted,
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions and others. The funds could experience difficulties in effecting
transactions if any of their foreign subcustodians, or if foreign
broker/dealers or foreign markets are not ready for Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one
of the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year
2000 readiness. Issuers in countries outside of the U.S., particularly in
emerging markets, may not be required to make the same level of disclosure
regarding Year 2000 readiness as is required in the U.S. The managers, of
course, cannot audit any company or their major suppliers to verify their
Year 2000 readiness. If a company in which any fund is invested is adversely
affected by Year 2000 problems, it is likely that the price of its security
will also be adversely affected. A decrease in the value of one or more of a
fund's portfolio holdings will have similar impact on the fund's performance.
The funds' managers and their affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the funds' ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the funds and their managers may have no control.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. If a fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and
accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the funds may hold in their
portfolios, and their impact on fund performance. To the extent a fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Except for the Money Fund,
each fund typically pays dividends from net investment income and net capital
gains, if any, following the close of the calendar year. Dividends or
distributions by the funds will reduce the per share NAV by the per share
amount paid.
The Money Fund declares a dividend each day the fund's NAV is calculated,
equal to all of its daily net income, payable 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.
Dividends paid by a fund will be automatically reinvested in additional
shares of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on
the provisions of the variable annuity or variable life insurance contract
through which they are invested in the funds. For more information, please
consult the accompanying contract prospectus.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS, ALL FUNDS
This table presents the funds' financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
[TO BE SUPPLIED IN A LATER AMENDMENT]
FUND ACCOUNT INFORMATION
[Insert graphic of a paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts. The funds' Board monitors this to be sure
there are no material conflicts of interest between the two different types
of contract owners. If there were, the Board would take corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares
are processed at the NAV next calculated after we receive the request in
proper form. The funds do not issue share certificates.
[Insert graphic] SELLING SHARES
Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under
the terms of its contracts. Requests to sell shares are processed at the NAV
next calculated after we receive the request in proper form.
[Insert graphic of two arrows] EXCHANGING SHARES
Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options
available under a variable insurance contract, subject to the terms and any
specific limitations on the exchange (or "transfer") privilege described in
the contract prospectus.
Frequent exchanges can interfere with fund management or operations and drive
up fund costs. To protect shareholders, there are limits on the number and
amount of exchanges that may be made (please see Market timers on page xx).
[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
CALCULATING SHARE PRICE The funds calculate their NAV per share each
business day at the close of trading on the New York Stock Exchange (normally
1:00 p.m. pacific time). Each class's NAV is calculated by dividing its net
assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value, except that the
Money Fund's assets are generally valued at their amortized cost. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of the
shares may change on days that the insurance company separate account cannot
buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open
for business at the NAV next calculated after we receive the request in
proper form.
STATEMENTS AND REPORTS Contract owners will receive confirmations and
account statements that show account transactions. Insurance company
shareholders will receive the fund's financial reports every six months. To
reduce fund expenses, if you need additional copies, please call
1-800/342-3863.
If there is a dealer or other investment representative of record on the
account, he or she will also receive confirmations, account statements and
other information about the contract owner's account directly from the
contract's administrator.
MARKET TIMERS The funds are not designed for market timers, large or
frequent transfers. The funds may restrict or refuse purchases or exchanges
by market timers. You will be considered a market timer if you have (i)
requested an exchange out of the fund within two weeks of an earlier exchange
request, or (ii) exchanged shares out of the fund more than twice in a
calendar quarter, or (iii) exchanged shares equal to at least $5 million, or
more than 1% of the fund's net assets, or (iv) otherwise seem to follow a
timing pattern. Accounts under common ownership or control are combined for
these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserves certain rights, including:
Each fund may refuse any order to buy shares.
At any time, the funds may establish or change investment minimums.
The funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES. Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule
12b-1" plan which is described in prospectuses offering class 2 shares.
[Insert graphic of a question mark] QUESTIONS
More detailed information about the Trust and the funds' account policies can
be found in the funds' Statement of Additional Information (SAI). If you have
any questions about the funds, you can write to us at 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at
1-800/342-3863 or the Valuemark Service Center at 1-800/624-0197. For your
protection and to help ensure we provide you with quality service, all calls
may be monitored or recorded.
[Begin callout]
FOR MORE INFORMATION
[End callout]
The funds are only available as investment options in variable annuity or
variable life insurance contracts. Please consult the accompanying contract
prospectus or disclosure document for information about the terms of an
investment in a contract.
You can learn more about the funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Include a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and
the auditor's report (Annual Report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, and policies.
It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment
representative or by calling us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/342-3863
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file 811-5583#
Lit. Code #
Prospectus
Franklin Valuemark Funds
CLASS 2 SHARES
MAY 1, 1999
[Insert Franklin Templeton Ben Head]
LIKE ALL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS COMPLETE
OR ACCURATE. ANYONE WHO ADVISES YOU OTHERWISE HAS COMMITTED A FEDERAL CRIME.
CONTENTS
FRANKLIN VALUEMARK FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[Insert page #] OVERVIEW
[Insert page #] INDIVIDUAL FUND DESCRIPTIONS
STABILITY OF PRINCIPAL AND INCOME
SEEKS INCOME AND STABILITY BY INVESTING IN HIGH-QUALITY, SHORT-TERM
INVESTMENTS.
[Insert page #] Money Market Fund
CURRENT INCOME
SEEKS INCOME BY INVESTING MAINLY IN BONDS.
[Insert page #] High Income Fund
[Insert page #] Templeton Global Income Securities Fund
[Insert page #] U.S. Government Securities Fund
[Insert page #] Zero Coupon Funds, 2000, 2005, 2010
GROWTH AND INCOME
Seeks growth and income by investing in stocks and bonds.
[Insert page #] Global Utilities Securities Fund
[Insert page #] Growth and Income Fund
[Insert page #] Income Securities Fund
[Insert page #] Mutual Shares Securities Fund
[Insert page #] Real Estate Securities Fund
[Insert page #] Rising Dividends Fund
[Insert page #] Templeton Global Asset Allocation Fund
[Insert page #] Value Securities Fund
CAPITAL GROWTH
SEEKS GROWTH BY INVESTING MAINLY IN STOCKS.
[Insert page #] Capital Growth Fund
[Insert page #] Global Health Care Securities Fund
[Insert page #] Mutual Discovery Securities Fund
[Insert page #] Natural Resources Securities Fund
[Insert page #] Small Cap Fund
[Insert page #] Templeton Developing Markets Equity Fund
[Insert page #] Templeton Global Growth Fund
[Insert page #] Templeton International Equity Fund
[Insert page #] Templeton International Smaller Companies Fund
[Insert page #] Templeton Pacific Growth Fund
ADDITIONAL FUND INFORMATION
[Insert page #] Important Recent Developments
[Insert page #] Distributions and Taxes
[Insert page #] Financial Highlights, All Funds
FUND ACCOUNT INFORMATION
[Begin callout]
Information about fund account transactions, and services
[End callout]
[Insert page #] Buying Shares
[Insert page #] Selling Shares
[Insert page #] Exchanging Shares
[Insert page #] Fund Account Policies
[Insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
Where to learn more about each fund
[End callout]
Back Cover
OVERVIEW
FRANKLIN VALUEMARK FUNDS
Franklin Valuemark Funds (the Trust) currently consists of twenty-five
separate funds, offering a wide variety of investment choices. Each fund has
two classes of shares, class 1 and class 2. The funds are only available as
investment options in variable annuity or variable life insurance contracts.
The accompanying contract prospectus indicates which funds and classes are
available to you.
INVESTMENT CONSIDERATIONS
Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
No single fund can be a complete investment program; consider
diversifying your fund choices.
You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
All securities markets, interest rates, and currency valuations move up
and down, sometimes dramatically, and mixed with the good years can be
some bad years. Since no one can predict exactly how financial markets
will perform, you may want to exercise patience and focus not on
short-term market movements, but on your long-term investments goals.
RISKS
There can be no assurance that any fund will achieve its investment goal.
Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risk disclosure before
investing.
Fund shares are not deposits or obligations of, or guaranteed or endorsed
by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency of the U.S. government. Fund shares involve investment
risks, including the possible loss of principal.
MORE DETAILED INFORMATION ABOUT EACH FUND, ITS POLICIES (INCLUDING TEMPORARY
INVESTMENTS) AND INVESTMENTS, AND ITS PARTICULAR, RISKS CAN BE FOUND IN THE
TRUST'S STATEMENT OF ADDITIONAL INFORMATION (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $217 billion
in assets. Franklin Templeton is one of the largest mutual fund organizations
in the United States, and offers money management expertise spanning a
variety of investment objectives. In 1992, Franklin, recognized as a leader
in managing domestic mutual funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later.
FUND SEEKING STABILITY OF PRINCIPAL AND INCOME
MONEY MARKET FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's goal is high current income, consistent with liquidity and
capital preservation. The fund also tries to maintain a stable share price of
$1.00.
PRINCIPAL INVESTMENTS The fund invests exclusively in U.S. dollar denominated
money market debt securities, including those issued by:
the U.S. government, its agencies or instrumentalities;
U.S. and foreign banks;
U.S. or foreign corporations; and
foreign governments or multinational organizations such as the World Bank.
[Begin callout]
The fund invests exclusively in money market securities.
[End callout]
A debt security obligates the issuer to the note holders, both to repay a
loan of money at a future date and generally to pay interest. Money market
securities are high-quality, short-term (maturing in 13 months or less) debt
obligations that may have fixed, floating or variable interest rates. U.S.
Treasury bills, commercial paper (unsecured promissory note issued by large
companies or financial firms), repurchase agreements, short-term corporate
obligations, bankers acceptances (credit instruments guaranteed by a bank),
and bank certificates of deposit are common money market securities.
Under the SEC's money fund rules, the fund maintains a dollar-weighted
average portfolio maturity of 90 days or less and only buys securities:
with remaining maturities of 397 days or less, and
that the fund's Board of Trustees determines present minimal credit
risks, and
are rated in the top two short-term rating categories (AAA to AA) by
independent by rating agencies or, if unrated, determined by the fund's
Board of Trustees to be comparable.
No more than 25% of the fund's total assets may be invested in obligations
[or commercial paper] issued by foreign banks or foreign branches of U.S.
banks [unless these obligations are backed by the U.S. parent bank]. No more
than 5% of assets may be invested in securities rated in the second highest
category (or comparable unrated). The fund may acquire securities on a
when-issued or delayed delivery basis, lend portfolio securities, and invest
up to 10% of its assets in illiquid investments.
PORTFOLIO SELECTION In selecting investments for the fund, the manager uses
a conservative investment approach, focusing on the highest quality and
liquid securities. The manager assesses the relative value of each security
meeting its stringent credit criteria in order to find the best combination
of assets that it believes will maximize the fund's yield relative to its
investment environment expectations. The manager also monitors short-term
interest rates, economic conditions, and Federal Reserve monetary policy to
determine the portfolio maturity it believes will provide a high overall
return to the fund.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. A sub category of interest rate risk is REINVESTMENT RISK,
which is the risk that interest rates will be lower when the fund seeks to
reinvest the proceeds from a matured debt security. In that case, the fund
would receive less income, resulting in lower total return. Since the fund
limits its investments to high-quality, short-term securities, it will
generally earn lower yields than a fund with lower-quality, longer-term
securities subject to more risk.
CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. government depend on the ability of the issuer
to meet interest or principal payments. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value. Even
securities supported by credit enhancements have the credit risk of the
entity providing credit support. Securities, or credit support, issued by a
foreign entity are subject to possible adverse foreign economic, political or
legal developments that may affect the ability of that entity to meet its
obligations.
[Begin callout]
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund tries
to keep a $1 share price, it is possible to lose money by investing in the
fund.
[End callout]
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Securities purchased on a
when-issued or delayed delivery basis are subject to market fluctuations and
their value at delivery may be higher or lower than the purchase price.
SEE ALSO "Important Recent Developments," for Year 2000 discussion, and any
potential impact on the fund's portfolio and operations. More detailed
information about the fund, its policies and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows the fund's average annual
total returns. Of course, past performance cannot predict or guarantee future
results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
MONEY MARKET FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] `9[ ]+[ ]%
WORST QUARTER:
[ ] `9[ ] - [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(01/24/89)
Money Market Fund -
Class 2(1)
1. All fund performance assumes reinvestment of dividends. Past expense
reductions by the manager increased returns. Because Class 2 shares were
first offered January 6th, 1999, performance shown represents the historical
results of Class 1 shares. Although invested in the same portfolio of
securities as Class1, Class 2 performance will differ only because of Class
2's higher annual fees and expenses resulting from its Rule 12b-1 Plan.
Current annual plan expenses are 0.30%.
To obtain the fund's current yield information, please call 1-800/342-3863.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The fund pays the manager a fee for managing the fund's assets, making its
investment decisions, and providing certain administrative facilities and
services for the funds. For the fiscal year ended December 31, 1998,
management fees, before any advance waiver, were 0.51% of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the
fund paid 0.43% of its average daily net assets to the manager. The manager
ended its fee waiver limitation beginning January 1, 1999.
FUNDS SEEKING CURRENT INCOME
HIGH INCOME FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is to earn a high level of
current income. Its secondary goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in debt securities. The fund seeks to invest
in debt securities that are offering the highest yield and expected total
return. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Bonds,
including those convertible into common stock and unsecured, zero coupon
bonds, notes, and short-term investments, are common debt securities. While
the fund may also invest in dividend-paying common or preferred stocks, it
more typically holds equity as a result of receiving those securities in a
corporate restructuring. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stock.
[Begin callout]
The fund invests primarily in high yield, lower rated bonds.
[End callout]
The fund may invest up to 100% of its assets in high yield, lower quality
debt securities ("junk bonds"). These securities are either rated below
investment grade (below the top four rating categories) by independent rating
organizations such as Standard & Poor's Corporation (S&P) and Moody's
Investors Service, Inc. (Moody's), or unrated securities the manager
determines are comparable. Nevertheless, the fund generally invests in
securities rated at least Caa by Moody's or CCC by S&P or unrated securities
the fund's manager determines are comparable. Generally, lower rated
securities pay higher yields than more highly rated securities to compensate
investors for the higher risk. As of December 31, 1998, about 95% of the
fund's portfolio were invested in lower rated and comparable quality unrated
debt securities.
The fund may also invest up to 20% of its total assets in foreign securities,
including up to 10% in emerging markets, and will typically focus on
dollar-denominated corporate debt. Many debt securities of non-U.S. issuers,
and especially emerging market issuers, are rated below investment grade or
are unrated so that their selection depends on the manager's internal
analysis.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION Yield and expected return are the primary criteria used
by the manager in selecting securities. The manager searches for securities
it believes offer opportunities for income today and growth tomorrow. It
performs independent analysis of the corporate debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In its analysis, the manager considers
a variety of factors, including:
a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
the experience and managerial strength of the company;
responsiveness to changes in interest rates and business conditions;
debt maturity schedules and borrowing requirements; and
the company's changing financial condition and market recognition of
the change.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities. A sub
category of interest rate risk is REINVESTMENT RISK, which is the risk that
interest rates will be lower when the funds seek to reinvest the proceeds
from a matured debt security, resulting in less income received by the fund.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of all the fund's debt securities will fall and so too
will the fund's share price. This means you could lose money.
[End callout]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares. Securities rated below investment grade,
sometimes called "junk bonds," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially as those with higher credit ratings. These companies
are more likely to encounter financial difficulties and are more vulnerable
to changes in the economy, such as a recession or a sustained period of
rising interest rates, that could prevent them from making interest and
principal payments.
DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose the entire
investment.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
ratings organizations. Prices are often closely linked with the company's
stock prices and typically rise and fall in response to factors that affect
stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, stock market activity, large sustained sales by major investors,
a high-profile default, or other factors. High yield securities are also
generally less liquid than higher-quality bonds. Many of these securities do
not trade frequently, and when they do trade their prices may be
significantly higher or lower than expected. At times, it may be difficult to
sell these securities promptly at an acceptable price, which may limit the
fund's ability to sell securities in response to specific economic events or
to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the possibility of currency devaluations, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on
removal of currency or other assets, nationalization of assets, punitive
taxes and certain custody and settlement risks. Non-U.S. companies are not
subject to the same disclosure, accounting, auditing and financial reporting
standards and practices as U.S. companies and their stocks may not be as
liquid as stocks of similar U.S. companies. Non-U.S. stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S.
Emerging market countries have additional risks due to a lack of established
legal, business and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks, and bond ratings, can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
HIGH INCOME FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89 )
High Income Fund - Class 21 []% []% []%
First Boston High Yield2 []% []% []%
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The unmanaged First Boston High Yield
is a trader-priced portfolio constructed to mirror the public high yield debt
market. The Consumer Price Index, a commonly used measure of inflation,
measures the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the U.S. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
JEFF HOLBROOK, CFA Mr. Holbrook has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1997. He joined the Franklin
Templeton Group in 1992.
CHRIS MOLUMPHY, CFA Mr. Molumphy has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1988.
R. MARTIN WISKEMANN Mr. Wiskemann has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1989. Mr.
Wiskemann has more than 30 years'
experience in the securities industry.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON GLOBAL INCOME SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high current income. Capital appreciation
is a secondary consideration.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the debt securities of governments and
their political subdivisions and agencies, supranational organizations, and
companies located anywhere in the world, including emerging markets. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Bonds, including those
convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities.
[Begin callout]
The fund invests primarily in bonds of governments located around the world
[End callout]
The fund focuses on "investment grade" debt securities. These are issues
rated in the top four rating categories (AAA to BBB) by independent rating
agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors
Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to
be comparable. The fund may also invest up to 30% of its net assets in high
yield, lower rated debt securities ("junk bonds") that are rated at least B,
including emerging market debt, or if unrated, determined by the fund's
manager to be comparable. As of December 31, 1998, about 20% of the fund's
portfolio was invested in lower rated and comparable quality unrated debt
securities. Many debt securities of non-U.S. issuers, and especially emerging
market issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis. The average maturity
of debt securities in the fund's portfolio is medium-term, but will fluctuate
depending on the manager's outlook on the country and future interest rate
changes.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The fund's manager allocates its assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. In considering these factors, a country's
changing market, economic, and political conditions, such as inflation rate,
growth prospects, global trade patterns and government policies will be
evaluated. The manager intends to manage the fund's exposure to various
currencies, and may from time to time make use of forward currency exchange
contracts for hedging purposes.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
FOREIGN SECURITIES Securities of governments and companies located outside
the U.S. involve risks that can increase the potential for losses in the
fund.
Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets are generally not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities, and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer stops
paying interest, payments may never resume and the securities may become
worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
It may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep
interest rate risk and country allocations at desired levels, as well as bond
maturities, may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL INCOME FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89 )
Templeton Global Income []% []% []%
Securities Fund - Class 21
JP Morgan Global Government Bond []% []% []%
Index2
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The unmanaged JP Morgan Global
Government. Bond Index tracks the performance of government bond markets in
13 countries. It includes issues with remaining maturities of greater than 13
months. The Consumer Price Index, a commonly used measure of inflation,
measures the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the U.S. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394,
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor. A team from Global Bond Managers provides Advisers
with investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
U.S. GOVERNMENT SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
in a portfolio limited to U.S. government securities, primarily fixed and
variable rate mortgage-backed securities. The fund currently invests a
substantial portion of its assets in Government National Mortgage Association
obligations ("Ginnie Maes").
[Begin callout]
The fund invests primarily in mortgage-backed U.S. government securities.
[End callout]
Ginnie Maes represent an ownership interest in mortgage loans made by banks
and other financial institutions to finance purchases of homes. The
individual loans are packaged or "pooled" together for sale to investors. As
the underlying mortgage loans are paid off, investors receive principal and
interest payments. Ginnie Maes carry a guarantee backed by the full faith and
credit of the U.S. government. The guarantee applies only to the timely
payment of principal and interest on the mortgages in the pool, and does not
apply to the market prices and yields of the Ginnie Maes or to the net asset
value or performance of the fund, which will vary with changes in interest
rates and other market conditions. Ginnie Mae yields (interest income as a
percent of price) have historically exceeded the current yields on other
types of U.S. government securities with comparable maturities, although
interest rate changes and unpredictable prepayments can greatly change
realized yields.
In addition to Ginnie Maes, the fund may invest in mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association, Federal
Home Loan Mortgage Corporation, or other U.S. government agencies. The fund
may also invest in U.S. government securities backed by other types of
assets, including business loans guaranteed by the U.S. Small Business
Administration. Finally, the fund may invest in U.S. Treasury bonds, notes
and bills, and securities issued by U.S. government agencies or
instrumentalities. While all of these securities carry the highest credit
ratings, securities issued or guaranteed by FNMA, FHLMA and certain other
entities are not backed by the full faith and credit of the U.S. government.
The fund may purchase securities on a "to-be-announced" and "delayed
delivery" basis. This means the securities will be paid for and delivered to
the fund at a future date, generally in 30 to 45 days.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goal.
PORTFOLIO SELECTION The manager generally buys, and holds, high quality
securities which pay high current interest rates. Using this
straightforward, low turnover approach, the manager seeks to produce high
current income and lower price volatility, rather than seeking capital
appreciation.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. If rates fall, mortgage holders
will refinance their mortgage loans at lower interest rates, which will
reduce the fund's interest and yield. Generally, interest rates rise during
times of inflation or a growing economy, and will fall during an economic
slowdown or recession, but rate changes can be sudden and unpredictable.
U.S. Treasury STRIPS are more sensitive to interest rate changes and their
price will fluctuate more than the prices of interest-paying Treasury bonds
or notes. Securities with longer maturities are also usually more sensitive
to interest rate changes than securities with shorter maturities. A sub
category of interest rate risk is REINVESTMENT RISK, which is the risk that
interest rates will be lower when the fund seeks to reinvest the proceeds
from a matured debt security, resulting in less income received by the fund.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money over short or even
extended periods.
[End callout]
GINNIE MAES Ginnie Maes, and other mortgage- and asset-backed securities,
differ from conventional debt securities because principal is paid back over
the life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal due to voluntary prepayments,
refinancing or foreclosure on the underlying mortgage or other loans. During
periods of declining interest rates, the volume of principal prepayments
generally increases as borrowers refinance their mortgages at lower rates.
The fund may be forced to reinvest returned principal at lower interest
rates, reducing the fund's income. For this reason, Ginnie Maes may be less
effective than other types of securities as a means of "locking in" long-term
interest rates and may have less potential for capital appreciation during
periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the
effective maturity of Ginnie Maes making them more susceptible than other
debt securities to a decline in market value when interest rates rise. This
could increase volatility of the fund's returns and share price.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. The fund's investments in securities
which are not backed by the full faith and credit of the U.S. government
depend upon the ability of the issuing agency or instrumentality to meet
interest or principal payments.
SEE ALSO "Important Recent Developments," for Year 2000 discussion, and any
potential impact on the fund's portfolio and operations. More detailed
information about the fund, its policies, including temporary investments and
risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten years
calendar years or since the fund's inception. The table shows the fund's
average annual total returns. Of course, past performance cannot predict or
guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
U.S. GOVERNMENT SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(03/14/89 )
U.S. Government Securities []% []% []%
Fund - Class 21
Lehman Brothers Government []% []% []%
Bond Index2
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. Lehman Brothers Intermediate
Government Bond Index is an unmanaged index of fixed-rate bonds issued by the
U.S. government and its agencies that are rated investment grade or higher
and have one to ten years remaining until maturity and at least $100 million
outstanding. The Consumer Price Index, a commonly used measure of inflation,
measures the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the U.S. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
JACK LEMEIN Mr. Lemein has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1989. Mr.
Lemein has more than 30 years experience
in the securities industry.
DAVE CAPURRO Mr. Capurro has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1983.
ROGER BAYSTON Mr. Bayston has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since 1993. He joined the Franklin
Templeton Group in 1991.
TONY COFFEY, CFA Mr. Coffey has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1996. He joined the Franklin
Templeton Group in 1989.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
ZERO COUPON FUNDS: MATURING IN DECEMBER 2000, 2005, 2010
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL Each of the funds' investment goal is to provide as high an investment
return as is consistent with capital preservation.
PRINCIPAL INVESTMENTS Under normal market conditions, each fund will invest
at least 65% of its net assets in zero coupon securities, primarily U.S.
Treasury issued stripped securities and U.S. government, and its agencies and
instrumentalities, issued stripped securities. The fund may also invest a
lesser amount in zero coupon securities issued by U.S. companies and
eurodollar obligations, which are U.S. dollar denominated debt typically
issued by foreign subsidiaries of U.S. companies.
[Begin callout]
Each fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific date in the future by
investing primarily in zero coupon securities.
[End callout]
Stripped U.S. Treasury securities are backed by the full faith and credit of
the U.S. government. The guarantee applies only to the timely payment of
principal and does not apply to the market prices and yields of the zero
coupon bonds or to the net asset value or performance of the fund, which will
vary with changes in interest rates and other market conditions. Where the
fund invests in other than stripped treasuries, the zero coupon bonds will be
rated at least A by independent rating agencies such as Standard & Poor's
Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if
unrated, securities determined by the Manager to be comparable.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Zero coupon
securities are debt securities that make no periodic interest payments but
instead are sold at substantial discounts from their value at maturity. The
most common zero coupon security is the zero coupon bond which may be issued
by a government or a corporation, or may be created by a dealer firm when it
strips the coupons off a bond and sells the principal and interest payments
separately. The buyer receives the rate of return by the gradual
appreciation of the zero coupon bond, which is redeemed at face value on the
specified maturity date
As a fund approaches its Target Date, its investments will be made up of
increasingly larger amounts of short-term money market investments, including
cash and cash equivalents. Each fund reserves the right to invest up to 10%
of its total assets in foreign securities, although typically each fund
invests less, and only in dollar denominated obligations.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the funds may be unable to
pursue their investment goal.
PORTFOLIO SELECTION In selecting investments for the funds, the manager
seeks to keep the average duration of each fund to within twelve months of
each funds' maturity Target Date. Duration is a measure of the length of an
investment, taking into account the timing and amount of any interest
payments and the principal repayment. By balancing investments with slightly
longer and shorter durations, the manager believes it can reduce its unknown
"reinvestment risk."
MATURITY Each fund matures on the third Friday of December of its specific
maturity year (Target Date). On each fund's Target Date, the fund will be
converted into cash. At least 30 days prior to the Target Date, 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 the cash proceeds, the proceeds will be automatically
invested in the Money Market Fund and the contract owners will be notified of
such event.
[Insert graphic of chart with line going up and down] MAIN RISKS
If fund shares are redeemed prior to the maturity of the fund, an investor
may receive a significantly different investment return than anticipated at
the time of purchase. Therefore, the Zero Coupon Funds may not be
appropriate for contract owners who do not plan to invest for the long-term
or until maturity.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Because zero coupon securities
do not pay interest, the market value of zeros can fall more dramatically
than interest-paying securities of similar maturities when interest rates
rise. When interest rates fall, however, zeros rise more rapidly in value.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities. Thus, the Zero Coupon Fund
2010 may experience more volatility in its share price than the Zero Coupon
Fund 2000. Generally, interest rates rise during times of inflation or a
growing economy, and will fall during an economic slowdown or recession, but
rate changes can be sudden and unpredictable. A sub category of interest
rate risk is REINVESTMENT RISK, which is the risk that interest rates will be
lower when the funds seek to reinvest the proceeds from a matured debt
security, resulting in less income received by the fund.
[Begin callout]
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money.
[End callout]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 discussion, and any
potential impact on the fund's portfolio and operations. More detailed
information about the fund, its policies, including temporary investments and
risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten years
calendar years or since the fund's inception. The table shows the fund's
average annual total returns. Of course, past performance cannot predict or
guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
ZERO COUPON FUND - 2000 CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
ZERO COUPON FUND - 2005 CLASS 2
Calendar Year Total Returns(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
ZERO COUPON FUND - 2010 CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE INCEPTION
(3/14/89)
Zero Coupon - 2000 []% []% []%
Class 2
Merrill Lynch Zero []% []% []%
Coupon 5-Year Bond
Total Return Index(2)
Merrill Lynch Zero []% []% []%
Coupon 1-Year Bond
Total Return Index(2)
Zero Coupon - 2005 []% []% []%
Class 2
Merrill Lynch Zero []% []% []%
Coupon 10-Year Bond
Total Return Index(2)
Zero Coupon - 2010 []% []% []%
Class 2
Merrill Lynch Zero []% []% []%
Coupon 20-Year Bond
Total Return Index(2)
CPI(2) []% []% []%
1. All fund performance assumes reinvestment of dividends. Past expense
reductions by the manager increased returns. Because Class 2 shares were
first offered January 6th, 1999, performance shown represents the historical
results of Class 1 shares. Although invested in the same portfolio of
securities as Class1, Class 2 performance will differ only because of Class
2's higher annual fees and expenses resulting from its Rule 12b-1 Plan.
Current annual plan expenses are 0.30%.
2. Source: Standard & Poor Micropal. The unmanaged Merrill Lynch Zero Coupon
indices include zero coupon bonds that pay no interest and are issued at a
discount from redemption price. The Consumer Price Index, a commonly used
measure of inflation, measures the average change in prices for a fixed
basket of goods and services regularly bought by consumers in the U.S.
Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
To obtain the funds' current yield information, please call 1-800/342-3863.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the funds' investment manager.
The team responsible for the funds' management is:
MANAGEMENT TEAM
DAVE CAPURRO Mr. Capurro has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1983.
JACK LEMEIN Mr. Lemein has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1989. Mr.
Lemein has more than 30 years'
experience in the securities industry.
TONY COFFEY, CFA Mr. Coffey has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1989. He joined the Franklin
Templeton Group in 1989.
Each fund pays the manager a fee for managing the fund's assets, making its
investment decisions, and providing certain administrative facilities and
services for the funds. For the fiscal year ended December 31, 1998,
management fees, before any advance waiver, were each 0.63% for the 2000
series and 2005 series and 0.62% for the 2010 series, of the fund's average
daily net assets. Under an agreement by the manager to limit its fees, the
2000 series and 2005 series each paid 0.37% and the 2010 series paid 0.36% of
average daily net assets to the manager. The manager ended its fee waiver
limitation beginning January 1, 1999.
FUNDS SEEKING GROWTH AND INCOME
GLOBAL UTILITIES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goals are capital appreciation and current
income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies in the
public utilities industry. These are companies that provide electricity,
natural gas, communications, cable and internet, satellite, wireless
telecommunications, and water services to the public and companies that
provide services to public utilities companies. The manager expects to invest
substantially in the electricity and communications sectors. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund may buy public
utilities companies anywhere in the world, including emerging markets, but
generally invests a greater percentage of its assets in U.S. companies than
any other single country.
[Begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies engaged
in the public utilities industry.
[End callout]
The fund may also invest a significant portion of its assets in smaller
capitalization companies which have market capitalization values (share price
times the number of common stock shares outstanding) of less than $1.5
billion.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy. Relying
on a team of analysts to provide in-depth industry expertise, the manager
looks for companies that will position the fund to benefit from potential
future technological advances and increasing worldwide demand in the public
utilities sector. In choosing equity investments, the fund's manager will
focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered.
[Insert graphic of chart with line going up and down] MAIN RISKS
UTILITIES INDUSTRY By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Utility companies in the U.S.
and in non-U.S. countries have generally been subject to substantial
government regulation. Major changes in government policies, ranging from
increased regulation or expropriation to deregulation, privatization or
increased competition, may dramatically increase or reduce opportunities for
companies in these industries. For example, while certain companies may
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable.
In addition, electric utility companies are subject to risks associated with
high interest costs on borrowings or reduced ability to borrow; restrictions
on operations and increased costs due to environmental and safety
regulations; regulators disallowing these higher costs in rate
authorizations; difficulties in obtaining fuel for electric generation at
reasonable prices; risks associated with the operation of nuclear power
plants; and the effects of energy conservation and other factors affecting
the level of demand for services.
Gas transmission and distribution companies continue to undergo significant
changes as well. Many companies have diversified into oil and gas exploration
and development, making returns more sensitive to energy prices. The water
supply industry is highly fragmented due to local ownership. Generally,
these companies are more mature and expect little or no per capita volume
growth. The wireless telecommunications industry is in its early
developmental stages, characterized by emerging, rapidly growing companies,
and is subject to the risk of rapidly changing technology.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, currencies and interest rate movements, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
INTEREST RATE Utility company stocks pay relatively high dividends, so they
are particularly sensitive to interest rate movements. Therefore, like bonds,
their stock prices may rise as interest rates fall or fall as interest rates
rise. Generally, interest rates rise during times of inflation or a growing
economy, and will fall during an economic slowdown or recession, but rate
changes can be sudden and unpredictable.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. involve risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can be
considered speculative. The companies may suffer significant losses, and
technology and biotechnology industry stocks, in particular, can be subject
to abrupt or erratic price movements.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
GLOBAL UTILITIES SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 SINCE
YEARS INCEPTION
(01/24/89 )
- --------------------------------------------------------------------------
Global Utilities Securities Fund []% []% []%
- - Class 21
S&P Index2 []% []% []%
CPI2 []% []% []%
FT/S&P2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. The Financial Times/S&P Actuaries World
(Energy 50%/Basic Industries 50%) Composite Index is a composite of companies
of which 50% are in the energy sector and 50% are in the basic industries
sectors. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SALLY EDWARDS-HAFF Ms. Edwards-Haff has been a manager of
SENIOR VICE PRESIDENT, ADVISERS the fund since 1990. She joined the
Franklin Templeton Group in 1986.
IAN LINK, CFA Mr. Link has been a manager of the fund
VICE PRESIDENT, ADVISERS since 1995. He joined the Franklin
Templeton Group in 1989.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
GROWTH AND INCOME FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in a broadly diversified portfolio of equity
securities that the manager believes have the potential to increase in
value. To help identify undervalued financially strong companies with
attractive long-term growth prospects, the manager uses a current relative
yield analysis. Dividend yield is a stock's annual per share dividends
dividend by its per share market price. Following this strategy, the fund
will invest predominantly in common stocks that have dividend yields at least
equal to the yield of the Standard & Poor's 500 Index. The fund seeks current
income through receipt of dividends from its investments. Equities represent
ownership interests in individual companies and give shareholders a claim in
the company's earnings and assets. They include common and preferred stocks,
and securities convertible into common stock.
The fund may also invest up to 30% of its total assets, but currently intends
to limit to 20%, in foreign securities, including depositary receipts and
emerging markests. The fund may also invest to a lesser extent in equity
real estate investment trusts (REITs). REITS are usually publicly traded
companies that manage a portfolio of real estate to earn profits and tend to
pay high yields since they must distribute most of their earnings.
[Begin callout]
The fund invests primarily in common stocks offering above market current
dividend yields.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy for this
fund. The fund's manager will focus on the market price of a company's
securities relative to its evaluation of the company's long-term earnings,
asset value and cash flow potential, with an emphasis on current dividend
yield. The manager believes that high relative dividend yield is frequently a
good indicator of value.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
REITS A REIT's performance depends on the types and locations of the
properties it owns and on how well it manages those properties. The value of
a REIT may also be affected by factors that affect the underlying
properties, the real estate industry, or local or general economic
conditions.
FOREIGN SECURITIES Securities, including Depositary Receipts, of companies
and governments located outside the U.S. involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the possibility of currency devaluations, the imposition of exchange
controls, foreign ownership limitations, expropriation, restrictions on
removal of currency or other assets, nationalization of assets, punitive
taxes, and certain custody and settlement risks. Non-U.S. companies are not
subject to the same disclosure, accounting, auditing and financial reporting
standards and practices as U.S. companies and their stocks may not be as
liquid as stocks of similar U.S. companies, or may become illiquid. Non-U.S.
stock exchanges, trading systems, brokers and companies generally have less
government supervision and regulation than in the U.S.
Emerging market countries have additional risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed
information about the fund, its policies, including temporary investments and
risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
GROWTH AND INCOME FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89 )
Growth and Income Fund - Class 21 []% []% []%
S&P Index2 []% []% []%
CPI2 []% []% []%
1. All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
FRANK FELICELLI, CFA Mr. Felicelli has been a manager of
SENIOR VICE PRESIDENT, ADVISERS the fund since 1995. He jointed the
Franklin Templeton Group in 1986.
KENT SHEPHERD, CFA Mr. Shepherd has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1998. He joined the
Franklin Templeton Group in 1991.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
INCOME SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in a diversified portfolio of debt securities, equity securities,
and cash equivalents. A debt security obligates the issuer to the
bondholders, both to repay a loan of money at a future date and generally to
pay interest. Bonds, including those convertible into common stock and
unsecured, notes, and short-term investments, are common debt securities.
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock.
The fund seeks income by selecting investments such as corporate, foreign,
and long-term U.S. Treasury bonds. In its search for income-producing growth
opportunities, the fund invests in common stocks with attractive dividend
yields of companies from a variety of industries such as utilities, oil, gas,
real estate and consumer goods. From time to time the fund may invest
substantially in certain sectors, including utilities.
The fund may invest up to 100% of its total assets in debt securities that
are below investment grade, but it is not currently expected that the fund
will invest more than 50% of its assets in these securities. Investment grade
debt securities are rated in the top four rating categories by independent
rating organizations such as Standard & Poor's Corporation (S&P) and Moody's
Investors Service, Inc. (Moody's). The fund generally invests in securities
rated at least Caa by Moody's or CCC by S&P or unrated securities the fund's
manager determines are comparable; modest amounts may be invested in
defaulted debt. Generally, lower rated securities pay higher yields than more
highly rated securities to compensate investors for the higher risk. As of
December 31, 1998, about 30% of the fund's portfolio was invested in lower
rated and comparable quality unrated debt securities.
The fund may invest up to 25% of its assets in foreign securities, including
emerging markets. It ordinarily buys foreign securities that are traded in the
U.S or American Depositary Receipts, which are certificates typically issued by
a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company. Many debt securities of
non-U.S. issuers, and especially emerging market issuers, are rated below
investment grade or are unrated so that their selection depends on the
manager's internal analysis.
[Begin callout]
The fund invests primarily in a diversified portfolio of high yield lower
rated bonds, and stocks.
[End callout]
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the manager believes the markets or the economies of countries where the fund
invests are experiencing excessive volatility or a prolonged general decline,
or other adverse conditions exist. Under these circumstances, the fund may be
unable to pursue its investment goal.
PORTFOLIO SELECTION The manager searches for undervalued or out-of-favor
securities it believes offer opportunities for income today and growth
tomorrow. It performs independent analysis of the debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In its analysis, the manager considers a
variety of factors, including:
a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
the experience and managerial strength of the company;
responsiveness to changes in interest rates and business conditions;
debt maturity schedules and borrowing requirements; and
the company's changing financial condition and market recognition of
the change.
[Insert graphic of chart with line going up and down] MAIN RISKS
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities. A sub
category of interest rate risk is REINVESTMENT RISK, which is the risk that
interest rates will be lower when the funds seek to reinvest the proceeds
from a matured debt security, resulting in less income received by the fund.
[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with interest
rate changes and market conditions, the value of your investment in the fund
will go up and down. This means you could lose money.
[End callout]
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares. Securities rated below investment grade,
sometimes called "junk bonds," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially as those with higher credit ratings. These companies
are more likely to encounter financial difficulties and are more vulnerable
to changes in the economy, such as a recession or a sustained period of
rising interest rates, that could prevent them from making interest and
principal payments.
DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose the entire
investment.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to changes in the ratings assigned by
ratings organizations. Prices are often closely linked with the company's
stock prices and typically rise and fall in response to factors that affect
stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, stock market activity, large sustained sales by major investors,
a high-profile default, or other factors. High yield securities are also
generally less liquid than higher-quality bonds. Many of these securities do
not trade frequently, and when they do trade their prices may be
significantly higher or lower than expected. At times, it may be difficult to
sell these securities promptly at an acceptable price, which may limit the
fund's ability to sell securities in response to specific economic events or
to meet redemption requests.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
Utility company stocks pay relatively high dividends, so they are
particularly sensitive to interest rate movements: like bonds, when interest
rates rise, their stock prices tend to fall.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. Because its
value can be influenced by many different factors, a convertible security is
not as sensitive to interest rate changes as a similar non-convertible debt
security, and generally has less potential for gain or loss than the
underlying stock.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country. The political, economic, and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluations, the imposition of exchange controls,
foreign ownership limitations, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. Non-U.S. companies are not subject to
the same disclosure, accounting, auditing and financial reporting standards
and practices as U.S. companies and their stocks may not be as liquid as
stocks of similar U.S. companies. Non-U.S. stock exchanges, trading systems,
brokers and companies generally have less government supervision and
regulation than in the U.S
Emerging market countries have additional risks due to a lack of established
legal, business, and social frameworks to support securities markets, and a
greater likelihood of currency devaluations. While short-term volatility in
these markets can be disconcerting, declines in excess of 50% are not unusual.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks, and bond ratings, can be found in the SAI.
[INSERT GRAPHIC OF A BULL AND A BEAR] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
INCOME SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
-7.42% 38.73% 14.17% 18.59% -6.27% 22.40% 11.28% 17.09% 1.64%
90 91 92 93 94 95 96 97 98
- -7.42% 38.73% 14.17% 18.59% -6.27% 22.40% 11.28% 17.09%
1.64%
90 91 92 93 94
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 PAST 5 YEARS SINCE INCEPTION
YEAR (01/24/89 )
Income Securities Fund - Class 1.64% 8.73% 11.23%
21
Lehman Brothers 9.47% 7.30% 9.29%
Government/Corporate Index2
S&P 500 Index2 28.58% 24.06% 18.70%
1. All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal: The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. Lehman
Brothers Government/Corporate Bond Index is an unmanaged index of fixed-rate
U.S. government and foreign and domestic corporate bonds that are rated
investment grade or higher and have maturities of one year or more and at
least $50 million outstanding. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CHARLES B. JOHNSON Mr. Johnson has been a manager of the
CHAIRMAN OF THE BOARD, ADVISERS fund since its inception in 1989 and
has been with the Franklin Templeton
Group since 1957.
MATTHEW F. AVERY Mr. Avery has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1989. He
joined the Franklin Templeton Group in
1987.
FREDERICK G. FROMM Mr. Fromm has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1998. He joined the
Franklin Templeton Group in 1992.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
MUTUAL SHARES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in U.S. equity and debt securities of
companies that the manager believes are available at market prices less than
their actual value based on certain recognized or objective criteria
(intrinsic value). Following this value-oriented strategy, the fund will
primarily invest in:
UNDERVALUED STOCKS Stocks trading at a discount to asset value
REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers, and
may participate in such transactions (Reorganizing Companies),
DISTRESSED SECURITIES Securities that are distressed or even in
bankruptcy, including the debt, or participation interests in the
indebtedness, of Reorganizing Companies.
[Begin callout]
The fund invests primarily in common stocks of companies the manager believes
are significantly undervalued.
[End callout]
While there are no set percentage targets for equities or debt, stocks tend
to be the predominant investment. The fund generally invests in large-to
medium- cap companies with market capitalization value (share price times the
number of common stock shares outstanding) greater than $1.5 billion but may
invest a small portion in smaller companies which have more risk. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and
preferred stocks, and securities convertible into common stock. While the
fund purchases securities for investment purposes, the manager may use the
fund's ownership in a company, or may buy other companies, to seek to
influence or control management when the manager believes the fund may
benefit.
The fund may invest in debt securities of any rating category by an
independent rating agency, including lower rated debt or defaulted securities
("junk bonds"), or in comparable unrated debt securities. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Bonds, including those convertible
into common stock or unsecured, notes, and short-term investments, including
cash or cash equivalents, are common debt securities.
The fund may also invest up to 20% of its total assets in foreign securities,
including American, European and Global Depositary Receipts. Depositary
receipts are certificates typically issued by a bank or trust company that
give their holders the right to receive securities issued by a foreign or
domestic company. The fund generally seeks to hedge (protect) against currency
risks, largely using forward foreign currency exchange contracts
(Hedging Instruments).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value strategy. In
choosing investments, the manager focuses on the market price of a company's
securities relative to its evaluation of the company's asset value, book
value, cash flow potential, long-term earnings, and multiples of earnings of
comparable securities. Similarly, debt securities are generally selected
based on the manager's own analysis of the security's intrinsic value rather
than the coupon rate or rating. The manager believes careful research can
uncover opportunities overlooked by other investors, and that undervalued or
"special situation" securities may tend to be affected less by general market
movements than the specifics surrounding each investment. Thus, each
security is examined separately and there are no set criteria as to asset
size, earnings or industry type.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk. There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests in a Reorganizing Company will be completed on the terms
contemplated.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
INDEBTEDNESS AND PARTICIPATIONS The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the issuer and
the possibility that the investment may be lost. There are no established
markets for indebtedness, making them less liquid than other securities, and
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness.
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities, and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, including devaluation of currency
by a country's government, will increase or decrease the fund's returns from
its foreign portfolio holdings. Currency markets generally are not as
regulated as securities markets.
COUNTRY General securities market movements in any country where the fund has
investments are likely to affect the value of the securities the fund owns
that trade in that country. The political, economic, and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluations by a country's government or banking
authority, the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S.
HEDGING INSTRUMENTS Considered derivative investments, the success of
Hedging Instruments will depend on the manager's ability to predict market
movements, and losses from their use can be greater than if they had not been
used. Hedging Instruments risks include a loss to the fund due to the
imposition of controls by a government on the exchange of foreign currencies,
delivery failure, default by the other party, or inability to close out its
position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities which are securities with a limited trading market.
There is a possible risk that the securities cannot be readily sold or can
only be resold at a price significantly lower than their value.
More detailed information about the fund, its policies, including temporary
investments, and risks can be found in the Statement of Additional
Information. SEE ALSO, "Important Recent Developments," for Year 2000 and
euro discussion and any potential impact on the fund's portfolio and
operations.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR
SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND
IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE
LOWER.
MUTUAL SHARES SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION (11/08/96)
Mutual Discovery []% []%
Securities Fund - Class 2(1)
S&P 500(R) Index(2) []% []%
Lipper Income Average []% []%
Index(2)
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard and Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Lipper Growth & Income Funds Objective Average Index consists of 30 funds
that combine earnings growth with an income requirement. Indices include
reinvested dividends and/or interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER LANGERMAN Mr. Langerman has been a manager of the
PRESIDENT fund since its inception in 1996. Before
CHIEF EXECUTIVE OFFICER joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
ROBERT L. FRIEDMAN Mr. Friedman has been a manager of the
CHIEF INVESTMENT OFFICER fund since its inception in 1996. Before
SENIOR VICE PRESIDENT joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
LAWRENCE N. SONDIKE Mr. Sondike has been a manager of the
SENIOR VICE PRESIDENT fund since its inception in 1996. Before
FRANKLIN MUTUAL joining the Franklin Templeton Group in
1996, he was a research analyst for
Heine Securities Corporation, the
predecessor of Franklin Mutual.
DAVID E. MARCUS Mr. Marcus has been a manager of the
SENIOR VICE PRESIDENT fund since 1998. Before joining the
FRANKLIN MUTUAL Franklin Templeton Group in 1996, he was
a research analyst for Heine Securities
Corporation, the predecessor of Franklin
Mutual.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
REAL ESTATE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is to earn current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in securities of companies operating in the
real estate industry, primarily equity real estate investment trusts (REITs).
Real estate companies include:
companies qualifying under federal tax law as REITs,
real estate operating companies, real estate services, homebuilders and
developers that have at least half of their assets or revenues from the
ownership, construction, management or other services, or sale of
residential, commercial or industrial real estate.
[Begin callout]
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
[End callout]
REITs are real estate investment trust companies, usually publicly traded,
that manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and shareholders receive income from the
rents received, and receive capital gains on the buildings sold at a profit.
Other types, for example, mortgage REITs specialize in lending money to
developers and pass interest income on to shareholders. Still others are
hybrid REITs, having a mix of equity and debt investments. The fund may
invest a significant portion of its assets in smaller capitalization REITs.
In addition to its principal investments, the fund may invest in equity or
debt securities of issuers engaged in businesses whose products and services
are closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but who have very
significant real estate holdings believed to be undervalued relative to the
company's securities. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Bonds, including
those convertible into common stock or unsecured, notes, and short-term
investments, including cash or cash equivalents, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy for this
fund. In choosing equity investments, the fund's manager will focus on the
market price of a company's security relative to its evaluation of the
company's long-term earnings, asset value, and cash flow potential. Using
both qualitative and quantitative analysis and on-site visits, the manager
evaluates security characteristics, the strength and quality of management,
and underlying properties. In addition, the manager may consider other
factors, such as the supply and demand outlook for various property types and
regional markets.
[Insert graphic of chart with line going up and down] MAIN RISKS
REAL ESTATE SECURITIES By concentrating in a single industry sector, the
fund carries much greater risk of adverse developments in that sector than a
fund that invests in a wide variety of industries. Real estate values rise
and fall in response to a variety of factors, including local, regional and
national economic conditions, the strength of specific industries renting
properties, and other factors affecting the supply and demand for properties.
When economic growth is slowing, demand for property decreases and prices may
decline. Rising interest rates, which drive up mortgage and financing costs,
can restrain construction and buying and selling activity and make other
investments more attractive. Property values could decrease because of
overbuilding, increases in property taxes and operating expenses, changes in
zoning laws, environmental regulations or hazards, uninsured casualty or
condemnation losses, or a general decline in neighborhood values.
REITS Equity REITs can be affected by any changes in the value of the
properties owned, while mortgage REITs can be affected by the quality of any
credit extended. A REIT's performance depends on the types and locations of
the properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to
pay rent or poor management. A REIT's performance also depends on the
company's ability to finance property purchases and renovations and manage
its cash flows. Because REITs are typically invested in a limited number of
projects or in a particular market segment, they are more susceptible to
adverse developments affecting a single project or market segment than more
broadly diversified investments. Loss of status as a qualified REIT or
changes in the treatment of REITs under the federal tax law, could adversely
affect the value of a particular REIT or the market for REITs as a whole and
the fund's performance.
[Begin callout]
Because the securities the fund holds fluctuate in price with real estate
market conditions, the value of your investment in the fund will go up and
down. This means you could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further.
SMALLER COMPANIES . Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, their growth prospects are less
certain, their securities are less liquid, and can be considered
speculative. These companies may suffer significant losses. Small cap REITs
can be subject to greater risks than mid or large cap issuers due to greater
regional concentration and less diversification in terms of the regions,
clients and types of properties available for investment.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten years or
since the fund's inception. The table shows how the fund's average annual
total returns compare to those of a broad-based securities index. Of course,
past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
REAL ESTATE SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS SINCE
INCEPTION
(01/24/89 )
- --------------------------------------------------------------------------
Real Estate Securities Fund - []% []% []%
Class 21
S&P Index2 []% []% []%
FT/S&P2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Wilshire Real Estate Securities Index is a market-cap weighted index of
publicly traded real estate securities. Indices include reinvested dividends
and/or. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
MATTHEW F. AVERY Mr. Avery has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISERS since its inception in 1989. He joined
the Franklin Templeton Group in 1987.
DOUGLAS BARTON, CFA Mr. Barton has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1998. He joined the Franklin
Templeton Group in 1988.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
RISING DIVIDENDS FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the securities of companies that have:
consistently increased dividends in at least 8 out of the last 10 years
and have not decreased dividends during that time;
increased dividends substantially (at least 100%) over the past ten years;
reinvested earnings, paying out less than 65% of current earnings in
dividends (except for utility companies);
strong balance sheets, with long-term debt representing no more than 30%
of total capitalization (except for utility companies); and
attractive prices, either in the lower half of the stock's price/earnings
ratio range for the past 10 years or less than the average current market
price/earnings ratio of the stocks comprising the Standard & Poor's(R) 500
Stock Index (this criterion applies only at the time of purchase).
[Begin callout]
The fund will invest primarily in the common stocks of financially sound
companies that have paid consistently rising dividends.
[End callout]
The fund typically invests the rest of its assets in equity securities of
companies that pay dividends but do not meet all of these criteria. Following
these policies, the fund typically invests predominantly in equity securities
issued by large-cap and mid-cap U.S. companies, which generally have market
capitalization values (share price times the number of common stock shares
outstanding) of $1.5 billion or more. It may also invest to a lesser extent
in small-cap companies which generally have lower market capitalizations.
Equities represent ownership interests in individual companies and give
shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined "growth but at a reasonable
price" strategy for this fund. Using both qualitative and quantitative
analysis, the manager evaluates companies for historical and potential growth
in revenues and earnings, in particular a strong dividend record, and also
considers anticipated price/earning ratios, return on shareholder's equity,
and quality of management, all factors the manager believes point to steady
growth over time potential. Moreover, since capital preservation is an
important consideration, the manager generally reviews a company's stability
and the strength of its balance sheet in selecting among eligible growth
companies.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALL AND MID-SIZE COMPANIES While smaller companies, and to a lesser extent
mid-size companies, may offer greater opportunities for capital growth than
larger, more established companies, they also have more risk. Historically,
small company securities, and to a lesser extent mid-size company securities,
have been more volatile in price and fluctuated independently from larger
company securities, especially over the shorter-term. Smaller or relatively
new companies can be particularly sensitive to changing economic conditions,
and their growth prospects are less certain. For example, smaller companies
may have limited financial resources for growth or development and limited
product lines or market share; they may lack depth of management; they may be
in new industries; or they may not find an established market for their
products or services, or their products or services may become quickly
obsolete. Small companies may suffer significant losses, their securities
can be less liquid, and investments in these companies may be speculative.
Technology and biotechnology industry stocks, in particular, can be subject
to abrupt or erratic price movements.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
RISING DIVIDENDS FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/27/92 )
- --------------------------------------------------------------------------
Rising Dividends Fund - Class 21 []% []% []%
Wilshire MidCap Growth Index2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The Wilshire MidCap Growth Index is
an unmanaged group of securities of companies selected based on growth
characteristics from among the middle capitalization universe of the Wilshire
5000. It includes reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, Inc. (Advisory Services), One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
DONALD TAYLOR Mr. Taylor has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISORY since 1996. Before joining the Franklin
SERVICES Templeton Group in 1996, he was a Portfolio
Manager for Fidelity Management & Research Co.
WILLIAM LIPPMAN Mr. Lippman has been a manager of the fund
PRESIDENT, ADVISORY SERVICES since its inception in 1996. He has more than
30 years' experience in the securities
industry and joined the Franklin Templeton
Group in 1988.
BRUCE BAUGHMAN Mr. Baughman has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISORY since its inception in 1996. He joined the
SERVICES Franklin Templeton Group in 1988.
GERARD P. SULLIVAN Mr. Sullivan has been a manager of the fund
SENIOR VICE PRESIDENT, ADVISORY since its inception in 1998. Before joining
SERVICES the Franklin Templeton Group 1998, he was a
portfolio manager for SunAmerica Asset
Management and for Texas Commerce Investment
Management & Co.
MARGARET MCGEE Ms. McGee has been a manager of the fund
VICE PRESIDENT, ADVISORY SERVICES since its inception in 1996. She joined the
Franklin Templeton Group in 1988.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON GLOBAL ASSET ALLOCATION FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is high total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
in equity and debt securities of any nation, including emerging markets, and
in money market instruments. The mix of investments will be adjusted to
capitalize on total return potential produced by changing economic conditions
throughout the world. While there are no minimum or maximum percentage
targets for each asset class, historically stocks have been the predominant
investment. Equities represent ownership interests in individual companies
and give shareholders a claim in the company's earnings and assets. They
include common and preferred stocks, securities convertible into common
stock, and American, European and Global Depositary Receipts. Depositary
Receipts are certificates issued by a bank or trust company that give their
holders the right to receive securities issued by a foreign or domestic
company. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Bonds,
including those convertible into common stock and unsecured, notes, and
short-term investments, are common debt securities.
[Begin callout]
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
[End callout]
The fund may invest in high yield, medium and lower quality debt securities
("junk bonds") as rated by independent rating agencies such as Standard &
Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or
comparable. As a Board set policy, however, the fund may invest no more than
25% of its total assets in securities rated BBB (the lowest category of
investment grade) or lower, including up to 10% in defaulted securities, or
if unrated, securities determined by the manager to be comparable. Many debt
securities of non-U.S. issuers, and especially emerging market issuers, are
rated below investment grade or are unrated so that their selection depends
on the manager's internal analysis.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes
in interest rates, and credit risks. The manager intends to manage the fund's
exposure to various geographic regions and their currencies based on its
assessment of changing market and political conditions; with respect to debt
securities, the manager may also from time to time make use of forward
currency exchange contracts for hedging purposes.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
[Begin callout]
Because the stocks and bonds the fund holds fluctuate in price with foreign
market conditions and currencies, the value of your investment in the fund
will go up and down. This means you could lose money over short or even
extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are
not as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher quality securities. Prices are especially sensitive to
developments affecting the company's business and to rating changes, and
typically rise and fall in response to factors that affect the company's
stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic
conditions, market activity, large sustained sales, a high-profile default,
or other factors. High yield securities are also generally less liquid than
higher-quality bonds, and infrequent trades can make accurate pricing more
difficult. At times, it may be difficult to sell these securities promptly
at an acceptable price, which may limit the fund's ability to sell these
securities.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks, and bond ratings, can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []%
96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 SINCE INCEPTION
YEARS (05/01/95 )
Templeton Global Asset []% []% []%
Allocation Fund - Class 21
MSCI World Index(R)2 []% []% []%
JP Morgan Global Government Bond []% []% []%
Index(R)2
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The unmanaged Morgan Stanley Capital International(R) World Index includes
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
unmanaged JP Morgan Global Gov. Bond Index tracks the performance of
government bond markets in 13 countries. It includes issues with remaining
maturities of greater than 13 months. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Global Advisors Limited (TGAL), Lyford Cay Nassau, N.P. Bahamas, is
the fund's investment manager.
Under an agreement with TGAL, Templeton Investment Counsel, Inc. (Investment
Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394, through its
Templeton Global Bond Managers division (Global Bond Managers), is the fund's
sub-advisor.
The team responsible for managing the equity portion of the fund is:
MANAGEMENT TEAM
DALE WINNER Mr. Winner has been a manager of the
PORTFOLIO MANAGER, TGAL fund since 1997. He joined the
Franklin Templeton Group in 1995.
Previously he was a trust officer at
J.P. Morgan for two years.
JEFFREY A. EVERETT, CFA Mr. Everett has been a manager of the
EXECUTIVE VICE PRESIDENT, TGAL fund since its inception in 1995. He
joined the Franklin Templeton Group in
1990.
S
EAN FARRINGTON, CFA Mr. Farrington has been a manager of
VICE PRESIDENT, TGAL the fund since its inception in 1995.
He joined the Franklin Templeton Group
in 1991.
A team from Global Bond Managers is responsible for managing the debt portion
of the fund's investments.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
VALUE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term total return.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies of various
sizes that the fund's manager believes are selling substantially below the
underlying value of their assets or their private market value (what a
sophisticated investor would pay for the entire company). Following this
strategy, the fund will invest in companies with, for example, low prices
relative to book value, cash flow, or earnings (of the market, industry group
or earnings growth); valuable intangibles not reflected in the stock price
such as franchises, trademarks, distribution channels or market share for
particular products or services; underused or understated assets or cash; or
strong balance sheets. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
They include common and preferred stocks, and securities convertible into
common stock.
[Begin callout]
The fund invests primarily in the common stocks of companies the manager
believes are significantly undervalued.
[End callout]
The fund may invest significantly in securities of small capitalization
companies, which have market capitalization values (share price times the
number of common stock shares outstanding) of less than $1.5 billion, at the
time of purchase. The fund may also invest up to 25% of its total assets in
foreign securities, including emerging markets, but has no current intention
of investing more than 15%.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where
the fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined value-oriented strategy for this
fund. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of the
company's long-term earnings, asset value and cash flow potential. The
manager seeks bargains among the "under researched and unloved" - out of
favor companies that offer, in the manager's opinion, excellent long-term
potential that might include former growth companies that have stumbled
recently, dropping sharply in price, but with significant potential ("fallen
angels") or companies that are a potential turnaround or takeover target.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can
be considered speculative. These companies may suffer significant losses,
and technology and biotechnology industry stocks, in particular, can be
subject to abrupt or erratic price movements.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
It may invest a greater portion of its assets in one issuer and have a
smaller number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
FOREIGN SECURITIES Securities of non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase
or decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their stocks may not
be as liquid. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear PERFORMANCE
Because the fund started May 1, 1998, performance for a full calendar year is
not yet available.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisory Services, LLP. (Advisory Services), One Parker Plaza,
Sixteenth Floor, Fort Lee, New Jersey 07024, is the fund's investment
manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
WILLIAM LIPPMAN Mr. Lippman has been a manager of the
PRESIDENT, ADVISORY SERVICES fund since its inception in 1998. He
has more than 30 years' experience in
the securities industry and joined the
Franklin Templeton Group in 1988.
BRUCE BAUGHMAN Mr. Baughman has been a manager of the
SENIOR VICE PRESIDENT, ADVISORY SERVICES fund since its inception in 1998. He
joined the Franklin Templeton Group in
1988.
GERARD P. SULLIVAN Mr. Sullivan has been a manager of the
SENIOR VICE PRESIDENT, ADVISORY fund since its inception in 1998.
Services Before joining the Franklin Templeton
Group 1998, he was a portfolio manager
for SunAmerica Asset Management and for
Texas Commerce Investment Management &
Co.
MARGARET MCGEE Ms. McGee has been a manager of the
VICE PRESIDENT, ADVISORY SERVICES fund since its inception in 1998. She
joined the Franklin Templeton Group in
1988.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
0.60% of the value of net assets up to an including $200 million;
0.50% of the value of net assets up to $1.3 billion; and
0.40% of value of net assets over $1.3 billion.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies believed
to be globally competitive, to offer favorable opportunities for capital
appreciation, and to be suitable for a buy-and-hold strategy. Following this
policy, the fund will typically invest predominantly in established, large
and mid capitalization companies. The fund may also invest, to a lesser
extent, in smaller companies, and in new and emerging industries where growth
is expected to be above average. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stocks.
[Begin callout]
The fund invests primarily in the common stocks of established companies.
[End callout]
From time to time the fund may have a significant portion of its assets
invested in cash or cash equivalents. The fund generally invests less than
15% of its assets in foreign securities, including depositary receipts and
emerging markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined long-term growth strategy.
Relying on a team of analysts to provide in-depth industry expertise, the
manager chooses companies that it believes are leaders in their industries,
and are positioned for rapid growth in revenues, earnings or assets. Using
both qualitative and quantitative analysis, the manager evaluates companies
for historical and potential growth in revenues and earnings, strength and
quality of management, and strategic positioning in its industry, all factors
the manager believes point to steady growth over time potential. The manager
diversifies the fund's assets across many industries, and from time to time
may invest substantially in certain sectors, including technology and
biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can be
considered speculative. The companies may suffer significant losses, and
technology and biotechnology industry stocks, in particular, can be subject
to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their stocks may not
be as liquid. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of bull and bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
CAPITAL GROWTH FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(05/01/96)
Capital Growth Fund -
[]% []%
Class 21
S&P 500 Index(R)2 []% []%
Russell 1000 Index(R)2 []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal: The S&P 500(R) Index is an unmanaged
group of widely held common stocks. The Russell 1000 Index measures the 1,000
largest companies in the Russell 3000 Index. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
CONRAD B. HERRMANN, CFA Mr. Herrmann has been a manager of the
SENIOR VICE PRESIDENT, ADVISERS fund since its inception in 1996. He
joined the Franklin Templeton Group in
1989.
KEVIN CARRINGTON, CFA Mr. Carrington has been a manager of
VICE PRESIDENT, ADVISERS the fund since its inception in 1996.
He joined the Franklin Templeton Group
in 1992
VIVIAN J. PALMIERI Mr. Palmieri has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1996. He
joined the Franklin Templeton Group in
1965.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
GLOBAL HEALTH CARE SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 70% of its total assets in equity securities of companies in the
health care industry. These are companies are principally engaged in
research, development, production or distribution of products and services in
industries such as pharmaceutical; biotechnology; health care facilities,
information systems and personal products; medical supplies, technology and
services; and managed care companies. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's
earnings and assets. They include common and preferred stocks, and securities
convertible into common stock.
[Begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
health care industry.
[End callout]
The fund may buy health care companies anywhere in the world, but generally
invests predominantly in U.S. companies. The fund may also invest a
substantial portion of its assets in smaller companies which have market
capitalization values (share price times the number of common stock shares
outstanding) of less than $1.5 billion.
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of U.S. or non U.S. issuers. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Bonds, including those
convertible into common stock or unsecured, notes, and short-term
investments, including cash or cash equivalents, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, combining both growth and value strategies. Relying on
a team of analysts to provide in-depth industry expertise, the manager
chooses companies that fill particular health care niches and that it
believes are positioned for rapid growth in revenues, earnings or assets,
and/or are selling at reasonable prices using a company's historical value
measures. Using both qualitative and quantitative analysis, the manager
looks for companies that will position the fund to benefit from potential
future technological advances and increasing worldwide demand in the health
care sector. In addition, the manager evaluates companies on factors such as
strength and quality of management, strategic positioning in its industry and
globally competitive advantages.
[Insert graphic of chart with line going up and down] MAIN RISKS
HEALTH CARE COMPANIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Government actions may affect
health care companies in many ways. For example, foreign, U.S. federal or
state governments could discontinue subsidies of certain research or other
activities of some companies. Stocks held by the fund may also be affected
by government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, or legislative reform of a health care
system. Health care companies are also subject to the risks of product
liability lawsuits and the risk that their products and services may rapidly
become obsolete.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from fact affecting individual companies or
industries, or the securities market as a whole. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. If other investors fail to recognize the
company's value and become buyers, or if they become sellers, or in markets
favoring faster-growing companies, value stocks may not increase in value as
anticipated by the manager or may decline further. Growth stock prices
reflect projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have securities have been
more volatile in price and fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
their growth prospects are less certain, their securities are less liquid,
and can be considered speculative. These companies may suffer significant
losses, and technology and biotechnology industry stocks, in particular, can
be subject to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase the potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
DIVERSIFICATION The fund is non-diversified under federal securities laws.
It may invest a greater portion of its assets in one issuer and have a
similar number of issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet tax
diversification requirements.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund started May 1, 1998, performance for a full calendar year is
not yet available.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Mariners Island Blvd., San Mateo,
CA 94404, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
KURT VON EMSTER, CFA Mr. Von Emster has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1998. He
joined the Franklin Templeton Group in
1989.
RUPERT H. JOHNSON, JR. Mr. Johnson has been a manager of the
PRESIDENT, ADVISERS fund since its inception in 1998. He
joined the Franklin Templeton Group in
1965.
EVAN MCCULLOCH, CFA Mr. McCulloch has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1998. He
joined the Franklin Templeton Group in
1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
0.60% of the value of net assets up to an including $200 million;
0.50% of the value of net assets up to $1.3 billion; and
0.40% of value of net assets over $1.3 billion.
MUTUAL DISCOVERY SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity and debt securities of companies
of any nation that the manager believes are available at market prices less
than their actual value based on certain recognized or objective criteria
(intrinsic value). Following this value-oriented strategy, the fund will
primarily invest in:
UNDERVALUED STOCKS Stocks trading at a discount to asset value,
REORGANIZING COMPANIES Securities of companies in the midst of change
such as mergers, consolidations, liquidations, reorganizations, financial
restructurings, or companies with takeover, tender or exchange offers, and
may participate in such transactions (Reorganizing Companies), and
DISTRESSED SECURITIES Securities that are distressed or even in
bankruptcy, including the debt, or participation interests in the
indebtedness, of Reorganizing Companies.
[Begin callout]
The fund invests primarily in common stocks of non U.S. and U.S. companies
the manager believes are significantly undervalued.
[End callout]
While there are no set percentage targets for equities or debt, stocks tend
to be the predominant investment. The fund invests significantly in smaller
companies with market capitalization value (share price times the number of
common stock shares outstanding) less than $1.5 billion. Equities represent
ownership interests in individual companies and give shareholders a claim in
the company's earnings and assets. They include common and preferred stocks,
and securities convertible into common stock. While the fund purchases
securities for investment purposes, the manager may use the fund's ownership
in a company, or may buy other companies, to seek to influence or control
management when the manager believes the fund may benefit.
The fund may invest 50% or more of its total assets in foreign equity
and debt securities, which may include sovereign debt and participation in
foreign government debt, and American, European and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or domestic company. The fund generally seeks to hedge (protect)
against currency risks, largely using forward foreign currency exchange
contracts (Hedging Instruments).
The fund may invest in debt securities of any rating category by an
independent rating agency, including lower rated debt or defaulted securities
("junk bonds"), or in comparable unrated debt securities. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Bonds, including those convertible
into common stock or unsecured, notes, and short-term investments, including
cash or cash equivalents, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of the countries in
which the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined and value strategy. In
choosing investments, the manager focuses on the market price of a company's
securities relative to its evaluation of the company's asset value, book
value, cash flow potential, long-term earnings, and multiples of earnings of
comparable securities. Similarly, debt securities are generally selected
based on the manager's own analysis of the security's intrinsic value rather
than the coupon rate or rating. The manager believes careful research can
uncover opportunities overlooked by other investors, and that undervalued or
"special situation" securities may tend to be affected less by general market
movements than the specifics surrounding each investment. Thus, each
security is examined separately and there are no set criteria as to asset
size, earnings or industry type.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further. The
fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors, including companies reporting
poor earnings, companies whose share prices have declined sharply,
turnarounds, cyclical companies, or companies emerging from bankruptcy, which
may have higher risk. There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests in a Reorganizing Company will be completed on the terms
contemplated.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance. The political, economic and social structures of
some countries the fund invests in may be less stable and more volatile than
those in the U.S. The risks of investing in these countries include the
possibility of currency devaluation by a country's government or banking
authority, the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks. In addition, political or economic conditions can cause
previously established securities markets to become limited trading markets,
or even illiquid, particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluation. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile
in price and fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, and their growth
prospects are less certain. For example, smaller companies may have limited
financial resources for growth or development and limited product lines or
market share; they may lack depth of management; they may be in new
industries; or they may not find an established market for their products or
services, or their products or services may become quickly obsolete. Small
companies may suffer significant losses, their securities can be less liquid,
and investments in these companies may be speculative. Technology and
biotechnology industry stocks, in particular, can be subject to abrupt or
erratic price movements.
INDEBTEDNESS AND PARTICIPATIONS The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the issuer and
the possibility that the investment may be lost. There are no established
markets for indebtedness, making them less liquid than other securities, and
purchasers of participations, such as the fund, must rely on the financial
institution issuing the participation to assert any rights against the
borrower with respect to the underlying indebtedness.
CREDIT RISK This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares. Junk bonds generally have more
risk than higher-rated securities, and can be considered speculative. Their
principal risks include:
SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are not
as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. If an issuer is not
paying or stops paying interest, payments may never resume and the securities
may become worthless.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more than
higher quality securities. Prices are especially sensitive to developments
affecting the company's business and to rating changes, and typically rise
and fall in response to factors that affect the company's stock prices. In
addition, the entire high yield securities market can experience sudden and
sharp price swings due to changes in economic conditions, market activity,
large sustained sales, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds, and
infrequent trades can make accurate pricing more difficult. At times, it may
be difficult to sell these securities promptly at an acceptable price, which
may limit the fund's ability to sell these securities.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
HEDGING INSTRUMENTS Considered derivative investments, the success of
Hedging Instruments will depend on the manager's ability to predict market
movements, and losses from their use can be greater than if they had not been
used. Hedging Instruments risks include a loss to the fund due to the
imposition of controls by a government on the exchange of foreign currencies,
delivery failure, default by the other party, or inability to close out its
position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities which are securities with a limited trading market.
Illiquid securities have the risk that the securities cannot be readily sold
or can only be resold at a price significantly lower than their value.
SEE ALSO, "Important Recent Developments," for Year 2000 and euro discussion
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments, and risks can be found in the Statement of Additional
Information.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
MUTUAL DISCOVERY SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS
[Insert bar graph]
[]% []%
97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION (11/08/96)
Mutual Discovery []% []%
Securities Fund - Class 2(1)
S&P 500(R) Index(2) []% []%
Lipper Income Average []% []%
Index(2)
1. All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The S&P 500(R) Index is an unmanaged group of widely held common stocks
covering a variety of industries. The Lipper Income Average Index consists
of 21 equity funds that seek a high level of current income through investing
in income-producing stocks, bonds, and money market instruments. Indices
include reinvested dividends and/or interest. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey, 07078, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
PETER LANGERMAN Mr. Langerman has been a manager of the fund since its
PRESIDENT inception in 1996. Before joining the Franklin
CHIEF EXECUTIVE OFFICER Templeton Group in 1996, he was a research analyst for
FRANKLIN MUTUAL Heine Securities Corporation, the predecessor of
Franklin Mutual.
ROBERT L. FRIEDMAN Mr. Friedman has been a manager of the fund since its
CHIEF INVESTMENT OFFICER inception in 1996. Before joining the Franklin
SENIOR VICE PRESIDENT Templeton Group in 1996, he was a research analyst for
FRANKLIN MUTUAL Heine Securities Corporation, the predecessor of
Franklin Mutual
DAVID E. MARCUS Mr. Marcus has been a manager of the fund since 1998.
SENIOR VICE PRESIDENT Before joining the Franklin Templeton Group in 1996, he
FRANKLIN MUTUAL was a research analyst for Heine Securities
Corporation, the predecessor of Franklin Mutual.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
NATURAL RESOURCES SECURITIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal goal is capital appreciation. Its secondary goal
is to provide current income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities of companies
principally engaged in the natural resources sector. These are companies that
own, produce, refine, process or market natural resources. They may also
provide support services for natural resources companies, for example,
develop technologies or provide services, supplies or equipment related to
natural resources. The natural resources sector includes industries such as
integrated oil; oil and gas exploration and production; gold and precious
metals; steel, iron ore, and aluminum production; forest, farming, and paper
products; chemicals; building materials; energy services and technology; and
environmental services. The manager expects to invest substantially in the
energy industries, because of its larger weighting in the natural resources
sector itself.
The fund may invest a significant portion of its assets in mid-capitalization
companies, and small cap companies of less than $1.5 billion market
capitalization value (share price times the number of common stock shares
outstanding). The fund will not invest in companies with less than three
years of continuous operations. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stock. The fund also invests in American, European,
and Global Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company.
[Begin callout]
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
natural resources sector.
[End callout]
The fund may buy natural resource companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than any other single country. In addition, the fund will be
exposed to emerging markets through developed market companies, which often
own or depend on natural resource assets in countries with emerging markets.
In addition to its principal investments, and depending upon market
conditions, the fund may invest significantly in equity or debt securities of
U.S. or non-U.S. issuers outside the natural resources sector. A debt
security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Bonds, including those
convertible into common stock or unsecured, notes, and short-term
investments, including cash or cash equivalents, are common debt securities.
The fund may also invest up to 10% of its assets in real estate investment
trusts and up to 5% in commodities (including gold bullion or gold coins) or
futures on commodities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goals.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined, "growth at a reasonable price"
strategy. Relying on a team of analysts to provide in-depth industry
expertise, the manager looks for companies it believes are positioned for
rapid growth in revenues, earnings or assets, and are selling at reasonable
prices. Using both qualitative and quantitative analysis, the manager chooses
companies it believes are highly profitable with skilled management, and that
have strong growth profiles and solid financials, as well as companies with
sustainable competitive advantages either through strategic asset bases or
technological expertise. These are all factors the manager believes point to
strong long-term growth potential.
[Insert graphic of chart with line going up and down] MAIN RISKS
NATURAL RESOURCES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. The securities of companies in
the natural resources sector may experience more price volatility than
securities of companies in other industries. For example, commodity prices
and the supply or demand for commodities change dramatically for reasons
beyond a company's control. In addition, supply and demand factors may
dictate the prices at which a company acquires raw materials or sells its
products or services. These factors can affect the profitability of companies
in the natural resources sector and, as a result, the value of their
securities.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with global market
conditions, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the investment is worth fewer dollars. Currency
markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, their growth
prospects are less certain, their securities are less liquid, and they can be
considered speculative.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
NATURAL RESOURCES SECURITIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
90 91 92 93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/24/89)
Natural Resources Securities []% []% []%
Fund - Class 21
S&P Index2 []% []% []%
FT/S&P2 []% []% []%
1. All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. The
Financial Times/S&P Actuaries World (Energy 50%/Basic Industries 50%)
Composite Index is a composite of companies of which 50% are in the energy
sector and 50% are in the basic industries sectors. Indices include
reinvested dividends and/or interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SUZANNE WILLOUGHBY KILLEA, CFA Ms. Killea has been a manager of the
VICE PRESIDENT, ADVISERS fund since 1994.
She joined the Franklin Templeton Group
in 1991.
ED PERKS, CFA Mr. Perks has been a manager of the fund
VICE PRESIDENT, ADVISERS since 1997. He joined the Franklin
Templeton Group in 1992.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
SMALL CAP FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the equity securities of small capitalization (small cap) growth
companies. Small cap companies are generally those with market cap values
(share price times the number of common stock shares outstanding) of less
than $1.5 billion, at the time of purchase. Equities represent ownership
interests in individual companies and give shareholders a claim in the
company's earnings and assets. They include common and preferred stocks, and
securities convertible into common stock.
[Begin callout]
The fund invests primarily in common stocks of small cap companies.
[End callout]
shapeType20fFlipH0fFlipV0shapePath4fFillOK0fFilled0fArrowheadsOK1Although the
fund's policies permit greater investment, currently, it will not invest more
than 10% of its total assets in foreign securities. The fund may also invest,
to a limited extent, in real estate investment trusts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economy are experiencing
excessive volatility or a prolonged general decline, or other adverse
conditions exist. Under these circumstances, the fund may be unable to pursue
its investment goal.
PORTFOLIO SELECTION The manager is a research driven, "bottom-up"
fundamental investor, pursuing a disciplined "growth at a reasonable price"
strategy. Relying on a team of analysts to provide in-depth industry
expertise, the manager chooses small cap companies that it believes are
positioned for rapid growth in revenues, earnings or assets, and are selling
at reasonable prices. Using both qualitative and quantitative analysis, the
manager evaluates companies for distinct and sustainable competitive
advantages, such as a particular marketing or product niche, proven
technology, and industry leadership - all factors the manager believes point
to strong long-term growth potential. The manager diversifies the fund's
assets across many industries, and from time to time may invest substantially
in certain sectors, including technology and biotechnology.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more over the shorter term. These
price movements may result from factors affecting individual companies or
industries, or the securities market as a whole. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, and their growth
prospects are less certain. For example, smaller companies may have limited
financial resources for growth or development and limited product lines or
market share; they may lack depth of management; they may be in new
industries; or they may not find an established market for their products or
services, or their products or services may become quickly obsolete. Small
companies may suffer significant losses, their securities can be less liquid,
and investments in these companies may be speculative. Technology and
biotechnology industry stocks, in particular, can be subject to erratic or
abrupt price movements.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
FOREIGN SECURITIES Securities of non-U.S. issuers, including Depositary
Receipts, involve special risks. Changes in foreign currency exchange rates,
including devaluation of currency by a country's government, will increase or
decrease the fund's returns from its foreign portfolio holdings. General
foreign securities market movements are likely to affect the value of the
securities the fund owns that trade in that country. Non-U.S. companies are
not subject to the same disclosure, accounting, auditing and financial
reporting standards and practices as U.S. companies and their stocks may not
be as liquid or may become illiquid. Non-U.S. stock exchanges, trading
systems, brokers, and companies generally have less government supervision
and regulation than in the U.S.
SEE ALSO, "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
SMALL CAP FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []%
96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 YEARS SINCE INCEPTION
(11/01/95)
Small Cap Fund - Class 21 []% []% []%
S&P 500 Index(R)2 []% []% []%
Russell 2500 Index(R)2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. Source: Standard & Poor's(R) Micropal: The S&P 500(R) Index is an unmanaged
group of widely held common stocks, whereas the Russell 2500 is an index of
2,500 companies with small market capitalizations, both covering a variety of
industries. Indices include reinvested dividends and/or. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
EDWARD JAMIESON Mr. Jamieson has been a manager of the
EXECUTIVE VICE PRESIDENT, ADVISERS fund since its inception in 1995. He
joined the Franklin Templeton Group in
1987.
MICHAEL MCCARTHY Mr. McCarthy has been a manager of the
VICE PRESIDENT, ADVISERS fund since its inception in 1995. He
joined the Franklin Templeton Group in
1992.
AIDAN O'CONNELL Mr. O'Connell has been a manager of
PORTFOLIO MANAGER, ADVISERS the fund since September 1998. Before
joining Franklin Templeton in May
1998, Mr. O'Connell was a research
analyst and a corporate financial
analyst at Hambrecht & Quist.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON DEVELOPING MARKETS EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries. Developing or emerging market countries include
those considered to be emerging by the World Bank, the International Finance
Corporation, the United Nations, or the countries' authorities. These
countries are typically located in the Asia-Pacific region, Eastern Europe,
Central and South America, and Africa. Equities represent ownership interests
in individual companies and give shareholders a claim in the company's
earnings and assets. They include common and preferred stock, and securities
convertible into common stock. The fund also invests in American, European
and Global Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in the common stocks of companies located in
emerging market countries
[End callout]
In addition to its principal investments, the fund may invest significantly
in securities of issuers in developed market countries, and particularly
those that are linked by tradition, economic markets, geography or political
events to emerging market countries. Depending upon current market
conditions, the fund may also invest a substantial portion of its assets in
debt securities of companies and governments located anywhere in the world. A
debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Bonds, including
those convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities. The fund may also invest up to 10%
of its total assets in securities of closed-end investment companies, to
facilitate foreign investment.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual companies and
securities, the fund may from time to time have significant investments in
particular countries. The manager intends to manage the fund's exposure to
various geographic regions and their currencies based on its assessment of
changing market and political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well diversified portfolio.
[Begin callout]
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO, "Important Recent Developments," for year 2000 and euro
discussion, and any potential impact on the fund's portfolio and operations.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
1 YEAR 5 YEARS SINCE
INCEPTION
(03/15/94)
Templeton Developing Markets []% []% []%
Equity Fund - Class 21
MSCI World Index(R)2 []% []% []%
MSCI EMF Index2 []% []% []%
IFC Investable Composite Index2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The unmanaged Morgan Stanley Capital International(R) World Index includes
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
unmanaged Morgan Stanley Capital International(R) Emerging Markets Free Index
comprises 26 of the 48 countries in the MSCI universe. The International
Finance Corporation's Investable Composite Index is an emerging markets index
that includes 650 stocks from 18 countries including Mexico, South Korea,
Brazil, Jordan and Turkey. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Asset Management Ltd. (TAML), 7 Temasek Boulevard, #38-03, Suntec
Towner One, Singaporte, 038987, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
J. MARK MOBIUS, PH.D. Dr. Mobius has been a manager of the
MANAGING DIRECTOR, TAML fund since its inception in 1994. He
joined the Franklin Templeton Group in
1987.
H. ALLAN LAM Mr. Lam has been a manager of the fund
VICE PRESIDENT, TAML since its inception in 1994. He joined
the Franklin Templeton Group in 1987.
TOM WU Mr. Wu has been a manager of the fund
DIRECTOR, TAML since its inception in 1994. He joined
the Franklin Templeton Group in 1987.
DENNIS LIM Mr. Lim has been a manager of the fund
VICE PRESIDENT, TAML since 1996. He joined the Franklin
Templeton Group in 1990.
EDDIE CHOW Mr. Chow has been a manager of the fund
INVESTMENT ANALYST, TAML since 1996. He joined the Franklin
Templeton Group in 1994.
TEK-KHOAN ONG Mr. Ong has been a manager if the fund
PORTFOLIO MANAGER, TAML since 1996. He joined the Franklin
Templeton Group in 1993.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON GLOBAL GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of companies located
anywhere in the world, including in the U.S. and emerging markets. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund also invests
in American, European, and Global Depositary Receipts, which are certificates
typically issued by a bank or trust company that give their holders the right
to receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of U.S. and non-U.S.
common stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, to repay a loan of money at a future date and generally to pay
interest. Bonds, including those convertible into common stocks and
unsecured, notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and fall during an economic
slowdown or recession, but rate changes can be sudden and unpredictable.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON GLOBAL GROWTH FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []%
95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 3 YEARS SINCE INCEPTION
(03/15/94)
Templeton Global Growth []% []% []%
Fund - Class 21
MSCI World Index(R)2 []% []% []%
MSCI AC World Free Index(R)2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The unmanaged Morgan Stanley Capital International(R) World Index includes
approximately 1450 companies representing the stock markets of 20 countries
in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. The
average company has a market capitalization of about $3.5 billion. The
unmanaged Morgan Stanley Capital International(R) All Countries World Free
Index represents both developed and emerging markets around the world.
Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Global Advisors Limited (TGAL), Lyford Cay Nassau, N.P. Bahamas, is
the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SEAN FARRINGTON, CFA Mr. Farrington has been a manager of
VICE PRESIDENT, TGAL the fund since 1995. He joined the
Franklin Templeton Group in 1990.
JEFFREY A. EVERETT, CFA Mr. Everett has been a manager of the
EXECUTIVE VICE PRESIDENT, TGAL fund since its inception in 1994. He
joined the Franklin Templeton Group
since 1990
MARK G. HOLOWESKO, CFA Mr. Holowesko has been a manager of
PRESIDENT, TGAL the fund since its inception in 1994.
He joined the Franklin Templeton Group
in 1985.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON INTERNATIONAL EQUITY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities that trade in non-U.S.
markets, including emerging markets, and that are issued by companies that
have their principal activities outside the U.S. Equities represent ownership
interests in individual companies and give shareholders a claim in the
company's earnings and assets. They include common and preferred stocks, and
securities convertible into common stock. The fund also invests in American,
European, and Global Depositary Receipts, which are certificates typically
issued by a bank or trust company that give their holders the right to
receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in a diversified portfolio of non-U.S. common
stocks.
[End callout]
Depending upon current market conditions, the fund may invest a significant
portion of its assets in debt securities of companies and governments located
anywhere in the world. A debt security obligates the issuer to the
bondholders, both to repay a loan of money at a future date and generally to
pay interest. Bonds, including those convertible into common stock and
unsecured, notes, and short-term investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, shapeType20fFlipH0fFlipV0fShadow0and the fund's share
price. Generally, when the U.S. dollar rises in value against a foreign
currency, an investment in that country loses value because that currency is
worth fewer U.S. dollars. Currency markets generally are not as regulated as
securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and fall during an economic
slowdown or recession, but rate changes can be sudden and unpredictable.
Securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []% []% []%
93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 PAST 5 YEARS SINCE INCEPTION
YEAR (01/27/92)
Templeton International Equity []% []% []%
Fund - Class 21
MSCI All Country World Ex-U.S. []% []% []%
Free Index2
CPI2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The unmanaged Morgan Stanley Capital International(R) All Countries World
Ex-U.S. Free Index comprises 48 countries around the world, except the U.S.
The Consumer Price Index, a commonly used measure of inflation, measures the
average change in prices for a fixed basket of goods and services regularly
bought by consumers in the U.S. Indices include reinvested dividends and/or
interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice
and assistance.
The team responsible for the fund's management is:
MANAGEMENT TEAM
HOWARD J. LEONARD Mr. Leonard has been a manager of the
EXECUTIVE VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1989.
MARK BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since 1994. He joined the
Franklin Templeton Group in 1994
WILLIAM T. HOWARD, JR. Mr. Howard has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1993. He joined the
Franklin Templeton Group in 1993.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the equity securities of smaller
companies located outside the U.S., including emerging markets. Smaller
companies generally are those with market capitalization values (share price
times the number of common stock shares outstanding) of less than $1.5
billion, at the time of purchase. Equities represent ownership interests in
individual companies and give shareholders a claim in the company's earnings
and assets. They include common and preferred stocks, and securities
convertible into common stock. The fund also invests in American, European,
and Global Depositary Receipts, which are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in an internationally diversified portfolio of
smaller companies' common stocks.
[End callout]
In addition to its principal investments, the fund may invest significantly
in equity securities of larger capitalized companies located outside the
U.S., equity securities of U.S. companies (though currently not more than 5%
of its assets), and depending upon current market conditions, in debt
securities of companies and governments located anywhere in the world. A
debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Bonds, including
those convertible into common stock and unsecured, notes, and short-term
investments, are common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more risk. Historically, small company securities have been more volatile in
price and have fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions, and their growth
prospects are less certain. For example, smaller companies may have limited
financial resources for growth or development and limited product lines or
market share; they may lack depth of management; they may be in new
industries; or they may not find an established market for their products or
services, or their products or services may become quickly obsolete. Small
companies may suffer significant losses, their securities can be less liquid,
and investment sin these companies can be speculative. Technology and
biotechnology industry stocks, in particular, can be subject to abrupt or
erratic price movements.
[Begin callout]
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or from the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
INTERNATIONAL SMALLER COMPANIES FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[ ]% [ ]%
96 97
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
PAST 1 YEAR SINCE INCEPTION
(05/01/96)
Templeton International Smaller []% []%
Companies Fund - Class 21
Salomon Global Ex-U.S. Less Than []% []%
$1 Billion Index2
Salomon World Ex-U.S. EMI2 []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The Salomon World Ex-U.S. Extended Market Index (EMI) tracks the
performance of every company with an investable market capitalization of over
$100 million in 22 countries, except the U.S. The Salomon Global Ex-U.S. Less
Than $1 Billion Index includes companies from developed and emerging markets,
excluding the U.S., with a market capitalization below U.S. $1 billion.
Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's
investments.
[Insert graphic of briefcase] MANAGEMENT
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394, is the fund's investment manager.
The team responsible for the fund's management is:
MANAGEMENT TEAM
SIMON RUDOLPH Mr. Rudolph has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1997.
Previouly, he was an executive
director with Morgan Stanley.
GARY CLEMONS Mr. Clemons has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since its inception in 1996. He
joined the Franklin Templeton Group in
1990.
MARK BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since its inception in 1996.
He joined the Franklin Templeton Group
in 1985.
PETER NORI, CFA Mr. Nori has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1990.
JUAN BENITO Mr. Benito has been a manager of the
VICE PRESIDENT, TICI fund since 1997. He joined the
Franklin Templeton Group in 1996.
Previously he was a management
consultant and case team leader with
Monitor Company, a leading global
strategy consulting firm.
The fund pays the manager a fee for managing its assets and making its
investment decisions. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
TEMPLETON PACIFIC GROWTH FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in equity securities that trade in Pacific
Rim markets, including emerging markets, and are issued by companies that
have their principal activities in the Pacific Rim. Pacific Rim countries
include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New
Zealand, Pakistan, Philippines, Singapore, South Korea and Thailand. Equities
represent ownership interests in individual companies and give shareholders a
claim in the company's earnings and assets. They include common and preferred
stocks, and securities convertible into common stock. The fund also invests
in American, European and Global Depositary Receipts, which are certificates
typically issued by a bank or trust company that give their holders the
right to receive securities issued by a foreign or domestic company.
[Begin callout]
The fund invests primarily in the common stocks of Pacific Rim companies.
[End callout]
In addition to the fund's principal investments, the fund may invest
significantly in securities of issuers domiciled outside the Pacific Rim,
including the U.S., and those that are linked by tradition, economic markets,
geography or political events to countries in the Pacific Rim. Depending upon
current market conditions, the fund may also invest in debt securities of
companies and governments located anywhere in the world. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Bonds, including those convertible
into common stock and unsecured, notes, and short-term investments, are
common debt securities.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the manager believes the markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal.
PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager
will focus on the market price of a company's securities relative to its
evaluation of the company's long-term earnings, asset value and cash flow
potential. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered. As a
"bottom-up" investor focusing primarily on individual securities, the fund
may from time to time have significant investments in particular countries.
The manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies or industries, or the securities market as a whole. Value stock
prices are considered "cheap" relative to the company's perceived value and
are often out of favor with other investors. If other investors fail to
recognize the company's value and become buyers, or if they become sellers,
or in markets favoring faster-growing companies, value stocks may not
increase in value as anticipated by the manager or may decline further.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S., including Depositary Receipts, involve risks that can increase the
potential for losses in the fund. Emerging markets in particular can
experience significant price volatility in any given year, and even daily.
The fund should be thought of as a long-term investment for the aggressive
portion of a well diversified portfolio.
[Begin callout]
Because the stocks the fund holds fluctuate in price with Pacific Rim market
conditions and currencies, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
[End callout]
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns, and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Currency markets generally are not as regulated as securities markets.
COUNTRY General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of currency
devaluations by a country's government or banking authority, the imposition
of exchange controls, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of
assets, punitive taxes, and certain custody and settlement risks. In
addition, political or economic conditions can cause previously established
securities markets to become limited trading markets, or even illiquid,
particularly in emerging market countries.
Emerging market countries are subject to all of the risks of foreign
investing generally, and have additional heightened risks due to a lack of
established legal, business, and social frameworks to support securities
markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. While short-term volatility in these
markets can be disconcerting, declines in excess of 50% are not unusual.
Because the fund invests a significant amount of its assets in issuers
located in a particular region of the world, and because the correlation
among the Singapore, Malaysia, Thailand and Hong Kong markets is very high,
the fund is subject to greater risks and may experience greater volatility
than a fund that is more broadly diversified geographically.
COMPANY Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Non-U.S. stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE When interest rates rise, debt securities with lower coupon
interest rates, can lose market value. Similarly, when interest rates fall,
higher coupon debt securities can gain value. Generally, interest rates rise
during times of inflation or a growing economy, and will fall during an
economic slowdown or recession, but rate changes can be sudden and
unpredictable. Securities with longer maturities usually are more sensitive
to interest rate changes than securities with shorter maturities.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect the security's value
and, thus, impact the value of fund shares.
SEE ALSO "Important Recent Developments," for Year 2000 and euro discussion,
and any potential impact on the fund's portfolio and operations. More
detailed information about the fund, its policies, including temporary
investments and risks can be found in the SAI.
[Insert graphic of a bull and a bear] PAST PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities index. Of
course, past performance cannot predict or guarantee future results.
PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES
CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN
INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER.
PACIFIC GROWTH FUND - CLASS 2
CALENDAR YEAR TOTAL RETURNS(1)
[Insert bar graph]
[]% []% []% []% []% []%
93 94 95 96 97 98
[Begin callout]
BEST QUARTER:
Q[ ] '[ ] [ ]%
WORST QUARTER:
Q[ ] '[ ] [ ]%
[End callout]
Average Annual Total Returns
For the periods ended December 31, 1998
PAST 1 YEAR PAST 5 YEARS SINCE
INCEPTION
(01/27/92)
Templeton Pacific Growth Fund - []% []% []%
Class 21
MSCI Pacific Index2 []% []% []%
1.All fund performance assumes reinvestment of dividends and capital gains.
Because Class 2 shares were first offered January 6th, 1999, performance
shown represents the historical results of Class 1 shares. Although invested
in the same portfolio of securities as Class1, Class 2 performance will
differ only because of Class 2's higher annual fees and expenses resulting
from its Rule 12b-1 Plan. Current annual plan expenses are 0.30%.
2. The unmanaged Morgan Stanley Capital International(R) Pacific Basin Index
includes over 400 companies and the five countries of Australia, Hong Kong,
Japan, New Zealand, and Singapore/Malaysia. This is a total return index in
U.S. dollars, with gross dividends reinvested. One cannot invest directly in
an index, nor is an index representative of the fund's investments.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc., (Advisers), 777 Marines Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice
and assistance.
The team responsible for the fund's management is:
MANAGEMENT TEAM
WILLIAM T. HOWARD Mr. Howard has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1993. He joined the
Franklin Templeton Group in 1993.
MARK BEVERIDGE Mr. Beveridge has been a manager of
SENIOR VICE PRESIDENT, TICI the fund since 1994. He joined the
Franklin Templeton Group in 1985.
GARY CLEMONS Mr. Clemons has been a manager of the
SENIOR VICE PRESIDENT, TICI fund since 1994. He joined the
Franklin Templeton Group in 1990.
The fund pays the manager a fee for managing its assets, making its
investment decisions, and providing certain administrative facilities and
services for the fund. For the fiscal year ended December 31, 1998, the fund
paid xx% of its average monthly net assets to the manager.
ADDITIONAL FUND INFORMATION
[Insert graphic of starburst] IMPORTANT RECENT DEVELOPMENTS
YEAR 2000 PROBLEM The funds' business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000
problem). In addition, the fact that the Year 2000 is a leap year may create
difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by their managers, their service providers and
other third parties they do business with are not Year 2000 ready. For
example, the funds' portfolio and operational areas could be impacted,
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions and others. The funds could experience difficulties in effecting
transactions if any of their foreign subcustodians, or if foreign
broker/dealers or foreign markets are not ready for Year 2000.
When evaluating current and potential portfolio positions, Year 2000 is one
of the factors that the funds' managers consider. The managers will rely upon
public filings and other statements made by companies regarding their Year
2000 readiness. Issuers in countries outside of the U.S., particularly in
emerging markets, may not be required to make the same level of disclosure
regarding Year 2000 readiness as is required in the U.S. The managers, of
course, cannot audit any company or their major suppliers to verify their
Year 2000 readiness. If a company in which any fund is invested is adversely
affected by Year 2000 problems, it is likely that the price of its security
will also be adversely affected. A decrease in the value of one or more of a
fund's portfolio holdings will have similar impact on the fund's performance.
The funds' managers and their affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the funds' ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the funds and their managers may have no control.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. If a fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and
accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the funds may hold in their
portfolios, and their impact on fund performance. To the extent a fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Except for the Money Fund,
each fund typically pays dividends from net investment income and net capital
gains, if any, following the close of the calendar year. Dividends or
distributions by the funds will reduce the per share NAV by the per share
amount paid.
The Money Fund declares a dividend each day the fund's NAV is calculated,
equal to all of its daily net income, payable 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.
Dividends paid by a fund will be automatically reinvested in additional
shares of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on
the provisions of the variable annuity or variable life insurance contract
through which they are invested in the funds. For more information, please
consult the accompanying contract prospectus.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS, ALL FUNDS
This table presents the funds' financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
[TO BE SUPPLIED IN A LATER AMENDMENT]
FUND ACCOUNT INFORMATION
[Insert graphic of a paper with lines and someone writing] BUYING SHARES
Shares of each fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts. The funds' Board monitors this to be sure
there are no material conflicts of interest between the two different types
of contract owners. If there were, the Board would take corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of each fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares
are processed at the NAV next calculated after we receive the request in
proper form. The funds do not issue share certificates.
[Insert graphic] SELLING SHARES
Each insurance company sells shares of the applicable fund to make benefit or
surrender payments or to execute transfers between investment options under
the terms of its contracts. Requests to sell shares are processed at the NAV
next calculated after we receive the request in proper form.
[Insert graphic of two arrows] EXCHANGING SHARES
Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options
available under a variable insurance contract, subject to the terms and any
specific limitations on the exchange (or "transfer") privilege described in
the contract prospectus.
Frequent exchanges can interfere with fund management or operations and drive
up fund costs. To protect shareholders, there are limits on the number and
amount of exchanges that may be made (please see Market timers on page xx).
[Insert graphic of paper and pen] FUND ACCOUNT POLICIES
CALCULATING SHARE PRICE The funds calculate their NAV per share each
business day at the close of trading on the New York Stock Exchange (normally
1:00 p.m. pacific time). Each class's NAV is calculated by dividing its net
assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value, except that the
Money Fund's assets are generally valued at their amortized cost. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of the
shares may change on days that the insurance company separate account cannot
buy or sell shares.
Requests to buy and sell shares are processed on any day the funds are open
for business at the NAV next calculated after we receive the request in
proper form.
STATEMENTS AND REPORTS Contract owners will receive confirmations and
account statements that show account transactions. Insurance company
shareholders will receive the fund's financial reports every six months. To
reduce fund expenses, if you need additional copies, please call
1-800/342-3863.
If there is a dealer or other investment representative of record on the
account, he or she will also receive confirmations, account statements and
other information about the contract owner's account directly from the
contract's administrator.
MARKET TIMERS The funds are not designed for market timers, large or
frequent transfers. The funds may restrict or refuse purchases or exchanges
by market timers. You will be considered a market timer if you have (i)
requested an exchange out of the fund within two weeks of an earlier exchange
request, or (ii) exchanged shares out of the fund more than twice in a
calendar quarter, or (iii) exchanged shares equal to at least $5 million, or
more than 1% of the fund's net assets, or (iv) otherwise seem to follow a
timing pattern. Accounts under common ownership or control are combined for
these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserves certain rights, including:
Each fund may refuse any order to buy shares.
At any time, the funds may establish or change investment minimums.
The funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
To permit investors to obtain the current price, insurance companies are
responsible for transmitting all orders to the fund promptly.
SHARE CLASSES. Each fund has two classes of shares, class 1 and class 2. Each
class is identical except that class 2 has a distribution plan or "Rule
12b-1" plan which is described in prospectuses offering class 2 shares.
DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 of each fund has a distribution
plan, sometimes known as a Rule 12b-1 plan, that allows Class 2 to pay
distribution and other fees to those who sell and distribute class 2 shares ,
or contracts funded by class 2 shares or for services provided to contract
owners. Because these fees are paid out of Class 2's assets on an on-going
basis, these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges. The maximum fee is up to 0.35%
per year, however, the Board of Trustees has set the current rate of 0.30% of
a fund's class 2 average daily net assets.
[Insert graphic of a question mark] QUESTIONS
More detailed information about the Trust and the funds' account policies can
be found in the funds' Statement of Additional Information (SAI). If you have
any questions about the funds, you can write to us at 777 Mariners Island
Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at
1-800/342-3863 or the Valuemark Service Center at 1-800/624-0197. For your
protection and to help ensure we provide you with quality service, all calls
may be monitored or recorded.
[Begin callout]
FOR MORE INFORMATION
[End callout]
The funds are only available as investment options in variable annuity or
variable life insurance contracts. Please consult the accompanying contract
prospectus or disclosure document for information about the terms of an
investment in a contract.
You can learn more about the funds in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Include a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and
the auditor's report (Annual Report only).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the funds, their investments, and policies.
It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment
representative or by calling us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/342-3863
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file 811-5583#
Lit. Code #
FRANKLIN(R) VALUEMARK(R) FUNDS
CLASS 1 AND CLASS 2
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/342-3863
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the trust's
prospectuses. The trust's prospectuses, dated May 1, 1999, which we may amend
from time to time, contains the basic information you should know before
investing in the funds. You should read this SAI together with the trust's
prospectuses.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended December 31, 1998 are
incorporated by reference (are legally a part of this SAI). [The financial
statements of the trust for the fiscal year ended December 31, 1998 will be
supplied in a later amendment.]
For a free copy of a current prospectus or annual report call 1-800/342-3863.
Contents Page
Goals and Strategies
Risks
Officers and Trustees
Management and
Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights
and Principal Holders
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT;
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ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
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ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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GOALS AND STRATEGIES
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FUND SEEKING STABILITY
OF PRINCIPAL AND INCOME
MONEY MARKET FUND
THE FUND'S INVESTMENT GOAL IS HIGH CURRENT INCOME, CONSISTENT WITH LIQUIDITY
AND CAPITAL PRESERVATION.
The fund seeks to achieve its investment goal by investing in high-quality,
short-term money market securities of domestic and foreign issuers, including:
U.S. government securities with fixed, floating or variable interest
rates;
repurchase agreements;
obligations, with fixed, floating or variable interest rates, issued or
guaranteed by U.S. banks with assets of at least one billion dollars,
including certificates of deposit, bank notes, loan participation
interests, commercial paper, unsecured promissory notes, time deposits,
and bankers' acceptances;
obligations of foreign branches of foreign banks, U.S. branches of
foreign banks ("Yankee Dollar Investments"), and foreign branches of U.S.
banks ("Eurodollar Investments"), all of which include certificates of
deposit, bank notes, loan participation interests, commercial paper,
unsecured promissory notes, time deposits, and bankers' acceptances, where
the parent bank has more than five billion dollars in total assets at the
time of purchase;
commercial paper;
other short-term securities, with fixed, floating or variable interest
rates, issued or guaranteed by U.S. corporations, or securities issued by
foreign entities;
taxable municipal securities, up to 10% of the fund's assets; and
unrated notes, paper, securities or other instruments that the manager
determines to be of comparable high quality.
Because the fund limits its investments to high-quality securities, it will
generally earn lower yields than a portfolio with lower quality securities
that are subject to greater risk. Accordingly, the yield to shareholders in
the fund will likely be lower.
BANK OBLIGATIONS The fund may invest in obligations of U.S. branches of
foreign banks, which are considered domestic banks. The fund will only make
these investments if the 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 25% of its assets in obligations of foreign branches of U.S.
or foreign banks. The fund may also invest in time deposits, which are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. The fund may invest up to 10% of
its assets in time deposits with maturities in excess of seven calendar days.
DIVERSIFICATION With respect to diversification, the fund may not invest
more than 5% of its total assets in securities of a single issuer, other than
U.S. government securities, although it may invest more than 5% of its total
assets in securities of a single issuer that are rated in the highest rating
category for a period of up to three business days after purchase. The fund
also must not invest more than (a) the greater of 1% of its total assets or
$1 million in securities issued by a single issuer that are rated in the
second highest rating category; and (b) 5% of its total assets in securities
rated in the second highest rating category.
OTHER INVESTMENT POLICIES The fund may also:
buy U.S. government securities on a when-issued or delayed delivery
basis,
lend portfolio securities, and
enter into repurchase agreements.
FUNDS SEEKING CURRENT INCOME
HIGH INCOME FUND
The investment goal of the fund is to earn a high level of current income.
Its secondary goal is capital appreciation consistent with its principal
goal.
DEBT SECURITIES The fund may buy debt securities regardless of their rating,
including lower rated debt securities, zero-coupon, deferred interest,
pay-in-kind securities or in unrated securities.
LOWER RATED SECURITIES The fund does not intend to invest more than 5% in
debt securities, including convertible bonds, in the lowest rating
categories, i.e., rated below Caa by Moody's or CCC by S&P; or, if unrated,
comparable securities in the view of the manager. The fund will not purchase
defaulted securities.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis
at the time of the rating. Credit quality in the high yield debt market,
however, can change suddenly and unexpectedly, and credit ratings may not
reflect the issuer's current financial condition. For these reasons, the
manager does not rely principally on the ratings assigned by rating agencies,
but performs its own independent investment analysis of securities being
considered for the fund's portfolio. In its analysis, the manager considers a
variety of factors, including:
the experience and managerial strength of the issuer;
responsiveness to changes in interest rates and business conditions;
debt maturity schedules and borrowing requirements;
the issuer's changing financial condition and the market's recognition
of the change; and
relative values based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, and earnings prospects.
FOREIGN SECURITIES The fund may invest up to 20% of its assets in foreign
securities, including emerging markets. However, the fund will limit its
investments in emerging markets to 10% of its assets.
OTHER INVESTMENT POLICIES The fund is also permitted to:
acquire loan participations;
purchase debt securities on a "when-issued" basis;
write covered call options;
lend its portfolio securities;
enter into repurchase agreements and forward currency exchange contracts,
participate in interest rate swaps, invest in restricted securities, and
invest in trade claims.
TEMPLETON GLOBAL INCOME SECURITIES FUND
The fund's investment goal is high current income, consistent with
preservation of capital. Capital appreciation is a secondary consideration.
The fund seeks to achieve its goal by investing at least 65% of its total
assets debt securities of governments and their political subdivisions and
agencies, supranational organizations, and companies located anywhere in the
world, including emerging markets. The fund selects investments to provide a
high current yield and currency stability, or a combination of yield, capital
appreciation, and currency appreciation consistent with the fund's goal. As a
global fund, the fund may invest in securities issued in any currency and may
hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the euro or the European Currency Unit (ECU). The manager
intends to manage the fund's exposure to various currencies, and may from
time to time use forward currency exchange contracts or options on currencies
for hedging purposes.
The fund may invest in debt 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.
Debt securities UNDER NORMAL MARKET CONDITIONS, THE FUND WILL HAVE AT LEAST
25% OF ITS ASSETS INVESTED IN DEBT SECURITIES ISSUED OR GUARANTEED BY FOREIGN
GOVERNMENTS. THE FUND CONSIDERS SECURITIES ISSUED BY CENTRAL BANKS THAT ARE
GUARANTEED BY THEIR NATIONAL GOVERNMENTS TO BE GOVERNMENT SECURITIES.
The fund may also invest in debt securities of supranational entities
denominated in any currency. 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 securities issued by entities
owned by either a national, state, or equivalent government or are securities
of a government jurisdiction that are not backed by its full faith and credit
and general taxing powers.
The fund may invest in long-term or short-term debt securities, such as
bonds, debentures, notes, convertible debt securities, and commercial paper.
These debt securities 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
securities and common stock are offered as a unit).
FOREIGN SECURITIES Under normal circumstances, at least 65% of the fund's
assets will be invested in issuers located in at least three countries, one
of which may be the U.S.
The fund normally invests its assets principally within Australia, Canada,
Japan, New Zealand, the U.S., and Western Europe, and in securities
denominated in the currencies of these countries or denominated in
multinational currency units such as the euro or ECU. The fund may also
invest a substantial portion of its assets in securities and currency in
emerging markets countries. Investments in foreign securities, especially
emerging 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 securities of
domestic entities.
MATURITY The fund may invest in debt securities with varying maturities.
Under current market conditions, it is expected that the dollar-weighted
average maturity of the fund's investments, i.e., the average life span of
all of the fund's investments, will not exceed 15 years. Generally, the
portfolio's average maturity will be shorter when the manager expects
interests rates worldwide or in a particular country to rise, and longer when
the manager expects interest rates to fall.
OTHER INVESTMENT POLICIES In order to hedge currency risk, the fund may, but
is not required to, use forward and futures contracts and interest rate
swaps. The fund may also:
acquire loan participations;
lend 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; and
enter into futures contracts for the purchase or sale of U.S. Treasury or
foreign securities or based upon financial indices.
U.S. GOVERNMENT SECURITIES FUND
The fund's investment goal is income.
THE FUND NORMALLY INVESTS IN A PORTFOLIO LIMITED TO U.S. GOVERNMENT
SECURITIES. THESE SECURITIES INCLUDE U.S. TREASURY BONDS, NOTES AND BILLS,
AND SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") OBLIGATIONS ("GINNIE MAES")
Ginnie Maes differ from other bonds in that principal may be paid back on an
unscheduled basis rather than returned in a lump sum at maturity. GNMA's
guarantee of payment of principal and interest on Ginnie Maes is backed by
the full faith and credit of the U.S. government. GNMA may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee.
Payments to holders of Ginnie Maes consist of the monthly distributions of
interest and principal less GNMA's and issuers' fees. The fund will reinvest
the return of principal in securities that may have different interest rates
than the Ginnie Mae.
Principal payments are passed through to the Ginnie Mae holders, such as the
fund, when mortgages in the pool underlying a Ginnie Mae are prepaid by
borrowers or as a result of foreclosure. Accordingly, a Ginnie Mae'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 Ginnie Mae.
OTHER MORTGAGE SECURITIES The fund may also invest in fixed-rate mortgage
backed securities, adjustable-rate mortgage-backed securities ("ARMS"), or a
hybrid of the two. 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"). Some government agency
obligations or guarantees 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.
The ARMS in which the fund invests are issued primarily by GNMA, the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC"), and are actively traded in the secondary market. ARMS
issued by GNMA are collateralized by underlying mortgages that are fully
guaranteed by the Federal Housing Administration or the Veterans
Administration. ARMS issued by the FNMA or the FHLMC are collateralized by
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 the current coupon of
adjustable rate mortgages in the fund exceeds 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 bonds.
See "Investment Strategies and Policies, Adjustable Rate Mortgage Securities"
for additional details.
OTHER INVESTMENT POLICIES The fund may invest in certain other types of
pass-through debt securities, issued or guaranteed by U.S. government
agencies or instrumentalities. The fund may also:
enter into covered mortgage "dollar rolls,"
lend portfolio securities, and
engage in repurchase agreements.
ZERO COUPON FUNDS:
MATURING IN DECEMBER OF 2000, 2005, 2010
Each fund's investment goal is to provide as high an investment return as is
consistent with the preservation of capital.
STRIPPED SECURITIES Under normal circumstances, each 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:
Zero coupon securities issued by the U.S. Treasury, including treasury
bills, debt securities issued by the U.S. Treasury which have been
stripped of their interest coupons or which were issued without interest
coupons, and interest coupons that have been stripped from debt securities
issued by the U.S. Treasury ("Stripped Treasury Securities"). The funds do
not anticipate that these securities will exceed 55% of a fund's assets.
Other zero coupon securities issued by the U.S. government and its
agencies and instrumentalities ("Stripped Government Securities").
Debt securities denominated in U.S. dollars that are issued by foreign
issuers, often subsidiaries of domestic corporations ("Stripped Eurodollar
Obligations").
To a lesser extent, zero coupon securities issued by domestic
corporations which consist of corporate debt securities without interest
coupons, and, if available, interest coupons that have been stripped from
corporate debt securities, and receipts and certificates for such stripped
debt securities and stripped coupons (collectively, "Stripped Corporate
Securities");
Stripped securities, like other debt securities, are subject to certain
risks, including credit and market risks. To the extent the funds invest in
stripped securities other than Stripped Treasury Securities, these
investments will be rated at least A by nationally recognized statistical
rating agencies, or unrated securities that the manager determines are of
comparable quality. Debt securities rated A are regarded as having an
adequate capacity to pay principal and interest but are vulnerable to adverse
economic conditions and have some speculative characteristics. The 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 funds must meet annuity tax diversification
rules, they may invest in other types of fixed-income securities.
Because each fund will be primarily invested in zero coupon securities,
investors who hold shares to maturity 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.
FOREIGN SECURITIES Although each fund reserves the right to invest up to 10%
of its assets in foreign securities, each fund typically limits these
investments to less than 10% of its assets and to dollar denominated
obligations.
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, which are comparable to zero coupon bonds in terms
of credit quality, interest rate volatility, and yield.
OTHER INVESTMENT POLICIES To provide income for expenses, redemption
payments, and cash dividends, each fund may invest up to 20% of its assets in
money market instruments. The manager intends to have less than 20% of the
funds' assets in these instruments under normal circumstances. The funds may
also lend portfolio securities and enter into repurchase agreements.
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 the 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 the 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
GLOBAL UTILITIES SECURITIES FUND
BEFORE MAY 1, 1998, THE FUND'S NAME WAS "UTILITY EQUITY FUND." The fund's
investment goals are capital appreciation and current income.
The public utilities industry includes companies which are, in the manager's
opinion, engaged in the ownership or operation or manufacture of facilities,
equipment or components used to generate, transmit or distribute electricity,
communications, satellite communications, cable and internet services,
wireless telecommunications, gas or water. The fund will normally invest in
common stocks that the manager expects to pay dividends.
The fund may invest in stocks and debt securities of companies of any nation,
developed or emerging. The fund will normally invest at least 65% of its
assets in issuers located in at least three different countries, which may
include the U.S. Under normal market conditions, the fund expects to invest a
higher percentage of its assets in U.S. securities than issuers located in
any other single country.
FOREIGN SECURITIES As a non-fundamental policy, the fund will limit its
investments in securities of Russian issuers to 5% of assets.
INDUSTRY CONCENTRATION Investing in a fund, like this fund, that concentrates
its investments in a limited group of related industries involves increased
risks.
OTHER INVESTMENT POLICIES The fund may invest up to 5% of its assets in debt
securities, including convertible bonds issued by public utility issuers.
These debt securities may be rated Ba or lower by Moody's or BB or lower by
S&P, or unrated securities that the manager determines to be of comparable
quality. 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. Subject to these limits, the fund may invest up to 5% of its assets
in enhanced convertible securities. The fund may also write covered call
options, lend its portfolio securities, and enter into repurchase
transactions.
GROWTH AND INCOME FUND
The fund's principal investment goal is capital appreciation. Its secondary
goal is to provide current income.
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, i.e., directly from the dealer.
Stocks and other equity securities representing ownership interests in
corporations have historically outperformed other asset classes over the long
term but tend to fluctuate more dramatically over the short term.
The fund will consider the payment of dividends on equities and interest on
debt securities in selecting portfolio securities in pursuing its secondary
goal of current income. The fund may also purchase other income producing
securities. These include convertible securities, including bonds or
preferred stocks, enhanced convertible securities, debt securities, and money
market instruments.
REITS The fund currently intends to invest no more than 15% of its assets in
equity real estate investment trusts ("REITs").
OTHER INVESTMENT POLICIES The fund currently does not intend to invest more
than 10% of its assets in convertible securities, which may carry special
risks as described below. In addition, the fund currently does not intend to
invest more than 5% of its assets in debt securities, including convertible
debt 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. 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;
lend its portfolio securities; and
enter into repurchase transactions.
INCOME SECURITIES FUND
The fund's investment goal is to maximize income while maintaining prospects
for 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 million as shown by its latest
published annual report. These investments may include zero coupon, deferred
interest or pay-in-kind bonds, or preferred stocks. The manager has the
discretion to choose the percentage of assets that can be invested in a
particular type of security. As market conditions change, the fund's
portfolio may be entirely invested in debt securities 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
assets.
DEFAULTED DEBT The fund may invest up to 5% of its assets in defaulted debt
securities. These securities are considered speculative.
OTHER INVESTMENT POLICIES The fund currently does not intend to invest more
than 5% of its assets in loan participations and other related direct or
indirect bank securities. The fund may invest up to 5% of its assets in
trade claims. Both loan participations and trade claims carry a high degree
of risk. In addition, the fund does not intend to invest more than 5% of its
assets in enhanced convertible securities. The fund may also:
lend its portfolio securities;
enter into repurchase transactions;
purchase debt securities on a "when-issued" or "delayed-delivery" basis; and
write covered call options on securities.
MUTUAL SHARES SECURITIES FUND
The fund's principal goal is capital appreciation. Its secondary goal is
income.
Under normal market conditions, the fund invests primarily in domestic equity
securities and debt securities of any quality. Debt securities may include
securities or debt issued by corporations or governments in any form. Debt
includes notes, bonds, or debentures, as well as distressed mortgage
obligations and other debt secured by real property. The manager does not
establish percentage limits for the fund's investment in equity securities,
debt securities or money market instruments.
The fund may invest in securities that are traded on U.S. or foreign
exchanges, the NASDAQ national market or in the over-the-counter market. It
may invest in any industry sector, although it will not concentrate in any
one industry. From time to time, the fund may hold significant cash
positions, consistent with its policy on temporary investments, until
suitable investment opportunities are available.
SMALL COMPANIES The fund may invest in securities from any size issuer,
including smaller capitalization companies. It will tend to invest, however,
in securities of issuers with market capitalizations in excess of $500
million.
REORGANIZING COMPANIES The fund also seeks to invest in securities of
companies involved in mergers, consolidations, liquidations and
reorganizations or as to which there exist tender or exchange offers. The
fund 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.
INDEBTEDNESS The fund may also invest in other forms of secured or unsecured
indebtedness or participations ("indebtedness"). These include without
limitation loan participations and trade claims of debtor companies involved
in reorganization or financial restructuring. Some of the indebtedness may
have very long maturities or is illiquid.
CONTROL The fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, the
manager may seek to influence or control management if it perceives that the
fund may benefit. The fund may also invest in other entities that purchase
securities for the purpose of influencing or controlling management. These
entities may invest in a potential takeover or leveraged buyout or invest in
other entities engaged in such practices.
LOWER RATED SECURITIES The fund may invest in debt securities in any rating
category including lower rated debt securities ("junk Bonds") or in unrated
debt securities. In general, the fund will invest in these instruments for
the same reasons as equity securities, i.e., the manager believes that the
securities are available at prices less than their intrinsic values.
Consequently, the manager's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The fund expects to invest in debt securities issued by
reorganizing or restructuring companies, or companies that recently emerged
from, or are facing the prospect of a financial restructuring. It is under
these circumstances, which usually involve unrated or low rated securities
that are often in, or are about to, default, that the manager seeks to
identify securities which are sometimes available at prices which it believes
are less than their intrinsic values. The fund may invest without limit in
defaulted debt securities, subject to the fund's restriction on investments
in illiquid securities. Defaulted debt securities may be considered
speculative. The purchase of debt of a troubled company always involves a
risk that the investment may be lost. However, the debt securities of
reorganizing or restructuring companies typically rank senior to the equity
securities of such companies.
FOREIGN SECURITIES Although the fund reserves the right to purchase
securities in any foreign country without percentage limitation, the fund's
current investment strategy is to invest primarily in domestic securities,
with approximately 15-20% of its assets in foreign securities, including
sponsored or unsponsored depositary receipts. Depositary receipts are
discussed more fully under "Foreign Securities, Depositary Receipts" below.
The fund presently does not intend to invest more than 5% of its assets in
securities of emerging markets, including Eastern European countries and
Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals.
CURRENCY HEDGING The fund may use the following currency hedging techniques:
investments in foreign currency futures contracts, options on foreign
currencies or currency futures, forward foreign currency exchange contracts
("forward contracts") and currency swaps.
CLOSED-END INVESTMENT COMPANIES While the fund may not purchase securities of
registered open-end investment companies or affiliated investment companies,
it may invest from time to time in other investment company securities. The
fund may not purchase more than 3% of the voting securities of another
investment company. In addition, the fund will not invest more than 5% of its
assets in the securities of any single investment company and will not invest
more than 10% of its assets in investment company securities. Investors
should recognize that they indirectly bear a proportionate share of the
expenses of these investment companies, including operating costs, and
investment advisory and administrative fees.
SHORT SALES The fund may also sell short securities it does not own up to 5%
of its assets. The fund may also sell securities "short against the box"
without limit.
OTHER INVESTMENT POLICIES The fund may also:
lend its portfolio securities;
enter into repurchase transactions;
purchase securities 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; and
purchase and sell financial futures contracts and related options.
REAL ESTATE SECURITIES FUND
The fund's principal goal is capital appreciation. Its secondary goal is
current income.
REAL ESTATE SECURITIES The fund primarily invests in equity real estate
investment trusts ("REITs"). 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, "real estate securities" will include
equity, debt securities, and convertible securities of companies having the
following characteristics and limitations:
Companies qualifying as a REIT for federal income tax purposes.
Companies that have at least 50% of their assets or revenues attributable
to the ownership, construction, management or other services, or sale of
residential, commercial or industrial real estate. These companies would
include real estate operating companies, real estate services and home
builders.
SMALL AND MID-CAP COMPANIES The fund will typically invest predominately in
securities issued by mid-cap or small-cap U.S. companies. Mid-cap companies
have market capitalizations of $5 billion or less and small-cap companies,
$1.5 billion or less. The sizes of these companies reflect the industry
itself. Small cap REITs can be subject to different and greater risks than
mid or larger cap issuers. Small cap REITs may have greater regional
concentration and less diversification in terms of the regions, clients and
types of properties available for investment.
INDUSTRY 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. Because the fund
concentrates its investments in the real estate industry, adverse
developments in that industry will have a greater impact on the fund, and
your investment, than a fund with broader diversification.
The manager believes, however, that diversifying 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.
Moreover, the real estate market historically has not correlated with the
broader equity market. While there can be no guarantee that historical trends
will continue in the future, investments in real estate securities may be a
useful way of diversifying one's overall portfolio.
In addition to fund's investments in real estate securities, it may also
invest a portion of its assets in debt or equity securities of issuers 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. These
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. Also, the fund may invest in companies
whose principal business is unrelated to the real estate industry but who
have at least 50% of their assets in real estate holdings and the manager
believes are undervalued relative to the price of those companies' securities.
LOWER RATED SECURITIES As an operating policy, the fund will not invest more
than 10% of its net assets in convertible debt securities or debt securities
rated Ba or lower by Moody's or, if unrated, the manager determines are of
comparable quality. Generally, however, the fund will not acquire any
investments rated lower than B by Moody's or, if unrated, the manager
determines are of comparable quality.
FOREIGN SECURITIES The fund may invest up to 10% in foreign securities,
including emerging markets.
OTHER INVESTMENT POLICIES The fund may also:
write covered call options;
lend its portfolio securities;
engage in repurchase transactions; and
invest in enhanced convertible securities.
RISING DIVIDENDS FUND
The fund's investment goal is long-term capital appreciation. The fund will
attempt to attain current income incidental to capital appreciation.
Preservation of capital, while not a goal, is also an important consideration.
The fund seeks to achieve its investment goal by investing, as a fundamental
policy, at least 65% of its net assets in financially sound companies that
have paid consistently rising dividends. The fund believes that the
securities of such companies, because of their dividend record, have a strong
potential to increase in value.
OTHER INVESTMENT POLICIES The fund may invest up to 10% of its net assets in
foreign securities, including emerging markets. The fund may also lend its
portfolio securities, enter into repurchase transactions, and write covered
call options.
TEMPLETON GLOBAL ASSET ALLOCATION FUND
The fund's investment goal is high total return. Under normal market
conditions, the fund will invest in equity and debt securities of any nation,
including emerging markets, and money market instruments.
The fund will adjust its investments among these three market segments in an
attempt to capitalize on total return potential with changing economic
conditions throughout the world. The fund may invest in each of the market
segments without limitation. Except as noted below under "Investment
Restrictions", the manager has complete discretion in determining the amount
of equity securities, debt securities, or money market instruments in which
the fund may invest.
The fund will normally invest its assets in at least three countries, except
during defensive periods.
EQUITY SECURITIES The fund may invest in various equity securities.
Consistent with its investment goal and policies, these equity securities may
include common and preferred stock, securities (bonds or preferred stock)
convertible into common stock ("convertible securities"), warrants, equity
real estate investment trusts ("REITs"), and securities representing
underlying foreign securities such as depositary receipts. The fund may
purchase sponsored or unsponsored depositary receipts, such as ADRs, EDRs,
and GDRs, which will be deemed investments in the underlying securities for
purposes of the fund's investment policies. Depositary receipts may not be
denominated in the same currency as the underlying securities.
DEBT SECURITIES The fund may invest in various debt securities. Consistent
with its investment goal and policies, these securities may include issues of
both domestic and foreign governments or companies, such as bonds,
debentures, notes, commercial paper, collateralized mortgage obligations
("CMOs") and securities issued or guaranteed by governments or government
agencies or instrumentalities. U.S. government securities include,
specifically, Government National Mortgage Association mortgage-backed
certificates ("Ginnie Mae"). The fund may invest in preferred stocks and
certain debt securities, rated or unrated, such as convertible bonds and
bonds selling at a discount. Debt securities 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.
LOWER RATED SECURITIES As an operating policy established by the Board, the
fund will not invest more than 25% of its assets in debt securities rated BBB
or lower by S&P or Baa or lower by Moody's or in unrated securities that the
manager determines to be comparable. This limit includes defaulted debt
securities. Many debt securities of non-U.S. issuers, and especially emerging
market issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis. The 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 securities 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 rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P or, unrated commercial paper issued
by companies having an outstanding debt issue currently rated Aaa or Aa by
Moody's or AAA or AA by S&P.
CURRENCY HEDGING With respect to debt securities the fund may employ the
following currency hedging techniques: foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and
options on foreign currencies.
OTHER INVESTMENT POLICIES The fund has an unlimited ability to purchase
exchange listed securities in any foreign country, developed or emerging. The
fund has a limited ability to purchase unlisted foreign securities. However,
as a non-fundamental policy, the fund will limit its investments in
securities of Russian issuers to 5% of assets. The fund may also:
invest in illiquid and restricted securities;
purchase securities on a "when-issued" basis;
enter into repurchase transactions; and
lend its portfolio securities.
As non-fundamental investment policies, which may be changed by the Board
without shareholder approval, the 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, unrated securities
that the managers determine are of comparable investment quality.
VALUE SECURITIES FUND
The fund's investment goal is long-term total return. Income, though not a
goal, is a secondary consideration.
The fund may invest in common and preferred stocks, securities convertible
into common stocks, warrants, secured and unsecured debt securities, and
notes. The fund may, from time to time, hold significant money market
instruments, up to 100% of its total assets, until suitable investment
opportunities meeting its value standards become available.
The fund may purchase securities based on information regarding company stock
buy-backs and company insiders' purchases and sales. The fund purchases
securities for investment purposes and not for the purpose of influencing or
controlling management of the issuer. In rare cases, however, when the
manager perceives that the fund may benefit, the manager may itself seek to
influence or control management.
As with all investments, there is always the possibility when investing in
these securities that the manager may be incorrect in its assessment of a
particular industry or company. Also, the manager may not buy these
securities at their lowest possible prices or sell them at their highest
prices.
COMPANIES EMERGING FROM BANKRUPTCY The fund may buy securities of companies
emerging from bankruptcy. These securities may have special risks. Companies
emerging from bankruptcy may have some difficulty retaining customers and
suppliers who prefer transacting with solvent organizations. If new
management is installed in a company emerging from bankruptcy, the management
may be considered untested; if the existing management is retained, the
management may be considered incompetent. Further, even when a company has
emerged from bankruptcy with a lower level of debt, it may still retain a
relatively weak balance sheet. During economic downturns these companies may
not have sufficient cash flow to pay their debt securities and may also have
difficulty finding additional financing. In addition, reduced liquidity in
the secondary market may make it difficult for the fund to sell the
securities or to value them based on actual trades.
FOREIGN SECURITIES The fund may invest in sponsored or unsponsored depositary
receipts. The fund presently does not intend to invest more than 5% of its
assets in emerging markets securities.
CONVERTIBLE SECURITIES The fund may invest in convertible securities,
enhanced convertible securities and synthetic convertibles. The fund applies
the same rating criteria and investment policies to convertible debt
securities as its investments in debt securities. Convertible preferred
stocks are equity securities that generally carry a higher degree of market
risk than debt securities, and often may be regarded as speculative in
nature. The fund's investments in enhanced convertible securities may provide
higher dividend income but may carry additional risks, including reduced
liquidity.
LOWER RATED SECURITIES The fund may invest up to 25% of its assets in debt
securities rated below BBB by S&P or Baa by Moody's, or in unrated debt
securities that the manager determines to be comparable. Such securities,
sometimes called "junk bonds," are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Therefore, these securities
involve special risks. Debt securities rated D by S&P are in default and may
be considered speculative.
OTHER INVESTMENT POLICIES The fund may also sell short securities it does not
own up to 5% of its assets. The fund may also sell securities "short against
the box" without limit. The fund may also:
lend its portfolio securities;
invest in zero coupon securities, pay-in-kind bonds, structured notes,
mortgage-backed and asset-backed securities;
purchase loan participations and trade claims both of which carry a high
degree of risk;
purchase and sell exchange-listed and over-the-counter put and call
options on securities and financial indices;
purchase and sell futures contracts or related options with respect to
securities and indices; and
invest in restricted or illiquid securities.
FUNDS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
The fund's investment goal is capital appreciation. Current income is only a
secondary consideration in selecting portfolio securities.
Under normal market conditions, the fund will invest at least 65% of assets
in equity securities, including common and preferred stocks, or securities
convertible into common stocks, which the manager believes offer favorable
possibilities for capital appreciation. Some of these securities may yield
little or no current income. The fund's assets may be invested in shares of
common stock traded on any national securities exchange or over-the-counter,
and in convertible securities. The fund may also keep a significant portion
of its assets in cash from time to time.
SMALL COMPANIES The fund will typically invest predominantly in equity
securities issued by large-cap or mid-cap U.S. companies, which have market
capitalizations of $1.5 billion or more. It may also invest to a lesser
degree in smaller capitalization companies, which may be subject to different
and greater risks. The fund does not intend to invest more than 20% of the
fund's assets in securities of small companies.
TECHNOLOGY COMPANIES Consistent with its investment goals, the fund expects
to have a portion of its assets invested in securities of companies involved
in computing technologies or computing technology-related companies. The
technology sector as a whole has historically been volatile, and issues from
this sector tend to be subject to abrupt or erratic price movements.
LOWER RATED SECURITIES The fund does not intend to invest more than 5% of its
assets in debt securities, including convertible debt securities, rated Ba or
lower by Moody's or BB or lower by S&P, or unrated securities the manager
determines to be comparable.
OTHER INVESTMENT POLICIES The fund may invest in convertible preferred
stocks, which are equity securities. The fund may also:
write covered call options;
purchase put options on securities;
lend its portfolio securities; enter into repurchase transactions; and
invest in restricted or illiquid securities.
GLOBAL HEALTH CARE SECURITIES FUND
The fund's investment goal is capital appreciation.
HEALTH CARE COMPANIES derive at least 50% of their earnings or revenues from,
or have devoted at least 50% of their assets to, health care activities,
based on their most recently reported fiscal year.
The fund looks to be in a position to benefit from potential future
technological advances and increasing worldwide demand in the health care
sector. Many major developments in health care come from foreign companies.
Therefore, in the opinion of the manager, a portfolio of global health care
company securities may provide greater potential for investment participation
in present and future opportunities than may be present in domestic health
care related industries. The manager also believes that the U.S. health care
industry may be subject to increasing regulation and government control. By
investing in foreign, as well as U.S., health care companies, the manager
believes that the fund will be able to minimize the impact of U.S. government
regulation on its portfolio. By investing in multiple countries, the risk of
a single government's actions on the portfolio is also reduced.
FOREIGN SECURITIES The fund will mix its investments globally by investing at
least 70% of its assets in securities of issuers in at least three different
countries, which may include the U.S. These investments may include issuers
located in developed and emerging markets. The fund will not invest more than
40% of its net assets in any one country (other than the U.S.). From time to
time, the fund may invest a significant portion of its assets in securities
of U.S. issuers, the prices of which may fluctuate independently from
comparable foreign securities. As a global fund, it may invest in securities
issued in any currency including multinational currency units such as the
euro or European Currency Unit, and may hold currency. The fund may buy
sponsored or unsponsored depositary receipts. The fund currently does not
intend to invest more than 10% of its assets in securities of emerging
markets. As a non-fundamental policy, the fund will limit its investments in
securities of Russian issuers to 5% of its assets.
INDUSTRY CONCENTRATION Investing in a fund that concentrates its investments
in a specialized market sector involves increased risks.
DEBT SECURITIES The fund may invest up to 30% of its assets in debt
securities issued by domestic or foreign corporations or governments. To the
extent the fund invests in debt securities, changes in interest rates in any
country where the fund has investments will affect the value of the fund and
its share price. The fund will invest in debt securities rated B or above by
Moody's or S&P, or in unrated securities of similar quality. Securities rated
below BBB are considered to be below investment grade. The manager does not
currently expect investments in such lower rated debt securities to exceed 5%
of the fund's assets.
OTHER INVESTMENT POLICIES The fund may engage in short sale transactions, in
which the fund sells a security it does not own to a purchaser at a specified
price. The fund's equity securities holdings may include rights and warrants.
The fund may also:
make temporary defensive investments;
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;
enter into repurchase or reverse repurchase agreements; enter into
foreign currency exchange contracts; and
borrow money.
MUTUAL DISCOVERY SECURITIES FUND
The fund's investment goal is capital appreciation.
Under normal market conditions, the fund invests in domestic and foreign
equity securities, including common and preferred stocks and securities
convertible into common stocks, and debt securities of any quality. Debt
securities may include securities or indebtedness issued by corporations or
governments in any form. Debt includes notes, bonds, or debentures, as well
as distressed mortgage obligations and other debt secured by real property.
The manager does not establish percentage limits for the fund's investment in
equity securities, debt securities or money market instruments.
SMALL COMPANIES The fund may invest in securities from any size issuer, and
may from time to time invest a substantial portion of its assets in
securities of smaller capitalization issuers. These securities have market
capitalizations of less than $1.5 billion.
The fund may invest in securities that are traded on U.S. or foreign
exchanges, the 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.
REORGANIZING COMPANIES The fund also seeks to invest in securities of
companies involved in mergers, consolidations, liquidations and
reorganizations or as to which there exist tender or exchange offers. The
fund 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.
INDEBTEDNESS The fund may also invest in other forms of secured or unsecured
indebtedness or participations ("indebtedness"). These include without
limitation loan participations and trade claims of debtor companies involved
in reorganization or financial restructuring. Some of the indebtedness may
have very long maturities or is illiquid.
CONTROL The fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, the
manager may seek to influence or control management if it perceives that the
fund may benefit. The fund may also invest in other entities that purchase
securities for the purpose of influencing or controlling management. These
entities may invest in a potential takeover or leveraged buyout or invest in
other entities engaged in such practices.
FOREIGN SECURITIES The fund presently does not intend to invest more than 5%
of its assets in securities of emerging markets including Eastern European
countries and Russia. Foreign investments may include both voting and
non-voting securities, sovereign debt and participation in foreign government
deals.
CURRENCY HEDGING To the extent that hedging is available, the fund may use
the following currency hedging techniques:
foreign currency futures contracts, options on foreign currencies or currency
futures, forward foreign currency exchange contracts and currency swaps.
LOWER RATED SECURITIES The fund may invest in debt securities in any rating
category including lower rated debt securities ("junk Bonds") or in unrated
debt securities. In general, the fund will invest in these instruments for
the same reasons as equity securities, i.e., the manager believes that the
securities may be acquired at prices less than their intrinsic values.
Consequently, the manager's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The fund expects to invest in debt securities issued by
reorganizing or restructuring companies, or companies that recently emerged
from, or are facing the prospect of a financial restructuring. It is under
these circumstances, which usually involve unrated or low rated securities
that are often in, or are about to, default, that the manager seeks to
identify securities which are sometimes available at prices which it believes
are less than their intrinsic values. The fund may invest without limit in
defaulted debt securities, subject to the fund's restriction on investments
in illiquid securities. Defaulted debt securities may be considered
speculative. The purchase of debt of a troubled company always involves a
risk that the investment may be lost. However, the debt securities of
reorganizing or restructuring companies typically rank senior to the equity
securities of such companies.
CLOSED-END INVESTMENT COMPANIES While the fund may not purchase securities of
registered open-end investment companies or affiliated investment companies,
it may invest from time to time in other investment company securities. The
fund may not purchase more than 3% of the voting securities of another
investment company. In addition, the fund will not invest more than 5% of its
assets in the securities of any single investment company and will not invest
more than 10% of its assets in investment company securities. Investors
should recognize that they indirectly bear a proportionate share of the
expenses of these investment companies, including operating costs, and
investment advisory and administrative fees.
SHORT SALES The fund may also sell short securities it does not own up to 5%
of its assets. The fund may also sell securities "short against the box"
without limit.
OTHER INVESTMENT POLICIES The fund may also:
lend its portfolio securities;
enter into repurchase transactions;
purchase securities 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; and
purchase and sell futures contracts and related options.
NATURAL RESOURCES SECURITIES FUND
PRIOR TO MAY 1, 1997, THE NATURAL RESOURCES FUND WAS KNOWN AS THE PRECIOUS
METALS FUND AND HAD DIFFERENT INVESTMENT GOALS AND POLICIES. The fund's
investment goal is capital appreciation. Its secondary goal is current
income.
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.
While the fund normally expects to invest primarily in equity securities, the
manager may vary the mixture of common stocks, preferred stocks and debt
securities depending on how each category will contribute to meeting the
fund's investment goal.
NATURAL RESOURCES RISKS. Because the fund concentrates its investments in the
natural resources sector, its shares may be subject to greater risk of
adverse developments in those industries than an investment in a portfolio
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. This
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.
Other commodities have 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
manager may strive to diversify among the industries within the natural
resources sector to reduce this volatility, the value of an individual
company's securities may 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 SECURITIES While the fund will normally invest a greater percentage
of its assets in U.S. securities than in securities of issuers in any other
single country, the fund may invest 50% or more of its assets in foreign
securities. These securities include depositary receipts of issuers in both
developed and emerging markets. Foreign securities include both equity
securities and debt securities.
SMALL COMPANIES The fund may invest without limitation in small
capitalization companies ("small companies"). These companies have market
capitalizations of $1.5 billion or less at the time of purchase. These may
include investments in small mining or oil and gas exploration concerns the
manager believes may 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.
DEBT SECURITIES The fund may invest in debt securities issued by domestic or
foreign corporations or governments.
The fund may invest, without percentage limitation, in debt securities rated
as "investment grade" by Moody's or S&P, or in unrated debt securities that
the manager determines are of similar quality. The fund may also invest up to
15% of its assets in debt securities 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
unrated debt securities that the manager determines are of similar quality.
The manager does not currently expect investments in lower rated debt
securities to exceed 5% of the fund's assets.
OTHER INVESTMENT POLICIES The fund may invest up to 35% of its assets in
equity or debt securities of foreign or domestic issuers outside the natural
resources sector. 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 also:
make temporary defensive investments;
purchase debt securities on a "when-issued" or "delayed delivery" basis;
write covered call options;
lend its portfolio securities;
enter into repurchase transactions;
borrow money; and
invest in restricted or illiquid securities.
SMALL CAP FUND
The fund's investment objective is long-term capital growth. Investments in
small capitalization companies ("small companies") may involve greater risks
and greater volatility than investments in larger and more established
companies. The fund may not be appropriate for short-term investors, and an
investment in the portfolio should not be considered a complete investment
program.
Under normal market conditions, the fund will invest at least 65% of its
total assets in equity securities of small growth companies. The securities
of small companies are traded on U.S. and foreign stock exchanges and in the
over-the-counter market. 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.
Equity securities of small 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.
FOREIGN SECURITIES Although the fund may invest up to 25% of its assets in
foreign securities, including those of emerging markets issuers and sponsored
or unsponsored depositary receipts, it does not intend to invest more than
10%. The fund presently does not intend to invest more than 5% of its assets
in emerging markets securities.
OTHER INVESTMENTS Although the fund's assets will be invested primarily in
equity securities of small companies, the fund may invest up to 35% of its
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 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 appreciation.
DEBT SECURITIES The fund may also invest in debt securities that 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 goal 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 determines are of comparable quality. Currently, however, the fund
does not intend to invest more than 5% of its assets in debt securities
(including convertible debt securities) rated lower than BBB by S&P or Baa by
Moody's or in unrated securities the manager determines to be of comparable
quality.
REITS The fund currently does not intend to invest more than 10% of its
assets in real estate investment trusts ("REITs"), including small company
REITs.
OTHER INVESTMENT POLICIES The fund may also:
write covered put and call options on securities or financial indices;
purchase put and call options on securities or financial indices;
purchase and sell futures contracts or related options with respect to
securities, indices and currencies;
invest in restricted or illiquid securities;
lend portfolio securities; borrow money; and
enter into repurchase or reverse repurchase agreements.
TEMPLETON DEVELOPING MARKETS EQUITY FUND
The fund's investment goal is long-term capital appreciation.
The fund seeks to achieve this goal by investing primarily in equity
securities of issuers in countries having emerging markets as defined in the
prospectus. Under normal market conditions, at least 65% of the fund's assets
will be invested in these securities. The manager will determine eligibility
based on publicly available information and inquiries to the companies. The
fund will at all times, except during defensive periods, maintain investments
in at least three countries having emerging markets. The fund has the ability
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 assets. 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 seeks to benefit from economic and other developments in emerging
markets. The investment goal of the fund reflects the belief that investment
opportunities may result from an evolving long-term international trend
favoring more market-oriented economies, a trend that may especially benefit
certain countries having emerging markets. This trend may be facilitated by
local or international political, economic or financial developments that
could benefit the capital markets of such countries. Certain countries,
particularly the emerging market countries in the process of developing more
market-oriented economies, may experience relatively high rates of economic
growth. Other countries, although having relatively mature emerging markets,
may also be in a position to benefit from local or international developments
encouraging greater market orientation and diminishing governmental
intervention in economic affairs.
DEBT SECURITIES For capital appreciation, the fund may invest up to 35% of
its assets in fixed-income debt securities which are rated at least C by
Moody's or S&P or unrated debt securities that the manager determines to be
of comparable quality. These securities include bonds, notes, debentures,
commercial paper, certificates of deposit, time deposits and bankers'
acceptances. As a current policy established by the Board, however, the fund
will not invest more than 5% of its assets in debt securities 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 these percentages if
economic conditions change such that a higher level of investment in high
risk, lower quality debt securities would be in the interests of the fund and
its shareholders.
Certain debt securities 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 SECURITIES As a fundamental policy, the fund may invest up to
10% of its assets in defaulted debt securities. They may be considered
speculative.
CURRENCY HEDGING With respect to debt securities the fund may employ the
following currency hedging techniques: foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and
options on foreign currencies. Further, the fund will not enter into forward
contracts if, as a result, the fund will have more than 20% of its assets
committed to these contracts.
OTHER INVESTMENT POLICIES The fund may also:
lend 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;
purchase convertible securities and warrants; and
invest in restricted or illiquid securities.
The fund may not commit more than 5% of its assets to initial margin deposits
on 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 fund's assets. Presently, the fund cannot use these
strategies to a significant extent in the markets in which the fund will
principally invest.
TEMPLETON GLOBAL GROWTH FUND
The fund's investment goal is long-term capital growth. Any income the fund
earns will be incidental.
The fund seeks to achieve its goal through a flexible policy of investing in
stocks and debt securities of companies and governments of any nation. The
fund has the ability 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 assets. Although the
fund generally invests in common stock, it may also invest in preferred
stocks and certain debt securities, 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.
Following these policies, the fund will typically invest predominantly in
equity securities issued by large-cap or mid-cap companies. These companies
have market capitalizations of $1.5 billion or more. It may also invest to a
lesser degree in smaller companies, which are subject to different and
greater risks.
DEBT SECURITIES For capital appreciation, the fund may invest in debt
securities (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 (the lowest rating category) or unrated
debt securities the manager determines to be of comparable quality. As a
policy established by the Board, however, the fund will not invest more than
5% of its assets in debt securities 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
securities would be consistent with the goal of the fund.
These debt securities 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 SECURITIES As a fundamental policy, the fund may invest up to
10% of its assets in defaulted debt securities. These securities may be
considered speculative.
CURRENCY HEDGING With respect to debt securities, the fund may employ the
currency hedging techniques: foreign currency futures contracts, forward
foreign currency exchange contracts ("forward contracts"), and options on
foreign currencies.
OTHER INVESTMENT POLICIES The fund may purchase and sell stock index futures
contracts up to in the aggregate 20% of its assets. It may not at any time
commit more than 5% of its 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.
The fund may also:
invest up to 5% of its assets in securities issued by any one company or
foreign government (exclusive of U.S. government securities)
invest up to 5% of its assets in warrants (exclusive of warrants acquired
in units or attached to securities);
invest up to 10% of its assets in securities with a limited trading
market, i.e., "illiquid securities";
enter into repurchase agreements;
lend its portfolio securities; and
invest in restricted securities.
TEMPLETON INTERNATIONAL EQUITY FUND
The fund's investment goal is long-term capital growth.
The fund's equity securities investments include 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.
The fund will purchase equity securities that trade in non-U.S. markets,
including emerging markets, and that are issued by companies that have their
principal activities outside the U.S. Nevertheless, 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 their 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 non-U.S. companies. These
securities have market capitalizations of $1.5 billion or more. It may also
invest to a lesser degree in smaller companies, which are subject to
different and greater risks.
The fund has the ability to purchase securities in any foreign country,
developed or emerging. Normally, the fund will invest at least 65% of its
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 assets.
DEBT SECURITIES The fund may invest up to 35% of its assets in debt
securities. The fund may invest up to 10% of its assets in debt obligations
rated Ba or lower by Moody's or BB or lower by S&P, or unrated securities the
manager determines to be of comparable quality.
The fund may seek capital appreciation by investing in debt securities that
increase in value through changes in relative foreign currency exchange
rates, changes in relative interest rates or improvement in the
creditworthiness of the issuer. These debt securities may consist of U.S. and
foreign government securities and corporate debt obligations, including
Yankee bonds, Eurobonds, and Depositary Receipts.
OTHER INVESTMENT POLICIES. The fund may:
invest up to 10% of its net assets in illiquid securities;
invest up to 10% of its net assets in warrants, including such warrants
that are not listed on an exchange;
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
invest in enhanced convertible securities.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
The fund's investment goal is long-term capital appreciation.
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 comprise a majority of the world's equity securities. These
companies also 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 U.S. small cap stocks and 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.
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.
The fund has the ability 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 assets.
DEBT SECURITIES The fund may invest up to 35% of its assets in:
equity securities of larger issuers outside the U.S.;
equity securities of larger or smaller issuers within the U.S., although
the fund does not expect these investments to exceed 5% of assets; or
debt securities issued by companies or governments in any nation which
are rated at least C by Moody's or S&P or unrated debt securities the
manager determines are comparable.
As a current policy, however, the fund will not invest more than 5% of its
assets in debt securities rated lower than BBB by S&P or Baa by Moody's.
These investments may cause the fund's performance to vary from those of
international smaller equity markets.
DEFAULTED DEBT SECURITIES. The fund may invest up to 10% of its assets in
defaulted debt obligations. These securities may be considered speculative.
CURRENCY HEDGING With respect to debt securities, the fund may employ the
following currency hedging techniques: foreign currency futures contracts,
forward foreign currency exchange contracts ("forward contracts"), and
options on foreign currencies. Further, the fund will not enter into forward
contracts if, as a result, the fund would have more that 20% of its assets
committed to these contracts.
OTHER INVESTMENT POLICIES The fund may invest no more than 5% of its assets
in securities of any one issuer. This restriction does not include U.S.
government securities. The fund may invest up to 5% of its assets in
warrants, including those not listed on an exchange.
For hedging purposes only, the fund may enter into:
transactions in options on securities, securities indices, and foreign
currencies; 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 assets of the fund.
The fund may also enter into repurchase agreements, invest in illiquid
securities, and lend its portfolio securities.
The fund may not invest more than 5% of its 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.
TEMPLETON PACIFIC GROWTH FUND
The Templeton Pacific Growth Fund seeks to provide long-term growth of
capital.
Normally, the fund will invest at least 65% of its assets in securities
traded in at least three foreign countries, including the listed 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.
Although the fund will not invest more than 25% of its assets in any one
industry or the government of any one country, the fund may invest more than
25% of its assets in the securities of issuers in any given country.
Other investments THE FUND MAY INVEST UP TO 35% OF ITS ASSETS IN THE
SECURITIES OF ISSUERS DOMICILED OUTSIDE OF THE PACIFIC RIM OR IN INVESTMENT
GRADE DEBT SECURITIES.
The fund may seek capital appreciation by investing in debt securities that
increase in value through changes in relative foreign currency exchange
rates, changes in relative interest rates or improvement in the
creditworthiness of the issuer. These debt obligations may consist of U.S.
and foreign government securities and corporate debt obligations, including
Yankee bonds, Eurobonds, and depositary receipts.
OTHER INVESTMENT POLICIES The fund may:
invest up to 10% of its net assets in illiquid securities;
invest no more than 10% of its net assets in warrants, including those
not listed on an exchange (this is the fund's current intention and is not
a fundamental policy);
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;
purchase convertible securities;
lend its portfolio securities; and
engage in repurchase agreements.
NON-FUNDAMENTAL POLICIES AFFECTING MULTIPLE FUNDS 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.
INVESTMENT STRATEGIES AND POLICIES
THIS SECTION DESCRIBES CERTAIN TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
THAT MAY BE USED BY A FUND, IF THE FUND IS AUTHORIZED TO DO SO IN THE
DISCUSSION IN ITS INDIVIDUAL FUND SECTION IN THIS SAI. IF THERE IS A CONFLICT
BETWEEN THIS SECTION AND THE INDIVIDUAL FUND SECTION WITH RESPECT TO
INVESTMENTS, THE INDIVIDUAL FUND SECTION CONTROLS AND SHOULD BE RELIED UPON.
All policies and percentage limitations are considered at the time of
purchase of an investment and refer to a fund's total assets, unless another
purpose is indicated. A fund will not necessarily use the strategies
described to the full extent permitted unless the managers believe that doing
so will help a fund reach its objectives. Further, not all instruments or
strategies will be used at all times.
In the event of a corporate restructuring or bankruptcy reorganization of a
company whose securities are owned by a fund, the fund may receive securities
different from those originally purchased. For example, a fund might receive
common stock that is not dividend paying, bonds with a lower coupon or more
junior status, convertible securities or even conceivably real estate. The
fund is not obligated to sell such investments immediately, if the manager
believes, based on its own analysis, that the longer term outlook is
favorable and there is the potential for a higher total return by holding
such investments.
Each fund is also subject to investment restrictions that are described under
the heading "Investment Restrictions" in this SAI. The investment objective
of each fund and its listed investment restrictions are "fundamental
policies" of each fund, which means that they may not be changed without a
majority vote of shareholders of the fund. With the exception of a fund's
investment objective and those restrictions specifically identified as
fundamental, all investment policies and practices described in the
Prospectus and in this SAI are not fundamental, which means that the Board of
Trustees may change them without shareholder approval.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. Equity securities generally take the form of
common stock or preferred stock, as well as securities convertible into
common stocks. Equity securities may also include warrants, or rights.
Warrants or rights give the holder the right to buy a common stock at a given
time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. These securities include bonds, notes,
debentures, and commercial paper, which differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. During periods of rising interest rates, the value of such
securities generally declines. These changes in market value of securities
owned by the fund will be reflected in the fund's net asset value per share.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the funds may invest. Higher yields are ordinarily
available from securities in the lower rating categories, such as securities
rated Ba or lower by Moody's or BB or lower by S&P or from unrated securities
deemed by a fund's manager to be of comparable quality. These ratings
represent the opinions of the rating services with respect to the issuer's
ability to pay interest and repay principal. They do not purport to reflect
other risk, such as the risk of fluctuations in market value and are not
absolute standards of quality. However, lower rated securities typically are
riskier than investment grade securities. Bonds which are rated C by Moody's
are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing. Bonds rated C by S&P are obligations on which no interest is being
paid. Please see the appendix for a discussion of the ratings.
If the rating on an issue held in a fund's portfolio is changed by the rating
service or the security goes into default, this event will be considered by
the fund in its evaluation of the overall investment merits of that security
but will not generally result in an automatic sale of the security.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the manager to
assess whether, at the time of purchase, the planned investment offers
potential returns which are reasonable in light of the risks involved.
FOREIGN SECURITIES Certain funds may invest in foreign securities, if the
investments are consistent with their objectives and comply with their
concentration and diversification policies. The funds may buy the securities
of foreign issuers directly in foreign markets, both in developed and
developing countries. The securities of foreign issuers may be denominated
in foreign currency. The funds may also buy foreign securities that are
traded in the U.S.
Investments in foreign securities may offer potential benefits not available
from investments solely in securities of domestic issuers or dollar
denominated securities. These benefits may include the opportunity to invest
in foreign issuers that appear, in the opinion of the manager, to offer:
A better outlook for long-term capital appreciation or current earnings
than investments in domestic issuers;
An opportunity to invest in foreign nations whose economic policies or
business cycles are different from those of the U.S.; and,
The opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in a
manner parallel to U.S. markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and tax and other laws limiting the amount and types of foreign
investments. A fund could experience investment losses if there are changes
of:
governmental administrations;
economic or monetary policies in the U.S. or abroad;
circumstances in dealings between nations; or,
currency convertibility or exchange rates.
The funds do not consider securities that they acquire outside of the U.S.
and that are publicly traded in the U.S. or on a foreign securities market to
be illiquid assets if (a) the fund reasonably believes it can readily dispose
of the securities for cash in the U.S. or foreign market, or (b) current
market quotations are readily available.
Certain funds may invest in debt securities issued by foreign corporations,
governments and their instrumentalities, and by supranational entities. A
supranational entity is an entity designated or supported by the national
government of one or more countries to promote economic reconstruction or
development. Examples of supranational entities include the World Bank, the
European Development Bank and the Asian Development Bank.
Many debt obligations of foreign issuers, and especially developing markets
issuers, are either (i) rated below investment grade or (ii) not rated by
U.S. rating agencies so that their selection depends on the manager's
individual analysis.
Certain funds may invest in countries that do not permit direct investment.
For example, some countries, such as South Korea, Chile and India, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In order to gain
investment access to these countries, a fund may invest up to 10% of its
assets in shares of such closed-end investment companies and up to 5% of its
assets in any one closed-end investment company as long as the investment
does not represent more than 3% of the voting stock of the acquired
investment company. If a fund acquires shares of closed-end investment
companies, shareholders would bear both their share of expenses of the fund
(including management and advisory fees) and, indirectly, the expenses of
such closed-end investment companies.
DEPOSITARY RECEIPTS. Certain funds may invest in depositary receipts.
American Depositary Receipts (ADRs) are typically issued by a U.S. bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a
U.S. corporation. Generally, depositary receipts in registered form are
designed for use in the U.S. securities market and depositary receipts in
bearer form are designed for use in securities markets outside the U.S.
Depositary receipts may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted.
Depositary receipts may be issued by sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there
may not be a correlation between the availability of such information and the
market value of the depositary receipts.
Depositary receipts also involve the same risks as direct investments in
foreign securities, as discussed below. For purposes of a fund's investment
policies, the fund will consider its investments in depositary receipts to be
investments in the underlying securities.
U.S. GOVERNMENT SECURITIES Certain funds may invest in U.S. government
securities including: (1) U.S. Treasury obligations with varying interest
rates, maturities and dates of issuance, such as U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (original maturities of
one to ten years) and U.S. Treasury bonds (generally original maturities of
greater than ten years); and (2) obligations issued or guaranteed by U.S.
government agencies and instrumentalities such as the Government National
Mortgage Association, the Export-Import Bank and the Farmers Home
Administration. Some of the funds' investments will include obligations that
are supported by the full faith and credit of the U.S. government. In the
case of U.S. government obligations that are not backed by the full faith and
credit of the U.S. government (e.g., obligations of the Federal National
Mortgage Association (FNMA) or a Federal Home Loan Bank), the fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its
commitments.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS ("GINNIE MAES") The
Government National Mortgage Association's guarantee of payment of principal
and interest on Ginnie Maes is backed by the full faith and credit of the
U.S. government. The Government National Mortgage Association may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee.
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 that 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 from the time they are issued.
CONVERTIBLE SECURITIES Certain funds may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and, through its conversion feature, the
potential for the security to increase in value if there is an increase in
the value of the underlying common stock.
A convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. The value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because both interest rate and market movements
can influence its value, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. A convertible security issued by an operating company is
generally senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security. However, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. The parity price
is the price at which the common stock underlying the convertible security
may be obtained; the call price is the price of the bond, including any
premium related to the conversion feature. A convertible security issued by
an investment bank is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value, because the holder of a convertible security will have
recourse only to the issuer. In addition, the issuer may redeem a convertible
security after a specified date and under circumstances established at the
time the security is issued.
A convertible preferred stock is treated like a preferred stock for the
fund's financial reporting, credit rating, and investment limitation
purposes. A preferred stock is subordinated to the issuer's debt obligations
in the event of insolvency. An issuer's failure to make a dividend payment
is generally not an event of default entitling a preferred shareholder to
take action. A preferred stock generally has no maturity date, so that its
market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock
are dividends, rather than interest payments, and are usually treated that
way for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES In addition to "plain vanilla" convertibles
a number of different structures have been created to fit the characteristics
of specific investors and issuers.
Certain funds may invest in convertible preferred stocks that offer enhanced
yield features, such as Preferred Equity Redemption Cumulative Stocks
("PERCS"), which provide an investor, such as a fund, with the opportunity to
earn higher dividend income than is available on a company's common stock.
PERCS are preferred stocks that generally feature a mandatory conversion
date, as well as a capital appreciation limit, which is usually expressed in
terms of a stated price. Most PERCS expire three years from the date they are
issued, at which time they are convertible into common stock of the issuer.
PERCS are generally not convertible into cash at maturity. Under a typical
arrangement, after three years PERCS convert into one share of the issuer's
common stock if the issuer's common stock is trading at a price below that
set by the capital appreciation limit, and into less than one full share if
the issuer's common stock is trading at a price above that set by the capital
appreciation limit. The amount of that fractional share of common stock is
determined by dividing the price set by the capital appreciation limit by the
market price of the issuer's common stock. PERCS can be called, i.e.,
required to be returned to the issuer, at any time prior to maturity, and
hence do not provide call protection. If called early, however, the issuer
must pay a call premium over the market price to the investor. This call
premium declines at a preset rate daily, up to the maturity date.
Certain funds may also invest in other classes of enhanced convertible
securities. These include but are not limited to:
ACES (Automatically Convertible Equity Securities),
PEPS (Participating Equity Preferred Stock),
PRIDES (Preferred Redeemable Increased Dividend Equity Securities),
SAILS (Stock Appreciation Income Linked Securities),
TECONS (Term Convertible Notes),
QICS (Quarterly Income Cumulative Securities) and
DECS (Dividend Enhanced Convertible Securities).
ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the following
features:
they are issued by a company whose common stock will be received in the
event the convertible preferred stock is converted;
unlike PERCS, they do not have a capital appreciation limit;
they seek to provide the investor with high current income with some
prospect of future capital appreciation;
they are typically issued with three or four-year maturities;
they typically have some built-in call protection for the first two to
three years;
investors have the right to convert them into shares of common stock at a
preset conversion ratio or hold them until maturity, and upon maturity
they will necessarily convert into either cash or a specified number of
shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company that convert to its common stock or the shares of a
different issuer. Names such as ELKS (Equity Linked Securities) or similar
names may identify these securities. Typically they share most of the
characteristics of an enhanced convertible preferred stock but will be ranked
as senior or subordinated debt in the issuer's corporate structure according
to the terms of the debt indenture, which is the agreement that describes the
security. A fund may invest in additional types of convertible securities not
specifically described here, as long as such investments are consistent with
its objectives and policies.
SYNTHETIC CONVERTIBLE SECURITIES Certain funds may invest a portion of their
assets in "synthetic convertible" securities. A synthetic convertible is
created by combining distinct securities that together possess fixed income
payments and the right to acquire the underlying equity security. This
combination is achieved by investing in nonconvertible fixed-income
securities and in warrants or stock or stock index call options which grant
the holder the right to purchase a specified quantity of securities within a
specified period of time at a specified price or to receive cash in the case
of stock index options. Synthetic convertible securities are generally not
considered to be "equity securities" for purposes of each fund's investment
policy regarding those securities.
Synthetic convertible securities differ from a true convertible security in
the following respects:
The value of a synthetic convertible is the sum of the values of its
fixed-income and convertibility components, which means that the values of
a synthetic convertible and a true convertible security will respond
differently to market fluctuations.
Typically, the two components of a synthetic convertible represent one
issuer, but a fund may combine components representing distinct issuers,
or to combine a fixed income security with a call option on a stock index,
when the manager determines that such a combination would better promote a
fund's investment objectives.
The component parts of a synthetic convertible security may be purchased
simultaneously or separately.
The holder of a synthetic convertible faces the risk that the price of
the stock, or the level of the market index underlying the convertibility
component will decline.
ZERO COUPON BONDS Certain funds may invest in zero coupon bonds issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Zero
coupon bonds are debt obligations that are issued at a significant discount
from the value set forth on the face of the bond. The original discount
approximates the total amount of interest the bonds will accumulate and
compounds over the period until maturity or the first interest accumulation
date at a rate of interest reflecting the market rate of the security at the
time of issuance. A fund will be deemed to have received income on such
investments for tax and accounting purposes. That income is distributable to
shareholders even though no cash is received at the time of accrual, which
may require the liquidation of other portfolio securities to satisfy the
fund's distribution obligations.
STRIPPED SECURITIES are the separate income and principal components of a
debt security. Once the securities have been stripped they are referred to
as zero coupon securities. Stripped securities do not make periodic payments
of interest prior to maturity and the stripping of the interest coupons
causes them to be offered at a discount from their face amount. This results
in the security being subject to greater fluctuations in response to changing
interest rates than interest-paying securities of similar maturities.
Certain funds may purchase the following stripped securities: U.S. Treasury
STRIPS; Stripped Government Securities; Stripped Obligations of the Financing
Corporation ("FICO STRIPS"); Stripped Corporate Securities; and, Stripped
Eurodollar Obligations
U.S. TREASURY STRIPS ("Separate Trading of Registered Interest and Principal
of Securities") are considered U.S. Treasury securities for purposes of a
fund's investment policies. Their risks are similar to those of other U.S.
government securities, although they may be more volatile. 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 principal payments on Treasury securities through the Federal
Reserve book-entry record-keeping system.
Stripped Government Securities ARE 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."
FICO STRIPS represent 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.
STRIPPED CORPORATE SECURITIES are 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 these stripped
debt obligations and stripped coupons.
STRIPPED EURODOLLAR OBLIGATIONS are stripped debt obligations denominated in
U.S. dollars that are issued by foreign issuers, often subsidiaries of
domestic corporations.
DEFERRED INTEREST AND PAY-IN-KIND BONDS Certain funds may buy bonds issued at
a discount that defer the payment of interest until maturity, or which pay
interest through the issuance of additional bonds, known as pay-in-kind
bonds. See "Risks, Lower rated securities" for more information about these
bonds.
DERIVATIVE SECURITIES are those securities whose values are dependent upon
the performance of one or more securities or indices. Certain funds may
invest in the following "derivative securities":
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 ;
mortgage pass-throughs, including multiclass pass-throughs, stripped
mortgage securities, and other asset-backed securities;
options;
spreads and straddles;
swaps;
synthetic convertible securities; and
uncovered mortgage dollar rolls.
Derivatives are used for "hedging", which means that they help manage risks
relating to interest rates, currency fluctuations and other market factors.
They may also be used to increase liquidity or to invest in a particular
stock or bond in a more efficient or less expensive way.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES Although the funds have no
present intention of investing in options, futures and options on financial
futures, certain funds have the authority to enter into these transactions.
Certain funds may write (sell) covered put and call options and buy put and
call options on securities listed on a national securities exchange and in
the over-the-counter ("OTC") market. Additionally, a fund may "close out"
options it has entered into.
A call option gives the option holder the right to buy the underlying
security from the option writer at the option exercise price at any time
prior to the expiration of the option. A put option gives the option holder
the right to sell the underlying security to the option writer at the option
exercise price at any time prior to the expiration of the option. The OTC
market is the dealer-to-dealer market in securities, in this case, option
securities in which the fund may buy or sell.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. Certain funds may write
options to generate additional income and to hedge their portfolios against
market or exchange rate movements. The writer of covered calls gives up the
potential for capital appreciation above the exercise price of the option
should the underlying stock rise in value. If the value of the underlying
stock rises above the exercise price of the call option, the security may be
"called away" and a fund required to sell shares of the stock at the exercise
price. A fund will realize a gain or loss from the sale of the underlying
security depending on whether the exercise price is greater or less than the
purchase price of the stock. Any gain will be increased by the amount of the
premium received from the sale of the call; any loss will be decreased by the
amount of the premium received. If a covered call option expires unexercised,
a fund will realize a gain in the amount of the premium received. If,
however, the stock price decreases, the hedging benefit of the covered call
option is limited to the amount of the premium received.
A call option written by a fund is "covered" if:
the fund owns the underlying security that is subject to the call; or
the fund has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio.
A call option is also covered if a fund holds a call on the same security and
in the same principal amount as the call written where the exercise price of
the call held:
(a) is equal to or less than the exercise price of the call written; or
(b) is greater than the exercise price of the call written if the
difference in exercise prices is maintained by a fund in cash and
marketable securities in a segregated account with its custodian bank.
Certain funds may write options in connection with "buy-and-write"
transactions; that is, a fund may purchase a security and then write a call
option against that security. The exercise price of the call will depend upon
the expected price movement of the underlying security. The exercise price of
a call option may be below ("in-the-money"), equal to ("at-the-money"), or
above ("out-of-the-money") the current value of the underlying security at
the time the option is written.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines
below the exercise price of the put option, the security may be "put to" a
fund and the fund required to buy the stock at the exercise price. A fund
will incur an unrealized loss to the extent that the current market value of
the underlying security is less than the exercise price of the put option.
However, the loss will be offset at least in part by the premium received
from the sale of the put. If a put option written by a fund expires
unexercised, the fund will realize a gain in the amount of the premium
received.
A put option written by the fund is "covered" if the fund maintains cash and
marketable securities with a value equal to the exercise price in a
segregated account with its custodian bank, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in
the market value of the underlying security during the option period. If a
call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer
must fulfill the obligation to buy the underlying security at the exercise
price, which will usually exceed the market value of the underlying security
at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same
series as the option previously written. The effect of the purchase is that
the clearing corporation will cancel the writer's position. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction may be made at
the time desired by a fund. Effecting a closing transaction allows the cash
or proceeds from the sale of any securities subject to the option to be used
for other fund investments.
A fund will realize a profit from a closing transaction if the cost of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option. A fund will realize a loss
from a closing transaction if the cost of the transaction is more than the
premium received from writing the option. Because increases in the market
price of a call option will generally reflect increases in the market price
of the underlying security, any loss resulting from the closing transaction
of a written call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the fund.
BUYING CALL AND PUT OPTIONS ON SECURITIES. The premium paid by the buyer of
an option will reflect, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
A fund may buy call options on securities that it intends to buy in order to
limit the risk of a substantial increase in the market price of the security
before the purchase is effected. A fund may also buy call options on
securities held in its portfolio and on which it has written call options.
Certain funds may buy put options. As the holder of a put option, a fund has
the right to sell the underlying security at the exercise price at any time
during the option period. A fund may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire.
A fund may buy a put option on an underlying security ("a protective put")
owned by the fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when a fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security when the manager finds
it desirable to continue to hold the security because of tax considerations.
The premium paid for the put option and any transaction costs would reduce
any short-term capital gain that may be available for distribution when the
security is eventually sold.
Certain funds may also buy put options at a time when they do not own the
underlying security. If a fund buys a put option on a security it does not
own, the fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining
value, and if the market price of the underlying security remains equal to or
greater than the exercise price during the life of the put option, the fund
will lose its entire investment in the put option. In order for the purchase
of a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
OVER-THE-COUNTER ("OTC") OPTIONS. Certain funds may write covered put and
call options and buy put and call options that trade in the OTC market to the
same extent that they may engage in exchange traded options. OTC options
differ from exchange traded options in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from
market makers. OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices, however, than
exchange traded options and the writer of an OTC option is paid the premium
in advance by the dealer.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. A fund may be able
to realize the value of an OTC option it has purchased only by exercising it
or entering into a closing sale transaction with the dealer that issued it. A
fund may suffer a loss if it is not able to exercise or sell its position on
a timely basis. When a fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer with which the fund originally wrote the option.
If a fund as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
The funds understand the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to
cover the sale of an OTC option are considered illiquid. The funds and the
manager disagree with this position. Nevertheless, pending a change in the
staff's position, the funds will treat OTC options and "cover" assets as
subject to a fund's limitation on illiquid securities.
OPTIONS ON STOCK INDICES. Certain funds may also buy and sell both call and
put options on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations or to increase income to the funds.
Call and put options on stock indices are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on a stock index give the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the underlying stock
index is greater (or less, in the case of puts) than the exercise price of
the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars multiplied by a specified number. Thus, unlike stock options, all
settlements are in cash, and gain or loss depends on the price movements of
the underlying index rather than the price movements of an individual stock.
When a fund writes an option on a stock index, the fund may cover the option
by owning securities whose price changes, in the opinion of the manager, are
expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. The funds may also cover by
establishing a segregated account containing cash or marketable securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index. The fund will maintain the account while the
option is open or it will otherwise cover the transaction.
FORWARD CONVERSIONS. In a forward conversion, a fund buys securities and
writes call options and buys put options on such securities. By purchasing
puts, a fund protects the underlying security from depreciation in value. By
selling calls on the same security, a fund receives premiums which may offset
part or all of the cost of purchasing the puts while foregoing the
opportunity for appreciation in the value of the underlying security. A fund
will not exercise a put it has purchased while a call option on the same
security is outstanding.
Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, a fund's
return may depend in part on movements in the price of the underlying
security.
SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, a fund
buys and writes a put or buys and writes a call on the same underlying
security with the options having different exercise prices and/or expiration
dates. In "straddles," a fund purchases or writes combinations of put and
call options on the same security. When a fund engages in spread and straddle
transactions, it seeks to profit from differences in the option premiums paid
and received and in the market prices of the related options positions when
they are closed out or sold. Because these transactions require a fund to buy
and/or write more than one option simultaneously, the fund's ability to enter
into such transactions and to liquidate its positions when necessary or
deemed advisable may be more limited than if the fund was to buy or sell a
single option. Similarly, costs incurred by a fund in connection with these
transactions will in many cases be greater than if the fund was to buy or
sell a single option.
FUTURES CONTRACTS. Certain funds may enter into contracts to buy or sell
futures contracts based upon financial instruments ("financial futures").
Financial futures contracts are commodity contracts that obligate the
purchase or seller to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
the securities called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract
at a specified price on a specified date. Futures contracts have been
designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission and must be executed through a futures
commission merchant, or brokerage firm, that is a member of the relevant
contract market. Existing contract markets for futures contracts on debt
securities include the Chicago Board of Trade, the New York Cotton Exchange,
the Mid-America Commodity Exchange (the "MCE"), and International Money
Market of the Chicago Mercantile Exchange (the "IMM"). Existing contract
markets for futures contracts on currency include the MCE, the IMM and the
London International Financial Futures Exchange. The exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
A fund may enter into futures contracts on foreign currencies, interest
rates, or on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through
mortgage-backed securities, and three-month U.S. Treasury bills. A fund may
also enter into futures contracts on corporate securities and non-U.S.
government debt securities, but such futures contracts are not currently
available.
At the same time a futures contract is purchased or sold, the fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the fund would provide or receive cash
that reflects any decline or increase in the contract's value.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although financial futures contracts by their terms call for the actual
delivery or acquisition of securities, or the cash value of the index, in
most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the securities or cash.
The obligation to make or take delivery is ended by buying (or selling, as
the case may be) on an exchange an identical financial futures contract
calling for delivery in the same month. All transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with
the exchange on which the contracts are traded. The fund will incur brokerage
fees when it buys or sells financial futures.
A fund will not engage in transactions in futures contracts for speculation.
Futures contracts will be used as a hedge against changes resulting from
market conditions in the values of its securities or securities that it
intends to buy or to attempt to protect a fund from fluctuations in price of
portfolio securities without actually buying or selling the underlying
security. When a fund buys futures contracts or related call options,
marketable instruments equal to the difference between the fluctuating market
value of such futures contract and the aggregate value of the initial and
variation margin payments made by the fund will be deposited in a segregated
account with the custodian bank to collateralize such long positions.
OPTIONS ON FUTURES CONTRACTS. Certain funds are permitted to purchase and
write options on futures contracts for hedging purposes only. The purchase of
a call option on a futures contract is similar in some respects to the
purchase of a call option on an individual security or currency. Depending on
the price of the option compared to either the price of the futures contract
upon which it is based or the price of the underlying securities or currency,
the option may be less risky than direct ownership of the futures contract or
the underlying securities or currency. As with the purchase of futures
contracts, when a fund is not fully invested, it may purchase a call option
on a futures contract to hedge against a market advance due to declining
interest rates or appreciation in the value of a foreign currency against the
U.S. dollar.
If a fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain
the full amount of the option premium, which may provide a partial hedge
against any decline that may have occurred in the value of the fund's
holdings. If the futures price at expiration of the option is higher than the
exercise price, the fund will retain the full amount of the option premium,
which may provide a partial hedge against any increase in the price of
securities that the fund intends to purchase. If a put or call option a fund
has written is exercised, the fund will incur a loss that will be reduced by
the amount of the premium it received. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, a fund's losses from existing options on
futures may be affected by changes in the value of its portfolio securities.
STOCK INDEX FUTURES AND OPTIONS ON THESE FUTURES
Certain funds may buy and sell stock index futures contracts and options on
stock index futures contracts.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at
the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index
is made.
A fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset a possible decrease in market value of
its equity securities. When a fund is not fully invested in stocks and
anticipates a significant market advance, it may buy stock index futures in
order to gain rapid market exposure that may in part or entirely offset
increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. Certain funds may buy and sell call and put
options on stock index futures to hedge against risks of market price
fluctuations. The need to hedge against these risks will depend on the extent
of diversification of the fund's common stock portfolio and the sensitivity
of such investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the writer of the option will
deliver to the holder of the option the accumulated balance in the writer's
futures margin account representing the amount that the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day before the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
INTEREST RATE FUTURES AND RELATED OPTIONS. Certain funds may buy and sell
interest rate futures contracts and options on these futures contracts. A
fund will enter into interest rate futures contracts in order to protect its
portfolio securities from fluctuations in interest rates without necessarily
buying or selling the underlying fixed-income securities.
Certain funds may also buy and write put and call options on interest rate
futures and enter into closing transactions with respect to such options.
CURRENCY TECHNIQUES AND HEDGING Certain funds may enter into forward
currency exchange contracts ("forward contracts") and currency futures
contracts and options on these futures contracts, although the fund has no
present intention of using any of these techniques except forward contracts.
The funds typically engage in these practices for hedging purposes, or in
other words for the purpose of protecting against declines in the value of a
fund's portfolio securities and the income on these securities. A fund will
normally conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or
sell foreign currencies.
FORWARD CURRENCY EXCHANGE CONTRACTS. Certain funds may enter into forward
currency exchange contracts to attempt to minimize the risk to the fund from
adverse changes in the relationship between currencies or to enhance income.
A forward contract involves an obligation to buy or sell a specific currency
at a future date, that may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks).
A fund may either accept or make delivery of the currency specified at the
maturity of a forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.
A fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange
of that currency for another currency. The investment position is not itself
a security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
Certain funds may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated
in a different currency, if the managers determine that there is a
correlation between the two currencies.
A fund may also enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of that
security. Additionally, for example, when a fund believes that a foreign
currency may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of that foreign currency
approximating the value of some or all of the fund's portfolio securities
denominated in such foreign currency. Similarly, when a fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency,
it may enter into a forward contract to buy that foreign currency for a fixed
dollar amount.
A fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of a fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the
ability of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates also may
result in poorer overall performance for the fund than if it had not entered
into such contracts.
The funds generally will not enter into a forward contract with a term of
greater than one year.
CURRENCY FUTURES CONTRACTS. Certain funds may enter into currency futures
contracts traded on regulated commodity exchanges, including non-U.S.
exchanges. A currency futures contract is a standardized contract for the
future delivery of a specified amount of currency at a future date at a price
set at the time of the contract. A fund may use currency futures contracts to
hedge against anticipated future changes in exchange rates which otherwise
might adversely affect the value of the fund's portfolio securities or
adversely affect the prices of securities that a fund intends to purchase at
a later date.
A fund may either accept or make delivery of the currency specified at the
maturity of a currency futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to currency futures contracts are effected
on the exchange on which the contract was entered into (or on a linked
exchange).
OPTIONS ON FOREIGN CURRENCIES. Certain funds may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities and against increases in
the U.S. dollar cost of foreign securities or other assets to be acquired. As
in the case of other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of
the premium received. A fund could be required to buy or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate
movements adverse to a fund's position, the fund may loose the entire amount
of the premium plus related transaction costs.
INTEREST RATE SWAPS. Certain funds may participate in interest rate swaps. A
swap is an agreement between two parties to exchange sets of cash flows over
a period in the future. Most corporate and government bonds pay fixed
coupons, and are exposed to the risk of rising interest rates. Swapping
fixed payments for floating payments, an interest rate swap is a vehicle to
hedge interest rate risk.
An example of an interest rate swap might be where one obligation has an
interest rate fixed to maturity while the other has an interest rate that
changes with changes in a designated benchmark, such as the London Interbank
Offered Rate ("LIBOR"), prime, commercial paper, or other benchmarks. The
obligations to make repayment of principal on the underlying securities are
not transferred. Similarly, the right to receive such payments is not
transferred. These transactions generally require the participation of an
intermediary, frequently a bank. The entity holding the fixed rate obligation
will transfer the obligation to the intermediary, and the entity will then be
obligated to pay to the intermediary a floating rate of interest, generally
including a fractional percentage as a commission for the intermediary. The
intermediary also makes arrangements with a second entity that has a
floating-rate obligation that substantially mirrors the obligation desired by
the first entity. 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.
The funds intend to participate in interest rate swaps involving obligations
held in a fund's portfolio on which it is receiving payments of principal and
interest. A fund might do this, for example, in order to gain or reduce its
exposure to fixed interest rate payments under certain market conditions. To
the extent, however, a fund does not own the underlying obligation, the fund
will maintain, in a segregated account with its custodian bank, cash or
marketable securities with an aggregate value equal to the amount of the
fund's outstanding swap obligation.
Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the 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 a fixed rate obligation, also
frequently at a price lower than is available in the capital markets. The
success of the transaction depends in large part on the availability of fixed
rate obligations at a low enough coupon rate to cover the cost involved.
CURRENCY RATE SWAPS Certain funds may participate in currency rate swaps. A
currency rate swap is the transfer between two counterparties of their
respective rights to receive payments in specified currencies.
REAL ESTATE INVESTMENT TRUSTS ("REITS") typically invest directly in real
estate and/or in mortgages and loans collateralized by real estate. Certain
funds may invest in "Equity" or "Mortgage" REITs "Equity" REITs are real
estate companies that own and manage income-producing properties such as
apartments, hotels, shopping centers or office buildings. The income,
primarily rent from these properties, is generally passed on to investors in
the form of dividends. These companies provide experienced property
management and generally concentrate on a specific geographic region or
property type. "Mortgage" REITs make loans to commercial real estate
developers and earn income from interest payments.
LOAN PARTICIPATIONS Certain funds may invest in loan participations and
other related direct or indirect bank obligations. These instruments are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. Generally, these instruments are sold
without a guarantee by the lending institution, and are subject to the credit
risks of both the borrower and the lending institution. While loan
participations generally trade at par value, a fund will also be able to
acquire loan participations that sell at a discount because of the borrower's
credit problems. To the extent the borrower's credit problems are resolved,
such loan participations may appreciate in value. The manager may acquire
loan participations for a fund when it believes that over the long term
appreciation will occur. Most loan participations in which the funds intend
to invest are illiquid and, to that extent, will be included in a fund's
limitation on illiquid investments described under "Illiquid securities." An
investment in these securities carries substantially the same risks as those
for defaulted debt securities. Interest payments on these securities may be
reduced, deferred, suspended or eliminated and principal payments may
likewise be reduced, deferred, suspended or canceled, causing the loss of the
entire amount of the investment.
TRADE CLAIMS Certain funds may invest a portion of their assets in trade
claims. Trade claims are purchased from creditors of companies in financial
difficulty. For buyers, such as a fund, trade claims offer the potential for
profits since they are often purchased at a significantly discounted value
and, consequently, may generate capital appreciation if the value of the
claim increases as the debtor's financial position improves. If the debtor is
able to pay the full obligation on the face of the claim as a result of a
restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of
risk. There can be no guarantee that the debtor will ever be able to satisfy
the obligation on the trade claim. Trade claims are not regulated by federal
securities laws or the SEC. Currently, trade claims are regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade
claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding.
REPURCHASE AGREEMENTS In a repurchase agreement, a fund buys U.S. government
securities from a bank or broker-dealer at one price and agrees to sell them
back to the bank or broker-dealer at a higher price on a specified date. A
custodian bank approved by the funds' Board holds the securities subject to
resale on behalf of a fund. The bank or broker-dealer must transfer to the
custodian securities with an initial market value of at least 102% of the
repurchase price to help secure the obligation to repurchase the securities
at a later date. The securities are then marked to market daily, that is,
their value is adjusted daily to equal their market value, to maintain
coverage of at least 100%. If the bank or broker-dealer does not repurchase
the securities as agreed, a fund may experience a loss or delay in the
liquidation of the securities underlying the repurchase agreement and may
also incur liquidation costs. The funds, however, intend to enter into
repurchase agreements only with banks or broker-dealers that are considered
creditworthy (I.E., banks or broker-dealers that have been determined by each
fund's manager to present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction).
REVERSE REPURCHASE AGREEMENTS. Certain funds may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. A fund sells securities to a bank or
dealer and agrees to repurchase them at a mutually agreed price and date.
Cash or liquid high-grade debt securities having an initial market value,
including accrued interest, equal to at least 102% of the dollar amount sold
by the fund are segregated, i.e., set aside, as collateral and
marked-to-market daily to maintain coverage of at least 100%. Reverse
repurchase agreements involve the risk that the market value of the
securities retained by a fund may decline below the price of the securities
the fund has sold but is obligated to repurchase under the agreement. A
default by the purchaser might cause the fund to experience a loss or delay
in the liquidation costs. The funds intend to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The manager
will evaluate the creditworthiness of these entities prior to engaging in
such transactions and it will conduct these activities under the general
supervision of the Board.
LOANS OF PORTFOLIO SECURITIES Consistent with procedures approved by the
Board and subject to the following conditions, each fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. These loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount equal (on a daily marked-to-market basis) to the current
market value of the securities loaned. The funds retain all or a portion of
the interest received on the investment of the cash collateral or receive a
fee from the borrower. The funds will continue to receive any interest or
dividends paid on any loaned securities and will continue to have voting
rights with respect to the securities. However, as with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail.
ILLIQUID SECURITIES Each fund may invest in securities that cannot be
offered to the public for sale without first being registered under the
Securities Act of 1933 ("restricted securities"), or in other securities
which, in the opinion of the Board, may be illiquid.
Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which a
fund has valued them. Subject to this limitation, the Board has authorized
each fund to invest in restricted securities where such investment is
consistent with each fund's investment objective. The Board has authorized
these securities to be considered liquid to the extent the investment manager
determines on a daily basis that there is a liquid institutional or other
market for such securities - for example, restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. In spite of the managers' determinations
in this regard, the Board will remain responsible for such determinations and
will consider appropriate action, consistent with a fund's objectives and
policies, if the security should become illiquid after purchase. In
determining whether a restricted security is properly considered a liquid
security, the investment manager and the Board will take into account the
following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers; (iii) dealer undertakings to make a
market in the security; and (iv) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). To the extent a
fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED ("TBA") TRANSACTIONS
Certain funds may purchase securities on a "when-issued," "delayed delivery"
or "TBA" basis. These transactions are arrangements under which a fund may
purchase securities with payment and delivery scheduled for a future time,
generally within 30 to 60 days. These transactions are subject to market
fluctuation and are subject to the risk that the value or yields at delivery
may be more or less than the purchase price or yields available when the
transaction was entered into. Although the funds will generally purchase
these securities on a when-issued or TBA basis with the intention of
acquiring such securities, they may sell such securities before the
settlement date if it is deemed advisable. When a fund is the buyer in such a
transaction, it will maintain, in a segregated account with its custodian
bank, cash or marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The creation and
maintenance of these accounts have the effect of limiting the extent to which
a fund may engage in these transactions. To the extent a fund engages in
when-issued, delayed delivery or TBA transactions, it will do so only for the
purpose of acquiring portfolio securities consistent with the fund's
investment objectives and policies, and not for the purpose of investment
leverage. In when-issued, delayed delivery and TBA transactions, a fund
relies on the seller to complete the transaction. The other party's failure
to do so may cause a fund to miss a price or yield considered advantageous.
Securities purchased on a when-issued, delayed delivery or TBA basis do not
generally earn interest until their scheduled delivery date. The funds are
not subject to any percentage limit on the amount of their assets that may be
invested in when-issued, delayed delivery or TBA purchase obligations.
MORTGAGE BACKED SECURITIES
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). Certain funds may invest in
ARMS. ARMS, like traditional mortgage securities, are interests in pools of
mortgage loans. The interest rates on the mortgages underlying ARMS are reset
periodically. The adjustable interest rate feature of the mortgages
underlying the mortgage securities in which the funds invest generally will
act as a buffer to reduce sharp changes in a fund's net asset value in
response to normal interest rate fluctuations. As the interest rates are
reset, the yields of the securities will gradually align themselves to
reflect changes in market rates so that their market value will remain
relatively stable compared to fixed-rate securities. As a result, a fund's
net asset value should fluctuate less significantly than if the fund invested
in more traditional long-term, fixed-rate securities. During periods of
extreme fluctuation in interest rates, however, a fund's net asset value will
fluctuate.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, a fund may participate in increases in interest rates,
resulting in both higher current yields and lower price fluctuations. This
differs from fixed-rate mortgages, which generally decline in value during
periods of rising interest rates. A fund, however, will not benefit from
increases in interest rates to the extent that interest rates exceed the
maximum allowable annual or lifetime reset limits (or "cap rates") for a
particular mortgage security. Since most mortgage securities held by the
funds will generally have annual reset limits or caps of 100 to 200 basis
points, short-term fluctuations in interest rates above these levels could
cause these mortgage securities to "cap out" and behave more like long-term,
fixed-rate debt securities. If prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, a fund
generally will be able to reinvest these amounts in securities with a higher
current rate of return.
During periods of rising interest rates, changes in the interest rates on
mortgages underlying ARMS lag behind changes in the market rate. This may
result in a lower net asset value until the interest rate resets to market
rates. Thus, you could suffer some principal loss if you sell your shares of
a fund before the interest rates on the underlying mortgages in the
underlying portfolio reset to market rates. Also, a fund's net asset value
could vary to the extent that current yields on mortgage-backed securities
are different from market yields during interim periods between coupon reset
dates. A portion of the ARMS in which the funds may invest may not reset for
up to five years.
During periods of declining interest rates, the interest rates may reset
downward, resulting in lower yields to a fund. As a result, the value of ARMS
is unlikely to rise during periods of declining interest rates to the same
extent as the value of fixed-rate securities. As with other mortgage-backed
securities, declining interest rates may result in accelerated prepayments of
mortgages, and a fund may have to reinvest the proceeds from the prepayments
at the lower prevailing interest rates.
For certain types of ARMS, the rate of amortization of principal, as well as
interest payments, change in accordance with movements in a pre-specified,
published interest rate index. The amount of interest due to an ARMS holder
is calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest
that is charged to the mortgagor during the life of the mortgage or to
maximum and minimum changes to that interest rate during a given period.
Mortgage loan pools offering pass-through investments in addition to those
described above may be created in the future. The mortgages underlying these
securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term, fixed-rate mortgages. As new
types of mortgage securities are developed and offered to investors, a fund
may invest in them if they are consistent with the fund's goal, policies, and
quality standards.
ADJUSTABLE RATE SECURITIES ("ARS"). Certain funds will invest in ARS. ARS are
debt securities with interest rates that are adjusted periodically pursuant
to a pre-set formula and interval. Movements in the relevant index on which
adjustments are based, as well as the applicable spread relating to the ARS,
will affect the interest paid on ARS and, therefore, the current income
earned by a fund by investing in ARS. (See "Resets.")
The interest rates on ARS are readjusted periodically to an amount above the
chosen interest rate index. These readjustments occur at intervals ranging
from one to sixty months. The degree of volatility in the market value of the
securities held by a fund and of the net asset value of the fund's shares
will be a function primarily of the length of the adjustment period and the
degree of volatility in the applicable indices. It will also be a function of
the maximum increase or decrease of the interest rate adjustment on any one
adjustment date, in any one year, and over the life of the securities. These
maximum increases and decreases are typically referred to as "caps" and
"floors," respectively. A fund does not seek to maintain an overall average
cap or floor, although the manager will consider caps or floors in selecting
ARS for a fund.
While the funds investing in ARS do not attempt to maintain a stable net
asset value per share, during periods when short-term interest rates move
within the caps and floors of the securities held by a fund, the fluctuation
in market value of the ARS held by the fund is expected to be relatively
limited, since the interest rates on the ARS generally adjust to market rates
within a short period of time. In periods of substantial short-term
volatility in interest rates, the value of a fund's holdings may fluctuate
more substantially because the caps and floors of its ARS may not permit the
interest rates to adjust to the full extent of the movements in the market
rates during any one adjustment period. In the event of dramatic increases in
interest rates, the lifetime caps on the ARS may prevent the securities from
adjusting to prevailing rates over the term of the loan. In this case, the
market value of the ARS may be substantially reduced, with a corresponding
decline in a fund's net asset value.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") Certain funds may invest in CMOs
issued and guaranteed by U.S. government agencies or instrumentalities and in
CMOs issued by certain financial institutions and other mortgage lenders.
CMOs are debt instruments issued by special purpose entities that are secured
by pools of mortgage loans or other mortgage-backed securities. Principal and
interest on the underlying collateral are paid to the issuer of the CMOs to
make required payments on these securities.
A CMO is a mortgage-backed security that separates mortgage pools into
short-, medium-, and long-term components. Each component pays a fixed rate
of interest to security holders at regular intervals. These components enable
an investor, such as a fund, to predict more accurately the pace at which
principal is returned.
CMOs purchased by a fund may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of
the U.S. government; or
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer, an entity specifically created for
this purpose, and the guarantee is collateralized by U.S. government
securities.
If the collateral securing the obligations is insufficient to make payment on
the obligation, a holder could sustain a loss. In addition, a fund may buy
CMOs without insurance or guarantees if, in the opinion of the manager, the
sponsor is creditworthy. The ratings of the CMOs will be consistent with the
ratings criteria of the fund.
RESETS. The interest rates paid on ARMS, ARS, and CMOs generally are
readjusted at intervals of one year or less to an increment over some
predetermined interest rate index, although some securities in which the
funds may invest may have intervals as long as five years. There are three
main categories of indices: those based on LIBOR, those based on U.S.
Treasury securities, and those derived from a calculated measure such as a
cost of funds index or a moving average of mortgage rates. Commonly used
indices include:
the one-, three-, and five-year constant-maturity Treasury rates;
the three-month Treasury bill rate;
the 180-day Treasury bill rate;
rates on longer-term Treasury securities;
the 11th District Federal Home Loan Bank Cost of Funds; the National
Median Cost of Funds;
the one-, three-, six-month, or one-year LIBOR; the prime rate of a
specific bank; or
commercial paper rates.
Some indices, such as the one-year constant-maturity Treasury rate, closely
mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of Funds, tend to lag behind changes in
market interest rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages that collateralize ARMS and CMOs
will frequently have caps and floors that limit the maximum amount by which
the loan rate to the borrower may change up or down (a) per reset or
adjustment interval and (b) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE SECURITIES. Certain funds may invest in stripped mortgage
securities, which are derivative multi-class mortgage securities. The
stripped mortgage securities in which a fund may invest will only be issued
or guaranteed by the U.S. government, its agencies or instrumentalities.
Stripped mortgage securities have greater market volatility than other types
of mortgage securities in which a fund invests.
Stripped mortgage securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security has
one class that receives some of the interest and most of the principal from
the mortgage assets, while the other class receives most of the interest and
the remainder of the principal. In the most extreme case, one class receives
all of the interest (the interest-only or "IO" class), while the other class
receives the entire 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 underlying mortgage assets. A rapid rate of
principal payments may have a material adverse effect on the yield to
maturity of any IO class held by a fund. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the fund may
fail to recoup its initial investment fully, 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 a fund, through several investment banking firms acting as
brokers or dealers. These securities were only recently developed, and
traditional trading markets have not yet been established for all stripped
mortgage securities. Accordingly, some of these securities may be illiquid.
The staff of the SEC has indicated that only government-issued IO or PO
securities that are backed by fixed-rate mortgages may be deemed to be
liquid, if procedures with respect to determining liquidity are established
by a fund's board. The Board may, in the future, adopt procedures that would
permit 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. This position may be
changed in the future, without notice to shareholders, in response to the SEC
staff's continued reassessment of this matter, as well as to changing market
conditions.
INVERSE FLOATERS. Certain funds may invest in inverse floaters. Inverse
floaters 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.
ASSET-BACKED SECURITIES. Certain funds may invest in asset-backed securities,
including adjustable-rate asset-backed securities that have interest rates
that reset at periodic intervals. Asset-backed securities are similar to
mortgage-backed securities. The underlying assets, however, may include
receivables on home equity and credit card loans, and automobile, mobile
home, and recreational vehicle loans and leases. Asset-backed securities are
issued in either a pass-through structure (similar to a mortgage pass-through
structure) or a pay-through structure (similar to a CMO structure). There may
be other types of asset-backed securities that are developed in the future in
which a fund may invest. In general, collateral supporting asset-backed
securities has shorter maturities than mortgage loans and historically has
been less likely to experience substantial prepayment.
"ROLLS"
U.S. TREASURY ROLLS Certain funds may 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. Two potential advantages of this strategy are (1) the fund
can regularly and incrementally adjust its weighted average maturity of its
portfolio securities (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.
During the period before the settlement date, the fund continues to earn
interest on the securities it is selling. It does not earn interest on the
securities that it is purchasing until after the settlement date. The fund
could suffer an opportunity loss if the counterparty to the roll failed to
perform its obligations on the settlement date, and if market conditions
changed adversely. The fund intends, however, 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.
MORTGAGE DOLLAR ROLLS Certain funds may enter into mortgage "dollar rolls"
in which a fund sells mortgage-backed securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar (name,
type, coupon, and maturity) securities on a specified future date. During the
period between the sale and repurchase (the "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 mortgage 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. The fund could suffer a
loss if the contracting party fails to perform the future transaction, with
the result that the fund may not be able to buy back the mortgage-backed
securities it initially sold. The funds intend to enter into mortgage dollar
rolls only with government securities dealers recognized by the Federal
Reserve Board or with member banks of the Federal Reserve System.
MUNICIPAL SECURITIES Certain funds may invest in "municipal securities."
These securities are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories
and possessions, to borrow money for various public or private projects. The
issuer pays a fixed or variable rate of interest, and must repay the amount
borrowed (the "principal") at maturity. Municipal securities generally pay
interest free from federal income tax.
SMALL COMPANIES Certain funds may invest in the securities of companies with
a market capitalization of $1.5 billion or less. Small companies are often
overlooked by investors or undervalued in relation to their earnings power.
Because small companies generally are not as well known to the investing
public and have less of an investor following than larger companies, they may
provide greater opportunities for long-term capital growth as a result of
relative inefficiencies in the marketplace. These companies may be
undervalued because they are part of an industry that is out of favor with
investors, although the individual companies may have high rates of earnings
growth and be financially sound.
BANK OBLIGATIONS, or instruments secured by bank obligations, include fixed,
floating or variable rate CDs, letters of credit, time deposits, bank notes
and bankers' acceptances. To the extent that a fund invests in bank
obligations, it will invest in those obligations or instruments issued by
banks and savings institutions with assets of at least $1 billion. Time
deposits are non-negotiable deposits that are held in a banking institution
for a specified time at a stated interest rate.
Certain funds may invest in obligations of U.S. banks, foreign branches of
U.S. banks, foreign branches of foreign banks, and U.S. branches of foreign
banks that have a federal or state charter to do business in the U.S. and are
subject to U.S. regulatory authorities.
COMMERCIAL PAPER typically refers to short-term obligations of banks,
corporations and other borrowers with maturities of up to 270 days. A fund
may invest in domestic or foreign commercial paper. See the Appendix for a
description of commercial paper ratings.
STRUCTURED NOTES are derivative instruments that entitle a holder to receive
some portion of the principal or interest payments that 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 of the change in an identified or
"linked" equity security, currency, interest rate, index or other financial
indicator. 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.
SHORT SALES Certain funds may make short sales of securities. In a short
sale a fund does not immediately deliver the securities sold and does not
immediately receive the proceeds from the sale. To fulfill its obligation to
deliver the securities sold short, the fund must borrow the security sold
short and deliver it to the broker through which it made the sale. A fund's
obligation to replace the borrowed security will be secured by collateral,
usually cash, U.S. government securities or other marketable securities. A
fund may make a short sale when the manager believes the price of the stock
may decline and when, for tax or other reasons, the manager does not
currently want to sell the stock or convertible security it owns. In this
case, any decline in the value of a fund's portfolio securities would be
reduced by a gain in the short sale transaction. Conversely, any increase in
the value of a fund's portfolio securities would be reduced by a loss in the
short sale transaction.
Certain funds may also make short sales "against the box" without limitation.
In this type of short sale, a fund owns an equal amount of the securities
subject to the short sale or owns securities that are convertible or
exchangeable, without payment of further consideration, into an equal amount
of such security.
BORROWING Most funds may borrow in excess of 5% only from banks for
temporary or emergency purposes. Certain funds may borrow up to 33 1/3% of
their total net assets to make investments or for other purposes. See
"Investment Restrictions" for more information about the funds' policies with
respect to borrowing.
Under federal securities laws, a fund may borrow from banks only and is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if disadvantageous from an investment
standpoint.
Leveraging by means of borrowing will exaggerate the effect of any increase
or decrease in the value of portfolio securities on a fund's net asset value,
and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average
balances) which may or may not exceed the income received from the securities
purchased with borrowed funds.
DIVERSIFICATION Each fund, except the Global Health Care Fund, Global
Income Fund, and the Value Fund will operate as a diversified fund under
federal securities law. Each diversified fund may not, with respect to 75% of
its total assets, purchase the securities of any one issuer (except U.S.
government securities) if more than 5% of the value of the fund's assets
would be invested in such issuer.
In addition, each fund intends to diversify its investments to meet the
requirements under federal tax laws relating to regulated investment
companies and variable contracts issued by insurance companies. In order to
comply with the diversification requirements related to regulated investment
companies, each fund will limit its investments so that, at the close of each
quarter of the taxable year:
(i) With respect to 50% of the market value of its assets, not more
than 5% of the market value of its assets will be invested in the
securities of a single issuer and each fund will not own more than
10% of the outstanding voting securities of a single issuer. A
fund's investments in U.S. government securities are not subject to
these limitations, and
(ii) Not more than 25% of the market value of each fund's assets will be
invested in the securities of a single issuer.
In order to comply with the diversification requirements related to variable
contracts issued by insurance companies, each fund will diversify its
investments such that:
(i) No more than 55% of the fund's assets are represented by any one
investment;
(ii) No more than 70% of the fund's assets are represented by any two
investments;
(iii) No more than 80% of the fund's assets are represented by any three
investments; and
(iv) No more than 90% of the fund's assets are represented by any four
investments. In the case of funds investing in obligations of U.S.
government agencies or instrumentalities, each agency or
instrumentality is treated as a separate issuer for purposes of the
above rules.
PORTFOLIO TURNOVER Each fund may purchase and sell securities without regard
to the length of time the security has been held, and the frequency of
portfolio transactions ("portfolio turnover") will vary from year to year,
depending on market conditions. High turnover will increase the fund's
transaction costs. The manager will weigh the benefits of short-term trading
against the transaction costs of higher turnover.
Higher turnover generally increases transaction costs, which are fund
expenses, but would not create capital gains for investors because of the
tax-deferred status of variable annuity and variable life insurance
investments. Portfolio turnover rates for recent years are shown in the
"Financial Highlights."
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility, that is, sharp
price movements over relatively short time periods, or a prolonged general
decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the
funds (other than the Money Market Fund) may invest up to 100% of their
assets in high quality money market instruments. These include government
securities, bank obligations, the highest quality commercial paper and
repurchase agreements.
In addition, certain funds may also invest in short-term fixed-income
securities, non-U.S. currency, short-term instruments denominated in non-U.S.
currencies, or 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.
Any decision to make a substantial withdrawal for a sustained period of time
from a fund's investment goals will be reviewed by the Board.
RISKS
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The value of your shares will increase as the value of the securities owned
by a fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the
value of any particular security that the fund owns, the value of fund shares
may also change with movements in the stock and bond markets as a whole.
FOREIGN SECURITIES Certain funds have an unlimited ability to purchase
securities in any foreign country, developed or developing, if they are
listed on a stock exchange, as well as a limited ability to purchase such
securities if they are unlisted. While foreign securities may offer
significant opportunities for gain, they also involve additional risks that
can increase the potential for losses in the fund. These risks can be
significantly greater for investments in emerging markets. Investments in
depositary receipts also involve some or all of the risks described below.
There may be less publicly available information about foreign companies
compared to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. A fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than
those in the U.S. or other major economies. In many foreign countries there
is less government supervision and regulation of stock exchanges, brokers,
custodians and listed companies than in the U.S. There is an increased risk,
therefore, of uninsured loss due to lost, stolen, or counterfeit stock
certificates. Foreign markets have substantially less volume than the New
York Stock Exchange and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the U.S., are likely to be higher. Custodial services, and
other costs relating to investment in foreign markets, including developing
markets, are generally higher than in the U.S. Settlement practices may be
cumbersome and result in delays that may affect portfolio liquidity, that is,
it may affect a fund's ability to sell its securities. The funds may have
greater difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies, and obtaining judgments with respect to foreign investments
in foreign courts than with respect to domestic issuers in U.S. courts.
A fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
Many debt obligations of foreign issuers, and especially emerging market
issuers, are not rated by U.S. rating agencies and their selection depends on
the manager's internal analysis.
EMERGING MARKETS. Investments in companies domiciled in developing countries
may be subject to potentially higher risks, making these investments more
volatile, than investments in developed countries. These risks include (i)
less social, political and economic stability; (ii) the risk that the small
size of the markets for such securities and the low or nonexistent volume of
trading may result in a lack of liquidity and in greater price volatility;
(iii) the existence of certain national policies which may restrict each
fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in many developing countries, of a
capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in some developing
countries may be slowed or reversed by unanticipated political or social
events in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, the Communist
governments of a number of Eastern European countries expropriated large
amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of expropriation, each fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in certain developing countries.
Finally, even though the currencies of some developing countries, such as
certain Eastern European countries may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to a funds' shareholders.
Repatriation, that is, the return to an investor's homeland, of investment
income, capital and proceeds of sales by foreign investors may require
governmental registration or approval in some developing countries. Delays in
or a refusal to grant any required governmental registration or approval for
such repatriation could adversely affect the funds. Further, the economies of
developing countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries
with which they trade.
RUSSIAN SECURITIES. Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with investing in
the U.S. securities markets, and should be considered highly speculative.
Such risks include, together with Russia's continuing political and economic
instability and the slow-paced development of its market economy, the
following:
(a) delays in settling portfolio transactions and the risk of loss arising
out of Russia's system of share registration and custody;
(b) the risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment;
(c) the pervasiveness of corruption, insider-trading, and crime in the
Russian economic system;
(d) currency exchange rate volatility and the lack of available currency
hedging instruments such as the techniques discussed under "Currency
techniques and hedging" in this SAI;
(e) higher rates of inflation (including the risk of social unrest
associated with periods of hyper-inflation);
(f) controls on foreign investment and local practices disfavoring foreign
investors, and limitations on repatriation of invested capital, profits
and dividends;
(g) the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the economic
reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies
such as the support of certain industries at the expense of other
sectors or investors, a return to the centrally planned economy that
existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises;
(h) the risks of investing in securities with substantially less liquidity
and in issuers having significantly smaller market capitalizations,
when compared to securities and issuers in more developed markets;
(i) the difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information;
(j) the financial condition of Russian companies, including large amounts
of inter-company debt which may create a payments crisis on a national
scale;
(k) dependency on exports and the corresponding importance of
international trade;
(l) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation or, in the
alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws;
(m) possible difficulty in identifying a purchaser of securities held by
the funds due to the underdeveloped nature of the securities markets;
(n) the possibility that pending legislation could restrict the levels of
foreign investment in certain industries, thereby limiting the number
of investment opportunities in Russia;
(o) the risk that pending legislation would confer to Russian courts the
exclusive jurisdiction to resolve disputes between foreign investors
and the Russian government, instead of bringing such disputes before an
internationally-accepted third-country arbitrator; and
(p) the difficulty in obtaining information about the financial condition
of Russian issuers, in light of the different disclosure and accounting
standards applicable to Russian companies.
There is little long-term historical data on Russian securities markets
because they are relatively new and a substantial proportion of securities
transactions in Russia is privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or by formal share certificates. However,
there is no central registration system for shareholders and these services
are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision nor are they licensed with any governmental entity and it
is possible for the funds to lose their registration through fraud,
negligence or even mere oversight. While each fund will endeavor to ensure
that its interest continues to be appropriately recorded by either itself or
through a custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent
illegal amendment or other fraudulent act may deprive the funds of their
ownership rights or improperly dilute their interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the funds to enforce any
rights they may have against the registrar or issuer of the securities in
the event of loss of share registration. Furthermore, although a Russian
public enterprise with more than 500 shareholders is required by law to
contract out the maintenance of its shareholder register to an independent
entity that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of independence,
management of a company may be able to exert considerable influence over who
can purchase and sell the company's shares by illegally instructing the
registrar to refuse to record transactions in the share register. In
addition, so-called "financial-industrial groups" have emerged in recent
years that seek to deter outside investors from interfering in the management
of companies they control. These practices may prevent the funds from
investing in the securities of certain Russian companies deemed suitable by
the manager. Further, this also could cause a delay in the sale of Russian
company securities by a fund if a potential purchaser is deemed unsuitable,
which may expose the fund to potential loss on the investment.
CURRENCY RISK Many of the investments in certain funds are denominated in
foreign currencies. Changes in foreign currency exchange rates will affect
the value of what certain funds own, and those funds' share price. In
addition, changes in foreign currency exchange rates will affect a fund's
income and distributions to shareholders. To the extent that the manager
intends to hedge currency risk in certain funds, the funds endeavor to buy
and sell foreign currencies on as favorable a basis as practicable. Some
price spread in currency exchange (to cover service charges) may be incurred,
particularly when a fund changes investments from one country to another or
when proceeds of the sale of shares in U.S. dollars are used for the purchase
of securities in foreign countries. Some countries may adopt policies that
would prevent the funds from transferring cash out of the country or withhold
portions of interest and dividends at the source.
The funds may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have
fixed or managed currencies that are not free-floating against the U.S.
dollar. Certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. Where
the exchange rate for a currency declines materially after a fund's income
has been accrued and translated into U.S. dollars, a fund may need to redeem
portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a fund incurs expenses in U.S.
dollars and the time such expenses are paid, the fund will have to convert a
greater amount of the currency into U.S. dollars in order to pay the expenses.
Through the funds' flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the funds' investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers the degree of risk involved through the
holding of portfolio securities in domestic and foreign securities
depositories. However, in the absence of willful misfeasance, bad faith, or
gross negligence on the part of the funds' manager, any losses resulting from
the holding of the funds' portfolio securities in foreign countries and/or
with securities depositories will be at the risk of the shareholders. No
assurance can be given that the board of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect
on a fund, the fund's manager and its affiliated services providers are
taking steps they believe are reasonably designed to address the euro issue.
INTEREST RATE RISK To the extent a fund invests in debt securities, changes
in interest rates in any country where the fund is invested will affect the
value of the fund's portfolio and its share price. Rising interest rates,
which often occur during times of inflation or a growing economy, are likely
to have a negative effect on the value of the fund's shares. Of course,
interest rates throughout the world have increased and decreased, sometimes
very dramatically, in the past. These changes are likely to occur again in
the future at unpredictable times.
LOWER RATED SECURITIES RISK Certain funds may invest in non-investment grade
securities, including such securities issued by foreign companies and
governments. Because these funds may invest in securities below investment
grade, an investment in any of these funds is subject to a higher degree of
risk than an investment in a fund that invests primarily in higher-quality
securities. You should consider the increased risk of loss to principal that
is present with an investment in higher risk securities, such as those in
which certain funds invest. Accordingly, an investment in any fund should not
be considered a complete investment program and should be carefully evaluated
for its appropriateness in light of your overall investment needs and goals.
The market value of high yield, lower-quality fixed-income securities,
commonly known as junk bonds, tends to reflect individual developments
affecting the issuer to a greater degree than the market value of
higher-quality securities, which react primarily to fluctuations in the
general level of interest rates. Lower-quality securities also tend to be
more sensitive to economic conditions than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities of these issuers is
generally greater than the risk associated with higher-quality securities.
For example, during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality securities may experience financial
stress and may not have sufficient cash flow to make interest payments. The
issuer's ability to make timely interest and principal payments may also be
adversely affected by specific developments affecting the issuer, including
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
a fund's portfolio defaults, the fund may have unrealized losses on the
security, which may lower the fund's net asset value. Defaulted securities
tend to lose much of their value before they default. Thus, a fund's net
asset value may be adversely affected before an issuer defaults. In addition,
a fund may incur additional expenses if it must try to recover principal or
interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from a fund. Although these
securities are typically not callable for a period of time, usually for three
to five years from the date of issue, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for a fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more
difficult for a fund to manage the timing of its income. To generate cash
for distributions, a fund may have to sell portfolio securities that it
otherwise may have continued to hold or use cash flows from other sources,
such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse
impact on market price of a security and on a fund's ability to sell a
security in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, or if necessary to meet the fund's
liquidity needs. Reduced liquidity may also make it more difficult to obtain
market quotations based on actual trades for purposes of valuing a fund's
portfolio.
Certain funds may buy high yield, fixed-income securities that are sold
without registration under the federal securities laws and therefore carry
restrictions on resale. While many high yielding securities have been sold
with registration rights, covenants and penalty provisions for delayed
registration, if a fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter of the
securities under the Securities Act of 1933, which entails special
responsibilities and liabilities. A fund may also incur special costs in
disposing of restricted securities, although the fund will generally not
incur any costs when the issuer is responsible for registering the securities.
Certain funds may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The funds have no arrangement with its underwriter or any
other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth
before 1990 paralleled a long economic expansion. The recession that began in
1990 disrupted the market for high yield securities and adversely affected
the value of outstanding securities, as well as the ability of issuers of
high yield securities to make timely principal and interest payments.
Although the economy has improved and high yield securities have performed
more consistently since that time, the adverse effects previously experienced
may reoccur. For example, the highly publicized defaults on some high yield
securities during 1989 and 1990 and concerns about a sluggish economy that
continued into 1993 depressed the prices of many of these securities. While
market prices may be temporarily depressed due to factors such as these, the
ultimate price of any security generally reflects the true operating results
of the issuer. Factors adversely impacting the market value of high yield
securities may lower a fund's net asset value. A fund relies on the manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the manager takes into consideration, among other
things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters.
The credit risk factors above also apply to lower-quality zero coupon,
deferred interest and pay-in-kind securities. These securities have an
additional risk, however, because unlike securities that pay interest
throughout the time until maturity, a fund will not receive any cash until
the cash payment date. If the issuer defaults, a fund may not obtain any
return on its investment.
Zero coupon or deferred interest securities are debt obligations that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face
amount or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing interest
rates, liquidity of the security, and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date approaches.
The value of zero coupon securities is generally more volatile than the value
of other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a
greater degree than other fixed-income securities having similar maturities
and credit quality.
Certain of the high yielding, fixed-income securities in which the funds may
invest may be purchased at a discount. When held to maturity or retired,
these securities may include an element of capital gain. Capital losses may
be realized when securities purchased at a premium, that is, in excess of
their stated or par value, are held to maturity or are called or redeemed at
a price lower than their purchase price. Capital gains or losses also may be
realized upon the sale of securities.
The tables below show the percentage of the Global Income, Asset Allocation,
High Income and Income Securities Funds' assets invested in securities rated
by S&P or Moody's in the rating categories shown. A credit rating by a rating
agency evaluates the safety of principal and interest based on an evaluation
of the security's credit quality, but does not consider the market risk or
the risk of fluctuation in the price of the security. The information shown
is based on a dollar-weighted average of each fund's portfolio composition
based on month-end assets for each of the 12 months in the fiscal year ended
December 31, 1998.
{to be provided by amendment}
- --------------------------------------------------------------------------------
MOODY'S Income Global Asset Global Income High Income
RATING Securities Fund Allocation Fund Fund Fund
xx% xx%
Aaa ........xx% xx% xx% xx% xx%
Aa ...............xxx% xx% xx% xx%
A ................xxx% xx% xx% xx%
Baa ..............xxx% xx% xx% xx%
Ba ...............xxx% xx% xx% xx%
B.................xxx% xx% xx% xx%
Caa ..............xxx% xx% xx% xx%
Ca ...............xxx% xx% xx% xx%
C ................xx% xx% xx%
- --------------------------------------------------------------------------------
*xx% of these securities, which are unrated by Moody's, have been included in
the __ rating category.
- --------------------------------------------------------------------------------
S&P Income Global Asset Global Income High Income
RATING Securities Allocation Fund Fund
Fund Fund..
xx% xx% xx%
AAA ..........xxx% xx% xx% xx%
AA............xxx% xx% xx% xx%
A ............xxx% xx% xx% xx%
BBB ..........xxx% xx% xx% xx%
BB ...........xxx% xx% xx% xx%
B.............xxx% xx% xx% xx%
CCC ..........xxx% xx% xx% xx%
CC ...........xxx% xx% xx% xx%
C .......... xx% xx% xx% xx%
D xx%
- --------------------------------------------------------------------------------
*xx% of these securities, which are unrated by S&P, have been included in the
__ rating category.
DEFAULTED DEBT Certain funds may buy debt securities of issuers that are not
currently paying interest, as well as issuers who are in default, and may
keep an issue that has defaulted. A fund will buy defaulted debt securities
if, in the opinion of the manager, they may present an opportunity for later
price recovery, the issuer may resume interest payments, or other
advantageous developments appear likely in the near future. In general,
securities that default lose much of their value before the actual default so
that the security, and thus the fund's net asset value, would be impacted
before the default. Defaulted debt securities may be illiquid and, as such,
will be part of the percentage limits discussed under "Investment
Restrictions."
NON-DIVERSIFICATION RISK Because certain funds are non-diversified, there is
no restriction under the Investment Company Act of 1940 on the percentage of
their assets that they may invest at any time in the securities of any
issuer. Nevertheless, these funds' non-diversified status may expose them to
greater risk or volatility than diversified funds with otherwise similar
investment policies, since the funds may invest a larger portion of its
assets in securities of a small number of issuers.
GINNIE MAE yields (interest income as a percentage of price) have
historically exceeded the current yields on other types of U.S. government
securities with comparable maturities. The effects of interest rate
fluctuations and unpredictable prepayments of principal, however, can greatly
change realized yields. As with most bonds, in a period of rising interest
rates, the value of a Ginnie Mae will generally decline. In a period of
declining interest rates, it is more likely that mortgages contained in
Ginnie Mae pools will be prepaid, thus reducing the effective yield. This
potential for prepayment during periods of declining interest rates may
reduce the general upward price increases of Ginnie Maes as compared to the
increases experienced by noncallable debt securities over the same periods.
In addition, any premium paid on the purchase of a Ginnie Mae will be lost if
the obligation is prepaid. Of course, price changes of Ginnie Maes and other
securities held by the funds will have a direct impact on the net asset value
per share of the funds.
SBA RISKS 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.
SMALL COMPANIES Historically, small company stocks have been more volatile in
price than larger company stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks,
and the greater sensitivity of small companies to changing economic
conditions. Besides exhibiting greater volatility, small company stocks may,
to a degree, fluctuate independently of larger company stocks. Small company
stocks may decline in price as large company stocks rise, or rise in price as
large company stocks decline. Investors should therefore expect that the net
asset value of a fund that invests a substantial portion of its net assets in
small company stocks may be more volatile than the shares of a fund that
invests solely in larger company stocks.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of
the security has declined, a fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy code or other laws, a
court may determine that the underlying security is collateral for a loan by
a fund not within the control of a fund, and therefore the realization by the
fund on the collateral may be automatically stayed. Finally, it is possible
that the fund may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the manager acknowledges these risks, it is expected that if
repurchase agreements are otherwise deemed useful to a fund, these risks can
be controlled through careful monitoring procedures.
REVERSE REPURCHASE AGREEMENTS are considered borrowings by the funds and as
such are subject to the investment limitations discussed under "Fundamental
Investment Restrictions." These transactions may increase the volatility of a
fund's income or net asset value. The fund carries the risk that any
securities purchased with the proceeds of the transaction will depreciate or
not generate enough income to cover the fund's obligations under the reverse
repurchase transaction. These transactions also increase the interest and
operating expenses of a fund.
MORTGAGE BACKED SECURITIES differ from conventional bonds in that the
principal is paid back over the life of the certificate rather than at
maturity. As a result, funds invested in these securities will receive
monthly scheduled payments of principal and interest on its investment in
these securities, and may receive unscheduled principal payments representing
prepayments on the underlying mortgages. When a fund reinvests the payments
and any unscheduled prepayments of principal it receives, it may receive a
rate of interest that is lower than the rate on the existing security. For
this reason, mortgage-backed securities may be less effective than other
types of U.S. government securities as a means of "locking in" long-term
interest rates.
The market value of mortgage-backed securities, like other U.S. government
securities in the funds, will generally vary inversely with changes in market
interest rates, declining when interest rates rise and rising when interest
rates decline. However, mortgage-backed securities, while having comparable
risk of decline in value during periods of rising rates, may have less
potential for capital appreciation than other investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline. To the extent these securities are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may
result in some loss of a fund's principal investment to the extent of the
premium paid.
ASSET-BACKED SECURITIES have risks similar to mortgage-backed securities.
However, these 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, i.e.,
a lien on the item purchased by the consumer, 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.
OPTIONS ON SECURITIES The fund's options investments involve certain risks.
The effectiveness of an options strategy depends on the degree to which price
movements in the underlying securities correlate with price movements in the
relevant portion of the fund's portfolio. In addition, the fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option it has purchased, or that there may be a negative
correlation that would result in a loss on both the securities and the
option. If the manager is not successful in using options in managing a
fund's investments, the fund's performance will be worse than if the manager
did not employ such strategies.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. The purchaser of an option can lose the amount of the
premium plus related transaction costs. Moreover, a fund as an option writer
could lose amounts substantially in excess of its initial investment, due to
the margin and collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As
a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all
option positions entered into on a national securities exchange are cleared
and guaranteed by the Options Clearing Corporation, thereby reducing the risk
of counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
Although a fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option,
or at any particular time. For some options, no secondary market on an
exchange may exist and a fund may have difficulty effecting closing
transactions in particular options. Therefore, the fund would have to
exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities where a buyer
exercises put or call options. If a fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. There is no assurance
that higher than anticipated trading activity or other unforeseen events
might not, at times, render certain of the facilities of the Options Clearing
Corporation inadequate, and thereby result in the institution by an exchange
of special procedures which may interfere with the timely execution of
customers' orders.
OPTIONS ON STOCK INDICES A fund's ability to hedge effectively all or a
portion of its securities through transactions in options on stock indexes
depends on the degree to which price movements in the underlying index or
underlying securities correlate with price movements in the relevant portion
of the fund's portfolio. Inasmuch as these securities will not duplicate the
components of any index, the correlation will not be perfect. Consequently, a
fund bears the risk that the prices of the securities being hedged will not
move in the same amount as the hedging instrument. It is also possible that
there may be a negative correlation between the index and the hedged
securities that would result in a loss on both the securities and the hedging
instrument. Accordingly, successful use by a fund of options on stock
indexes, will be subject to the manager's ability to predict correctly
movements in the direction of the securities markets generally or of a
particular segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Positions in stock index options may be closed out only on an exchange that
provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option at any
specific time. Thus, it may not be possible to close an option position. The
inability to close options positions could have an adverse impact on the
fund's ability to effectively hedge its securities.
FUTURES CONTRACTS entail certain risks. A purchase or sale of a futures
contract may result in losses in excess of the amount invested. A fund may
not be able to properly hedge its securities where a liquid secondary market
is unavailable for the futures contract the fund wishes to close. In
addition, there may be an imperfect correlation between movements in the
securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency held by the fund. Although
the manager believes that the use of futures contracts will benefit certain
funds, if the manager's investment judgment about the general direction of
interest or currency exchange rates is incorrect, a fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if a fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of the bonds which it has
hedged because it will have offsetting losses in its futures positions.
Similarly, if a fund sells a foreign currency futures contract and the U.S.
dollar value of the currency unexpectedly increases, the fund will lose the
beneficial effect of the increase on the value of the security denominated in
that currency. In addition, in such situations, if a fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Sales of bonds may be, but are not necessarily, at
increased prices that reflect the rising market. A fund may have to sell
securities at a time when it may be disadvantageous to do so.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price. Once the daily
limit has been reached in a futures contract subject to the limit, no more
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and, therefore,
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
The funds which are authorized to engage in futures transactions intend to
purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available may be
relatively new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market will
develop or continue to exist. A fund may not be able to achieve a perfect
correlation between its futures positions and portfolio positions in
corporate fixed-income securities because futures contracts based on these
securities are not currently available.
Futures contracts that are purchased on foreign exchanges may not be as
liquid as those purchased on CTFC-designated contract markets. In addition,
foreign futures contracts may be subject to varied regulatory oversight.
OPTIONS ON FUTURES CONTRACTS The amount of risk a fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In writing options on futures, a fund's loss
is potentially unlimited and may exceed the amount of the premium received.
Also, a fund may not be able to properly hedge its securities where a liquid
secondary market is unavailable for the option the fund wishes to close. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased. A
fund will purchase a put option on a futures contract only to hedge the
fund's portfolio against the risk of rising interest rates or the decline in
the value of securities denominated in a foreign currency.
FORWARD CONTRACTS, CURRENCY FUTURES CONTRACTS AND OPTIONS ON FOREIGN
CURRENCIES. Successful use of forward contracts, currency futures contracts
and options on foreign currencies depends on the manager's ability to
properly predict movements in the foreign currency markets. There may be an
imperfect correlation between movements in the foreign currency on which a
forward contract, currency futures contract, or option on a foreign currency
is based and movements in the foreign currency.
Forward contracts are not traded on contract markets regulated by the CFTC or
by the SEC. The ability of a fund to use forward contracts could be
restricted to the extent that Congress authorizes the CFTC or the SEC to
regulate such transactions. Forward contracts are traded through financial
institutions acting as market makers. Also, a hedging strategy may not be
successful if the fund is unable to sell its forward contract, currency
futures contract, or option on a foreign currency with the market maker from
which it bought the security.
If a fund retains a portfolio security and enters into a closing transaction,
the fund will have a gain or a loss to the extent that the forward contract
prices have increased or decreased. If a fund enters into a closing
transaction, it may subsequently enter into a new forward contract to sell
the foreign currency. If forward prices decline between the date that a fund
enters into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the fund will realize a gain. If forward prices increase, a fund
will suffer a loss.
The purchase and sale of exchange-traded foreign currency options are subject
to the risks of the availability of a liquid secondary market, as well as the
risks of adverse market movements, possible intervention by governmental
authorities, and the effects of other political and economic events.
Futures contracts on currencies and options on foreign currencies may be
traded on foreign exchanges. These transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign
currencies. The value of such positions could also be adversely affected by
(i) other foreign political and economic factors, (ii) less available data
than in the U.S. on which to base trading decisions, (iii) delays in a fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the U.S., (iv) the imposition of exercise and
settlement terms and procedures, and margin requirements different from those
in the U.S., and (v) lesser trading volume.
INTEREST RATE AND CURRENCY SWAPS A fund will only enter into interest rate
swaps on a net basis, which means that the fund will receive or pay, 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, a fund's risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that the fund must make. If
the other party to an interest rate swap defaults, a fund's risk of loss
consists of the net amount of interest payments that the fund is 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, a fund could lose the entire principal value
of a currency swap if the other party defaults.
The use of interest rate and currency swaps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the managers are
incorrect in their forecasts of market values, interest rates and currency
exchange rates, the investment performance of a fund would be less favorable
than it would have been if this investment technique were not used.
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, that is, the securities may not be sold as readily as
other securities, 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, i.e., a change or a reversal in the direction of the market. The
Board of Trustees will monitor the liquidity of structured notes. Notes
determined to be illiquid will be subject to a fund's percentage limits on
illiquid securities.
REAL ESTATE Because certain funds invest in the real estate industry, a fund
could own real estate directly as a result of a default on debt securities it
may own. Receipt of rental income or income from the disposition of real
property by a fund may adversely affect its ability to retain its tax status
as a regulated investment company.
CONVERTIBLE SECURITIES have risk characteristics of both equity and debt
securities. Its value may rise and fall with the market value of the
underlying stock or, like a debt security, vary with changes in interest
rates and the credit quality of the issuer. A convertible security tends to
perform more like a stock when the underlying stock price is high (because it
is assumed it will be converted) and more like a debt security when the
underlying stock price is low (because it is assumed it will not be
converted). Because its value can be influenced by many different factors, a
convertible security is not as sensitive to interest rate changes as a
similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
A fund may have difficulty disposing of such securities because there may be
a thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and a fund's ability to
dispose of particular securities, when necessary, to meet a fund's liquidity
needs or in response to a specific economic event, such as the deterioration
in the creditworthiness of an issuer. Reduced liquidity in the secondary
market for certain securities may also make it more difficult for a fund to
obtain market quotations based on actual trades for purposes of valuing a
fund's portfolio. The funds, however, intend to acquire liquid securities,
though there can be no assurances that this will be achieved.
FUNDAMENTAL INVESTMENT RESTRICTIONS Each fund has adopted the following
restrictions as fundamental policies. This means they may only be changed if
the change is approved by (i) more than 50% of the fund's outstanding shares
or (ii) 67% or more of the fund's shares present at a shareholder meeting if
more than 50% of the fund's outstanding shares are represented at the meeting
in person or by proxy, whichever is less.
Each fund may not:
1. with respect to 75% of its total assets, except for the Global Income,
Global Health Care and Value Funds, 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 (except the Asset Allocation, Developing
Markets, Global Health Care, International Smaller Companies, Mutual
Discovery, Mutual Shares, Small Cap and Value Funds). The Asset Allocation,
Developing Markets, Global Health Care, International Smaller Companies,
Mutual Discovery, Mutual Shares, Small Cap and Value Funds may borrow money
from banks in an amount not exceeding 33 1/3% of the value of the fund's
total assets including the amount borrowed. Each of these funds may also
pledge, mortgage or hypothecate its assets to secure borrowings to an extent
not greater than 15% of the fund's total assets. Arrangements with respect to
margin for futures contracts, forward contracts and related options are not
deemed to be a pledge of assets.
3. lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of 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 Global Health Care, International Smaller Companies, Mutual
Discovery, Mutual Shares or Value Funds);
6. invest in securities for the purpose of exercising management or control
of the issuer (not applicable to the Mutual Discovery, Mutual Shares or Value
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 Global
Health Care Fund, Global Utility Fund, Natural Resources 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, Global Health Care
Fund, International Smaller Companies Fund, Mutual Discovery Fund, Mutual
Shares Fund, Small Cap Fund or the Value 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, Mutual Shares,
Global Health Care and Value Funds may engage in short sales to the extent
described in the prospectus and SAI, and (iii) the Natural Resources Fund,
the Global Health Care 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, the Value 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 Health Care Fund, 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, the Value 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, the Global
Health Care Fund, the International Equity Fund, the International Smaller
Companies Fund, the Mutual Discovery Fund, the Mutual Shares Fund, the
Pacific Fund, the Asset Allocation Fund, the Value 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, Global Health Care,
Value, 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 Global Health
Care, International Smaller Companies, Mutual Discovery, Mutual Shares or
Value 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.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
- ------------------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes, among different insurance companies or between
owners of variable annuity and variable life insurance contracts. While none
is expected, the board will act appropriately to resolve any material
conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
NAME, AGE AND HELD WITH PRINCIPAL OCCUPATION(S)
ADDRESS THE TRUST DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------
Frank H. Abbott, III (3/15/21)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
Edward J. Bonach (45)
Allianz Life Insurance Company
1750 Hennepin Avenue
Minneapolis, MN 55403-2195
Trustee
Senior Vice President and Chief Financial Officer, Allianz Life Insurance
Company of North America; President and Chief Executive Officer, Canadian
American Financial Corporation; and Director, Preferred Life Insurance
Company of New York and Life USA Holding, Inc.
Robert F. Carlson (71)
2120 Lambeth Way
Carmichael, CA 95608
Trustee
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); director or trustee, as the case may
be, of nine of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, member and Chairman of the Board, Sutter Community
Hospitals, member, Corporate Board, Blue Shield of California, and Chief
Counsel, California Department of Transportation.
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 50 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
President and Trustee
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 34 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President and
Director, Franklin Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Director, Quarterdeck Corporation
(software firm) and Digital Transmission Systems, Inc. (wireless
communications); director or trustee, as the case may be, of 27 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Director, Fischer Imaging Corporation (medical imaging systems) and General
Partner, Peregrine Associates, which was the General Partner of Peregrine
Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers,
Inc.; Executive Vice President and Director, Templeton Worldwide, Inc.;
Executive Vice President, Chief Operating Officer and Director, Templeton
Investment Counsel, Inc.; Executive Vice President and Chief Financial
Officer, Franklin Advisers, Inc.; Chief Financial Officer, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services, Inc.; President and
Director, Franklin Templeton Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc. and Franklin Mutual Advisers,
Inc.; Vice President, Chief Legal Officer and Chief Operating Officer,
Franklin Investment Advisory Services, Inc.; and officer of 54 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $675 per month plus $550 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members may
also serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
TOTAL FEES TOTAL FEES RECEIVED NUMBER OF BOARDS IN
RECEIVED FROM THE FRANKLIN THE FRANKLIN
FROM THE TRUST1 TEMPLETON GROUP OF TEMPLETON GROUP OF
NAME ($)[TO BE FUNDS2 ($) FUNDS ON WHICH EACH
PROVIDED IN A SERVES3
LATER AMENDMENT]
- --------------------------------------------------------------------------------
Frank H. Abbott 159,051 27
Harris Ashton 361,157 49
Robert F. Carlson 78,052 9
S. Joseph Fortunato 367,835 51
Frank W.T. LaHaye 163,753 27
Gordon Macklin 361,157 49
1For the fiscal year ended December 31, 1998. During the period from January
1, 1998 through May 31, 1998, fees at the rate of $550 per month and $182 per
board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 164 U.S. based funds or series.
Noninterested board members 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 or
trustee. No officer or board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGERS AND SERVICES PROVIDED Franklin Advisers, Inc. is the manager of
each fund, except Asset Allocation Fund, Global Growth Fund, International
Smaller Companies Fund, Developing Markets Fund, Mutual Discovery Fund,
Mutual Shares Fund, Rising Dividends Fund and Value Fund. The manager for
Rising Dividends Fund and Value Securities Fund is Franklin Advisory
Services, Inc. The manager for Mutual Discovery Fund and Mutual Shares Fund
is Franklin Mutual Advisers, Inc. The manager of the International Smaller
Companies Fund is Templeton Investment Counsel, Inc. The manager for the
Asset Allocation Fund and Global Growth Fund is Templeton Global Advisors
Limited. The manager for the Developing Markets Fund is Templeton Asset
Management Ltd. The managers are wholly owned by Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson,
Jr. are the principal shareholders of Resources.
The managers provide investment research and portfolio management services,
and select the securities for the funds to buy, hold or sell. The managers
also select the brokers who execute the funds' portfolio transactions. The
managers provide periodic reports to the board, which reviews and supervises
the managers' investment activities. To protect the funds, the managers and
their officers, directors and employees are covered by fidelity insurance.
Templeton Asset Management Ltd. and Templeton Global Advisors Limited render
their services to the funds from outside the U.S.
The Templeton organization has been investing globally since 1940. It has
offices in Argentina, Australia, Bahamas, Bermuda, Brazil, the British Virgin
Islands, Canada, China, Cyprus, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, United Kingdom
and the U.S.
The managers and their affiliates manage numerous other investment companies
and accounts. The managers may give advice and take action with respect to
any of the other funds they manage, or for their own account, that may differ
from action taken by a manager on behalf of a fund. Similarly, with respect
to the funds, the managers are not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the managers
and access persons, as defined by applicable federal securities laws, may buy
or sell for their own account or for the accounts of any other fund. The
managers are not obligated to refrain from investing in securities held by
the funds or other funds they manage. Of course, any transactions for the
accounts of the managers and other access persons will be made in compliance
with the trust's code of ethics.
Under the trust's code of ethics, employees of the Franklin Templeton Group
who are access persons may engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the trade must
receive advance clearance from a compliance officer and must be completed by
the close of the business day following the day clearance is granted; (ii)
copies of all brokerage confirmations and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file
annual reports of their securities holdings each January and inform the
compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they
are recommending a security in which they have an ownership interest for
purchase or sale by a fund or other client.
Templeton Investment Counsel, Inc. is the sub-advisor to the Asset Allocation
Fund, the Global Income Fund, the International Equity Fund and the Pacific
Fund. The sub-advisor has agreements with the managers and provides the
managers with investment management advice and assistance. The sub-advisor's
activities are subject to the board's review and control, as well as the
managers' instructions and supervision.
MANAGEMENT FEES Each Fund pays the manager a fee equal to an annual rate as
follows:
Money Market Fund, Growth and Income Fund, Natural Resources Securities Fund,
Real Estate Securities Fund, Global Utilities Securities Fund, High Income
Fund, Templeton Global Income Securities Fund, Income Securities Fund, U.S.
Government Securities Fund, Zero Coupon Fund - 2000, Zero Coupon Fund - 2005
and Zero Coupon Fund - 2010:
0.625% of the value of net assets up to an including $100 million;
0.50% of the value of net assets over $100 million up to and including
$250 million;
0.45% of the value of net assets over $250 million up to and including
$10 billion;
0.44% of the value of net assets over $10 billion up to and including
$12.5 billion; plus
0.42% of the value of net assets over $12.5 billion up to and
including $15 billion; plus
0.40% of the value of net assets over $15 billion.
RISING DIVIDENDS FUND, SMALL CAP FUND, CAPITAL GROWTH FUND:
0.75% of the value of net assets up to $500 million;
0.625% of the value of net assets over $500 million up to and
including $1 billion; and
0.50% of the value of net assets in excess of $1 billion.
TEMPLETON PACIFIC GROWTH FUND, TEMPLETON INTERNATIONAL EQUITY FUND, TEMPLETON
GLOBAL GROWTH FUND:
1.00% of the value of net assets up to $100 million;
0.90% of the value of net assets over $100 million up to and including
$250 million;
0.80% of the value of net assets over $250 million up to and including
$500 million; and
0.75% of the value of net assets over $500 million.
TEMPLETON DEVELOPING MARKETS EQUITY FUND:
1.25% of the value of net assets.
TEMPLETON GLOBAL ASSET ALLOCATION FUND:
0.65% of the value of net assets up to $200 million;
0.585% of the value of net assets over $200 million up to and
including $1.3 billion;
0.52% of the value of net assets over $1.3 billion.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND:
0.85% of the value of the fund's net assets up to and including
$200 million;
0.765% of the value of the fund's net assets over $200 million up
to and including $1.3 billion;
0.68% of the value of the fund's net assets over $1.3 billion.
GLOBAL HEALTH CARE SECURITIES FUND AND VALUE SECURITIES FUND:
0.60% of the value of net assets up to an including $200 million;
0.50% of the value of net assets up to $1.3 billion; and
0.40% of value of net assets over $1.3 billion.
MUTUAL DISCOVERY SECURITIES FUND:
0.80% of the value of the fund's net assets.
MUTUAL SHARES SECURITIES FUND:
0.60% of the value of the fund's net assets.
The fees are computed according to the terms of the management agreements.
Each class of a fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the funds paid the
following management fees:
Management fees paid ($)
1998 1997 1996
Money Fund(1) [to be supplied 1,740,190 1,781,802
in a later
amendment]
Global Income Fund 1,133,609 1,262,055
High Income Fund 2,305,480 1,985,566
Government Fund 3,775,626 3,162,073
Zero Coupon Fund - 2000(1) 442,683 494,949
Zero Coupon Fund - 2005(1) 290,964 299,714
Zero Coupon Fund - 2010(1) 293,620 291,798
Income Fund 6,348,820 6,130,804
Rising Dividends Fund 4,942,390 3,785,807
Global Utility Fund 5,139,011 6,097,507
Growth and Income Fund 5,667,415 4,643,546
Natural Resources Fund 584,675 754,383
Real Estate Fund 1,988,023 1,335,653
Small Cap Fund 1,878,273 694,975
International Equity 9,676,740 7,945,053
Fund
Pacific Fund 2,608,312 3,343,850
Asset Allocation Fund 526,125 272,732
Developing Markets Fund 4,277,977 2,887,400
Global Growth Fund 5,894,743 4,016,061
International Smaller
Companies Fund 239,272 56,389(2)
Growth Fund 558,503 86,028(2)
Mutual Discovery Fund 930,954 11,033(3)
Mutual Shares Fund 1,265,341 11,822(3)
Global Health Care Fund 4 - -
Value Fund 4 - -
(1)Under an agreement by the manager to limit its management fees, the fund's
fees before any advance waiver were ($):
1998 1997 1996
Money Fund [to be supplied 2,072,982 2,225,389
in a later
amendment]
Zero Coupon Fund - 2000 724,202 790,492
Zero Coupon Fund - 2005 485,690 503,611
Zero Coupon Fund - 2010 491,457 490,108
Global Health Care Fund - -
Value Fund - -
(2)For the period from May 1, 1996 to December 31, 1996.
(3)For the period from November 6, 1996 to December 31, 1996.
4For the period from May 1, 1998 to December 31, 1998.
The managers pay the sub-advisors fees equal to an annual rate of:
TEMPLETON INVESTMENT COUNSEL FOR ITS SERVICES TO GLOBAL INCOME FUND,
INTERNATIONAL EQUITY FUND AND PACIFIC GROWTH FUND:
0.35% of the value of the net assets up to and including $100
million;
0.25% of the value of net assets over $100 million up to and
including $250 million; and
0.20% of the value of net assets over $250 million.
TEMPLETON INVESTMENT COUNSEL FOR ITS SERVICES TO ASSET ALLOCATION FUND:
0.25% of the value of the fund's net assets up to and including
$200 million;
0.225%of the value of the fund's net assets over $200 million up to
and including $1.3 billion;
0.20% of the value of the fund's net assets over $1.3 billion.
The managers pay the above fees from the management fees they receive from
the funds. For the last three fiscal years, the managers paid the following
sub-advisory fees:
[to be supplied in a later amendment]
sub-advisory fees paid ($)
1998 1997 1996
Asset Allocation Fund
Global Income Fund
International Equity Fund
Pacific Growth Fund
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) provides certain administrative services and facilities for each
fund. FT Services has direct agreements with Asset Allocation Fund, Global
Health Care Fund, International Smaller Companies Fund, Mutual Discovery
Fund, Mutual Shares Fund and Value Securities Fund. FT Services has
subcontracts with the managers of all other funds. FT Services is wholly
owned by Resources and is an affiliate of the funds' managers and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The funds, in the case of the Asset Allocation Fund,
Global Health Care Fund, International Smaller Companies Fund, Mutual
Discovery Fund, Mutual Shares Fund and Value Securities Fund, and the
managers for all other funds, pay FT Services a monthly fee for each fund
equal to an annual rate of:
0.15% of the fund's average daily net assets up to $200 million;
0.135% of average daily net assets over $200 million up to $700
million;
0.10% of average daily net assets over $700 million up to $1.2
billion; and
0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended December 31, the funds or the
managers, as applicable, paid FT services the following administration fees:
[to be supplied in a later amendment]
Administration fees paid ($)
1998 1997
Money Fund
Global Income Fund
High Income Fund
Government Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Income Fund
Rising Dividends Fund
Global Utility Fund
Growth and Income Fund
Natural Resources Fund
Real Estate Fund
Small Cap Fund
International Equity
Fund
Pacific Fund
Asset Allocation Fund
Developing Markets Fund
Global Growth Fund
International Smaller
Companies Fund
Growth Fund
Mutual Discovery Fund
Mutual Shares Fund
Global Health Care Fund 3
Value Fund 3
1For the period from May 1, 1996 to December 31, 1996.
2For the period from November 6, 1996 to December 31, 1996.
3For the period from May 1, 1998 to December 31, 1998.
DEFENSIVE DISTRIBUTION PLANS Each fund's management agreement includes a
distribution or "Rule 12b-1" plan (the "Defensive Plan"). No payments are to
be made by the funds, however, as a result of the Defensive Plan. A fund does
not make any payments other than those required under its management
agreement, the Class 2 "Rule 12b-1" plan (see "Class 2 distribution and
service (12b-1) fees" under the section "Underwriter") or as incurred in the
ordinary course of business. To the extent payments are still deemed
indirectly to be for the financing of any activity primarily intended to
result in the sale of shares within the context of Rule 12b-1 under the
Investment Company Act of 1940, as amended, then such payments shall be
deemed to have been made pursuant to the Defensive Plan. In connection with
their approval of the applicable management agreements, the Board, 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
Defensive Plans will benefit each fund and the Contract Owners whose purchase
payments have indirectly been invested in each fund.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA
94403-7777.
CUSTODIANS Bank of New York, Mutual Funds Division, 90 Washington Street,
New York, NY 10286, acts as custodian of the trust's securities and other
assets. In addition, The Chase Manhattan Bank, at its principal office at
MetroTech Center, Brooklyn, NY 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of the assets of Global
Income Fund, Developing Markets Fund, Global Growth Fund, Asset Allocation
Fund, International Equity Fund and Pacific Growth Fund. As foreign custody
manager, the bank selects and monitors foreign sub-custodian banks, selects
and evaluates non-compulsory foreign depositories, and furnishes information
relevant to the selection of compulsory depositories.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco CA
94105, is the trust's independent auditor. The auditor gives an opinion on
the financial statements included in the Annual Report to Shareholders and
reviews the trust's registration statement filed with the U.S. Securities and
Exchange Commission (SEC).
RESEARCH SERVICES The managers may receive services from various affiliates.
The services may include information, analytical reports, computer screening
studies, statistical data, and factual resumes pertaining to securities
eligible for purchase by the funds. Such supplemental research, when
utilized, is subject to analysis by the managers before being incorporated
into the investment advisory process.
PORTFOLIO TRANSACTIONS
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The managers select brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management
agreements and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio
transactions on a securities exchange, the amount of commission paid is
negotiated between the manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage
commissions paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the transactions. These
opinions are based on the experience of these individuals in the securities
industry and information available to them about the level of commissions
being paid by other institutional investors of comparable size. The manager
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in
the opinion of the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services they receive. This may be viewed in terms of either the
particular transaction or the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the managers include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the managers in carrying out their
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the managers in
carrying out their overall responsibilities to their clients.
To the extent a fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker
without incurring charges for the services of a broker on its behalf, unless
it is determined that a better price or execution may be obtained by using
the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. The funds seek
to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers in return for research and
statistical information, as well as for special services provided by the
dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services the managers receive from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the managers to supplement
their own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the managers and their
affiliates may use this research and data in their investment advisory
capacities with other clients. If the trust's officers are satisfied that the
best execution is obtained, the sale of trust shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, may also be considered
a factor in the selection of broker-dealers to execute a fund's portfolio
transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
fund, any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of a fund and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended December 31, the funds paid the
following brokerage commissions:
Brokerage Commissions ($)
1998 1997 1996
Money Fund [to be 0 0
supplied in a
later
amendment]
Global Income 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
Income Fund 130,767 211,977
Rising Dividends Fund 615,127 485,120
Global Utility Fund 987,011 1,277,007
Growth and Income
Fund 1,277,652 848,162
Natural Resources Fund 347,537 149,263
Real Estate Fund 213,815 89,985
Small Cap Fund 242,801 183,601
Pacific Fund 487,776 487,464
Asset Allocation Fund 131,597 62,209
Developing Markets Fund 1,147,089 604,200
Global Growth Fund 860,436 0
International Smaller 109,554 10,847
Companies Fund
Growth Fund 57,736 44,722
Mutual Discovery Fund 247,576 20,812
Mutual Shares Fund 310,461 31,174
Global Health Care Fund - -
Value Fund - -
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 5% of the voting securities of one or
more broker-dealers through whom such fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent that the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the fund to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary broker's commissions for similar transactions.
The following table identifies each fund which held securities of its regular
brokers or dealers during 1998, the names of each such broker or dealer, and
the value, if any, of such securities as of December 31, 1998.
FUND REGULAR BROKER OR DEALER VALUE OF SECURITIES
AS OF 12/31/98
[to be supplied in a later amendment]
The Mutual Discovery Fund and the Mutual Shares Fund may receive research
services from persons who act as brokers or dealers for the funds. The
discussion below relates in general to these brokers or dealers who, pursuant
to various arrangements, pay for certain computer hardware and software and
other research and brokerage services to the manager and/or the funds for
transactions effected by it for the fund. Commission soft dollars may be used
only for brokerage and research services provided by brokers to whom
commissions are paid and under no circumstances will cash payments be made by
any such broker to the funds' manager. To the extent that commission soft
dollars do not result in the provision of any "brokerage and research
services" by brokers to whom such commissions are paid, the commissions,
nevertheless, are the property of such broker. Although, potentially, the
manager could be influenced to place fund brokerage transactions with a
broker in order to generate soft dollars for the manager's benefit, the
manager believes that the requirement that it achieve best execution on fund
portfolio transactions, and the fund's negotiated commission structure with
brokers, mitigate these concerns as the cost of transactions effected through
brokers, before consideration of any soft dollar benefits that may be
received, generally will be comparable to that available elsewhere. During
the fiscal year ended December 31, 1998, the funds [did not pay any] [paid]
brokerage commissions [of $[]] to brokers who provided research services. -
to be supplied in a later amendment]
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by a fund. These
gains when distributed will be treated as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution.
This treatment could increase or reduce a fund's ordinary income
distributions, and may cause some or all of a fund's previously distributed
income to be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of
its foreign securities
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute. To ensure that individuals holding the
Contracts whose assets are invested in a fund will not be subject to federal
income tax on distributions made by the fund prior to receipt of payments
under the Contracts, each fund intends to comply with the additional
requirements of Section 871(h) of the Internal Revenue Code relating to
diversification of its assets. The board reserves the right not to maintain
the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to make certain minimum distributions
by December 31 of each year. Federal excise taxes will not apply to a fund
in a given calendar year, however, if all of its shareholders at all times
during the calendar year are segregated asset accounts of life insurance
companies where the shares are held in connection with variable products.
INVESTMENT IN COMPLEX SECURITIES A fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses, and, in
limited cases, subject a fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed by a fund.
- ------------------------------------------------------------------------------
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
The Trust is an open-end management investment company, commonly called a
mutual fund. The Trust was organized as a Massachusetts business trust on
April 26, 1988 and is registered with the SEC.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer
of shareholder liability for acts or obligations of the trust. The
Declaration of Trust also provides for indemnification and reimbursement of
expenses out of each series' (fund's) assets for any shareholder held
personally liable for obligations of that fund or the trust. The Declaration
of Trust provides that the trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of a fund or
the trust and shall satisfy any judgment thereon. All such rights are limited
to the assets of the fund. The Declaration of Trust further provides that the
trust may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the trust, its
shareholders, trustees, officers, employees and agents to cover possible tort
and other liabilities. Furthermore, the activities of the fund as an
investment company, as distinguished from an operating company, would not
likely give rise to liabilities in excess of the fund's total assets. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to the unlikely circumstance in which both inadequate
insurance exists and the fund itself is unable to meet its obligations.
The trust currently offers two classes of shares for each series, Class 1 and
Class 2. All shares purchased before the initial offering of Class 2 shares
on December 28, 1998 are considered Class 1 shares. After that date, all
shares are designated either Class 1 or Class 2. Additional classes of shares
may be offered in the future. The full title of each series and class is:
Money Market Fund - Class 1
Money Market Fund - Class 2
Growth and Income Fund - Class 1
(Equity Growth Fund until 05/01/95)
Growth and Income Fund - Class 2
Natural Resources Securities Fund - Class 1
(Precious Metals Fund until 05/01/97)
Natural Resources Securities Fund - Class 2
Real Estate Securities Fund - Class 1
Real Estate Securities Fund - Class 2
Global Utilities Securities Fund - Class 1
(Utility Equity Fund until 05/01/98)
Global Utilities Securities Fund - Class 2
High Income Fund - Class 1
High Income Fund - Class 2
Templeton Global Income Securities Fund Class 1
(Global Income Fund until 05/01/96)
Templeton Global Income Securities Fund Class 2
Income Securities Fund Class 1
Income Securities Fund Class 2
U.S. Government Securities Fund - Class 1
U.S. Government Securities Fund - Class 2
Zero Coupon Fund - 2000 - Class 1
Zero Coupon Fund - 2000 - Class 2
Zero Coupon Fund - 2005 - Class 1
Zero Coupon Fund - 2005 - Class 2
Zero Coupon Fund - 2010 - Class 1
Zero Coupon Fund - 2010 - Class 2
Rising Dividend Fund - Class 1
Rising Dividend Fund - Class 2
Templeton Pacific Growth Fund - Class 1
Templeton Pacific Growth Fund - Class 2
Templeton International Equity Fund - Class 1
Templeton International Equity Fund - Class 2
Templeton Developing Markets Equity Fund - Class 1
Templeton Developing Markets Equity Fund - Class 2
Templeton Global Growth Fund - Class 1
Templeton Global Growth Fund - Class 2
Templeton Global Asset Allocation Fund - Class 1
Templeton Global Asset Allocation Fund - Class 2
Small Cap Fund - Class 1
Small Cap Fund - Class 2
Capital Growth Fund - Class 1
Capital Growth Fund - Class 2
Templeton International Smaller Companies Fund - Class 1
Templeton International Smaller Companies Fund - Class 2
Mutual Discovery Securities Fund - Class 1
Mutual Discovery Securities Fund - Class 2
Mutual Shares Securities Fund - Class 1
Mutual Shares Securities Fund - Class 2
Global Health Care Securities Fund - Class 1
Global Health Care Securities Fund - Class 2
Value Securities Fund - Class 1
Value Securities Fund - Class 2
Shares of each class represent proportionate interests in a fund's assets. On
matters that affect a fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only
one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of the trust for matters that affect the trust as a whole.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the board to consider
the removal of a board member if requested in writing by shareholders holding
at least 10% of the outstanding shares. In certain circumstances, we are
required to help shareholders communicate with other shareholders about the
removal of a board member. A special meeting may also be called by the board
in its discretion. For information regarding voting privileges of Contract
Owners, see the insurance company separate account SAI.
As of January 31, 1999, Allianz Life Variable Account A, Allianz Life
Variable Account B and Preferred Life Variable Account C owned, 0.31%, 92.15%
and 7.54%, respectively, of the issued and outstanding shares of the Trust.
As of January 31, 1999, Board members and officers, as a group, owned less
than 1%, of record or beneficially, of the outstanding shares of trust.
PRICING SHARES
- ------------------------------------------------------------------------------
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
FUNDS OTHER THAN MONEY FUND When determining its NAV, a fund values cash and
receivables at their realizable amounts, and records interest as accrued and
dividends on the ex-dividend date. If market quotations are readily available
for portfolio securities listed on a securities exchange or on the NASDAQ
National Market System, the fund values those securities at the last quoted
sale price of the day or, if there is no reported sale, within the range of
the most recent quoted bid and ask prices. The fund values over-the-counter
portfolio securities within the range of the most recent quoted bid and ask
prices. If portfolio securities trade both in the over-the-counter market and
on a stock exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the fund's NAV is not calculated. Thus, the calculation of
the fund's NAV does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in the calculation
and, if events materially affecting the values of these foreign securities
occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.]
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
MONEY FUND The valuation of the fund's 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
fund shares may tend to be higher than the same 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.
The fund's use of amortized cost may result in a lower aggregate value on a
particular day, a prospective investor in the fund would be able to obtain a
somewhat higher yield than would result from an investment in a fund using
only market values, and existing shareholders would receive less investment
income. The opposite would apply in a period of rising interest rates.
The fund's use of amortized cost which helps it to maintain its net asset
value per share of $1 is allowed by an SEC rule. Under the rule 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
determines present minimal credit risks and that 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 SEC rules may have stated maturities of more than
one year.
The board has established 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. These procedures include review of the fund's
holdings by the board, at such intervals as it may deem appropriate. This
will be done in to determine whether the fund's NAV calculated by using
available market quotations deviates from $1 per share based on amortized
cost. The extent of any deviation will be examined by the board. If the
deviation exceeds 1/2 of 1%, the board will consider what action needs to be
initiated. If the board determine that a deviation exists which may result in
material dilution or other unfair results to investors or existing
shareholders, it will take such corrective action that it may regard as
necessary and appropriate. This action may include,
selling portfolio instruments before maturity to realize capital gains
or losses or to shorten average portfolio maturity,
withholding dividends,
redeeming shares in kind, or
establishing a net asset value per share by using available market
quotations.
THE UNDERWRITER
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Franklin/Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the trust's shares.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, except to
the extent these expenses are borne by the Insurance Companies. These
expenses include advertising expenses and the costs of printing sales
material and prospectuses used to offer shares to the public. The trust pays
the expenses of preparing and printing amendments to its registration
statements and prospectuses (other than those necessitated by the activities
of Distributors) and of sending prospectuses to existing shareholders.
Distributors may be entitled to receive payment under the Class 2 Rule 12b-1
plans, as discussed below. Except as noted, Distributors receives no other
compensation from the trust for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each fund's Class 2 has a separate
distribution or "Rule 12b-1" plan. Under each plan, the fund may pay up to a
maximum of .35% per year of the average daily net assets attributable to its
Class 2 shares. The board, however, has set the current rate at .30% per
year. These fees may be used to compensate Distributors, the Insurance
Companies or others for distribution and related services and as a servicing
fee.
The terms and provisions of the plans, including terms and provisions
relating to required reports, term, and approval, are consistent with Rule
12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the board, including a majority
vote of the board members who are not interested persons of the trust and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such board members be done by the
non-interested members of the board. The Class 2 plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the non-interested board members on not more than 60 days'
written notice, by Distributors on not more than 60 days' written notice, by
any act that constitutes an assignment of a management agreement with a
manager, or by vote of a majority of the outstanding shares of the class.
Distributors, the Insurance Companies or others may also terminate their
respective distribution or service agreement at any time upon written notice.
The Class 2 plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the fund's class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the non-interested members of the board, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the board with such other
information as may reasonably be requested in order to enable the board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended December 31, 1998, the funds did not pay any fees
pursuant to the plans.
PERFORMANCE
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Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by a fund are
based on the standardized methods of computing performance mandated by the
SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees from
the date of the plan's implementation. An explanation of these and other
methods used by the fund to compute or express performance follows.
Because the trust only offers its shares to Insurance Company separate
accounts (Insurance Companies) for use in variable annuity and variable life
insurance contracts, to the extent required by SEC rules, the advertised
performance of the funds will be displayed no more prominently than
standardized performance of the applicable insurance company separate
accounts/contracts. For information about how an Insurance Company may
advertise such performance, please consult the contract prospectus which
accompanies the trust prospectus.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
Average annual total return is determined by finding the average annual rates
of return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was
completely redeemed at the end of each period and the deduction of all
applicable fund charges and fees. It does NOT, however, include any fees or
sales charges imposed by the variable insurance contract for which the fund
is an investment option. If they had been included, performance would be
lower.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
The total return performance for each fund's Class 2 shares for the periods
prior January 6, 1999, when the trust's Class 2 shares commenced operations,
will represent the historical results of Class 1 Shares. Performance of Class
2 shares for the periods after January 6, 1999 will reflect Class 2's higher
annual fees and expenses resulting from its Rule 12b-1 plan. Historical
performance data for Class 2 shares, based on Class 1 performance, will
generally not be restated to include 12b-1 fees, although each fund may
restate these figures consistent with SEC rules.
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended December 31. 1998, were:
[to be supplied in a later amendment]
The average annual total returns for each fund as of the end of the most
recent fiscal year are set forth in the trust's most recent annual report.
From time to time, the "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 of the funds, other than the Money
Fund, may be published in advertisements and communications to Contract
Owners. The current yield for each fund will be calculated by dividing the
annualization of the income earned by the fund during a recent 30-day period
by the net asset value per share at the end of such period. In addition,
aggregate, cumulative and average total return information for each fund over
different periods of time may also be advertised. Except as stated above,
each fund will use the same methods for calculating its performance.
A distribution rate for each fund may also be published in communications
preceded or accompanied by a copy of the trust's current prospectus. The
fund's current distribution rate will be calculated by dividing the
annualization of the total distributions made by that fund during the most
recent preceding fiscal quarter by the net asset value per share at the end
of such period. The current distribution rate may differ from current yield
because the distribution rate will be for a different period of time and may
contain items of capital gain and other items of income, while current yield
reflects only earned income. Uniformly computed yield and total return
figures for each fund will also be published along with publication of its
distribution rate.
Hypothetical performance information may also be prepared for sales
literature or advertisements. See "Performance Data" in the appropriate
insurance company separate account prospectus and "Calculation of Performance
Data" in the appropriate insurance company separate account SAI.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
CONSUMER PRICE INDEX - Measure of the average change in prices for a
fixed basket of goods and services regularly bought by consumers in the
United States, published by the Bureau of Labor Statistics.
CREDIT SUISSE FIRST BOSTON HIGH YIELD (CSFB HY) INDEX - The index is an
unmanaged, trader-priced portfolio constructed to mirror the high yield
debt market. The index has several modules representing different sectors
of the high yield market including a cash paying module, a zerofix module,
a pay-in-kind module, and a defaulted module. The modular nature of the
index allows customization of data to meet client needs. The index is
divided into other categories including industry, rating, seniority,
liquidity, market value, security price range, yield range and other
sector divisions. The CSFB HY Index follows a total of 250 sectors. CS
First Boston has maintained the index since January 1986. While the index
is priced and run weekly, monthly returns are typically used for
performance attribution.
FINANCIAL TIMES/ S&P ACTUARIES WORLD (ENERGY 50%/BASIC INDUSTRIES 50%)
COMPOSITE INDEX - Franklin Templeton customizes this index using 50% of
the Financial Times/S&P Actuaries World Energy Index and 50% of the
Financial Times/S&P Actuaries World Basic Industries Index. Both indices
are compiled by the Financial Times, Goldman Sachs & Co. and Wood
Mackenzie & Co., Ltd. in conjunction with the Institute of Actuaries and
the Faculty of Actuaries. The index includes electric utilities,
waterworks supply and telephone utilities. The indices are weighted
arithmetic averages of the market prices of the elements that make them
up. They also adjust for the intervening price changes of these elements.
FINANCIAL TIMES/ S&P ACTUARIES WORLD UTILITIES INDEX - This index is
compiled by the Financial Times, Goldman Sachs & Co. and Wood Mackenzie &
Co., Ltd. in conjunction with the Institute of Actuaries and the Faculty
of Actuaries. The utilities sector includes electric utilities, waterworks
supply, natural gas utilities and telephone companies. The indices are
weighted arithmetic averages of the market prices of the elements that
make them up. They also adjust for the intervening price changes of these
elements. This is a total return index in $U.S.
INTERNATIONAL FINANCE CORPORATION'S (IFC) INVESTABLE COMPOSITE INDEX -
The index tracks the emerging stock markets of three world regions based
on market capitalization weighting. Those regions are Latin America, Asia
and Europe/Mideast/Africa. As of the end of May 1997, the regional weights
of the IFC Composite Index were distributed accordingly: Asia, 40%; Latin
America, 38%; and Europe/Mideast/Africa, 22%.
JP MORGAN GLOBAL GOVERNMENT BOND INDEX (UNHEDGED) - The index comprises
13 markets, including Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, Netherlands, Spain, Sweden, the U.K. and the U.S.
Each country's weight is determined by the total market capitalization in
$U.S. of all the bonds in that country's traded index. The J.P. Morgan
Global Government Bond Total Return Index includes only actively traded,
fixed-rate bonds with a remaining maturity of one year or longer. The
index is unhedged and expressed in terms of $U.S.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX - The index includes
securities in the Lehman Brothers Government and Corporate indices. These
securities must have at least $100 million par amount outstanding and must
be rated investment grade (Baa3 or better) by Moody's Investors Service.
If a Moody's rating is not available, the Standard & Poor's or Fitch
rating is used. These must be fixed-rate securities, although they can
carry a coupon that steps up or changes according to a predetermined
schedule, and they must be dollar-denominated and non-convertible.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX - This index includes
securities issued by the U.S. government or its agencies with maturities
from one up to, but not including, 10 years. These securities must have at
least $100 million par amount outstanding and must be rated investment
grade (Baa3 or better) by Moody's Investors Service. If a Moody's rating
is not available, the Standard & Poor's or Fitch rating is used. These
must be fixed-rate securities, although they can carry a coupon that steps
up or changes according to a predetermined schedule, and they must be
dollar-denominated and non-convertible.
LIPPER GROWTH & INCOME FUNDS OBJECTIVE AVERAGE - This is an equally
weighted average calculation of performance figures for all funds within
the Lipper Growth and Income Funds Objective Category, which is defined as
all mutual funds that combine a growth of earnings orientation and an
income requirement for level and/or rising dividends. As of 9/23/98, there
were 30 funds in this category.
LIPPER INCOME FUNDS OBJECTIVE AVERAGE - This is an equally weighted
average calculation of performance figures for all funds within the Lipper
Income Funds Objective Category, which is defined as all mutual funds that
normally seek a high level of current income through investing in
income-producing stocks, bonds and money market instruments. As of
9/23/98, there were 10 funds in this category.
MERRILL LYNCH TREASURY ZERO COUPON 1-, 5-, 10-, 20-YEAR BOND TOTAL RETURN
INDICES - The indices include zero coupon bonds that pay no interest and
are issued at a discount from redemption price.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL COUNTRIES-WORLD FREE
Index - The index represents both developed and emerging markets around
the world. "Free" in the title reflects the actual buying opportunities
for global investors by taking into account local market restrictions on
share ownership by foreigners. The MSCI indices define the local market
for each country by constructing a matrix of all listed securities,
sorting the matrix by industry, and seeking to capture 60% of the market
capitalization for each group by selecting the most investable stocks in
each industry. The index applies full market capitalization weights to
each included stock.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL COUNTRIES-WORLD EX-U.S.
FREE INDEX - The index comprises 48 countries around the world, both
developed and emerging markets, except the U.S. "Free" in the title
reflects the actual buying opportunities for global investors by taking
into account local market restrictions on share ownership by foreigners.
The MSCI indices define the local market for each country by constructing
a matrix of all listed securities, sorting the matrix by industry, and
seeking to capture 60% of the market capitalization for each group by
selecting the most investable stocks in each industry. The index applies
full market capitalization weights to each included stock.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS FREE INDEX -
This is a market capitalization-weighted equity index comprising 26 of the
48 countries in the MSCI universe. "Free" denotes investment opportunities
in the developing world available to foreign investors. EMF performance
data is calculated in $US and local currency. The MSCI indices define the
local market for each country by constructing a matrix of all listed
securities, sorting the matrix by industry, and seeking to capture 60% of
the market cap for each group by selecting the most investable stocks in
each industry. The index applies full market cap weights to each included
stock.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) PACIFIC INDEX - The index
comprises five developed market countries or regions in the Pacific:
Australia, Hong Kong, Japan, New Zealand and Singapore. The MSCI indices
define the local market for each country by constructing a matrix of all
listed securities, sorting the matrix by industry, and seeking to capture
60% of the market capitalization for each group by selecting the most
investable stocks in each industry. The index applies full market
capitalization weights to each included stock.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX - The index
comprises the developed markets of 22 countries around the world. The MSCI
indices define the local market for each country by constructing a matrix
of all listed securities, sorting the matrix by industry, and seeking to
capture 60% of the market cap for each group by selecting the most
investable stocks in each industry. The index applies full market cap
weights to each included stock.
RUSSELL 1000 INDEX - Published by Frank Russell Company, the index
measures the performance of the 1,000 largest companies in the Russell
3000 Index, representing 89% of the market capitalization of the Russell
3000. The Russell 3000 contains the 3,000 largest companies incorporated
in the U.S. and its territories. As of the latest reconstitution, the
average market capitalization of the companies in the Russell 1000 was
approximately $9.9 billion; the median market capitalization was
approximately $3.7 billion. The smallest company in the index had an
approximate market capitalization of $1,404.7 million.
RUSSELL 2500 INDEX - Published by Frank Russell Company, the index
measures the performance of the 2,500 smallest companies in the Russell
3000 Index, representing approximately 22% of the total market
capitalization of the companies in the Russell 3000. The Russell 3000
contains the 3,000 largest companies incorporated in the U.S. and its
territories. As of the latest reconstitution, the average market
capitalization of the Russell 2500 was approximately $931 million; the
median market capitalization was approximately $630 million. The largest
company in the index had an approximate market capitalization of $3.7
billion.
SALOMON GLOBAL EX-U.S. LESS THAN $1 BILLION INDEX - This is a
total-capitalization weighted index that includes all developed and
emerging countries, except the U.S., and includes companies with a total
market capitalization below U.S. $1 billion.
SALOMON WORLD EX-U.S. EXTENDED MARKET INDEX (EMI) - This is a
comprehensive float-weighted equity index consisting of every company with
an investable market capitalization of over $100 million in 22 countries,
except the U.S. The broad market index (BMI) is segregated into the
primary market index (PMI) and extended market index (EMI), consisting of
large and small capitalization issues, respectively.
STANDARD & POOR'S 500 (S&P 500) - The S&P 500 consists of 500 widely held
domestic common stocks, consisting of four broad sectors: industrials,
utilities, financials and transportation. It is a market value-weighted
index, where the stock price is multiplied by the number of shares
outstanding, with each stock affecting the index in proportion to its
market value. This index, calculated by Standard & Poor's, is a total
return index with dividends reinvested.
STANDARD & POOR'S HEALTH CARE COMPOSITE INDEX - This is a
capitalization-weighted index of all of the stocks in the Standard &
Poor's 500 that are involved in the business of health care related
products or services. The index was developed with a base level of 100 as
of January 14, 1987.
WILSHIRE MID CAP COMPANY GROWTH INDEX - This index overlaps the top 750
and the next 1,750 of Wilshire Asset Management's Wilshire 2500 universe
(the top 2,500 companies and 99% of the market capitalization of the
Wilshire 5000). Wilshire includes companies that have market
capitalizations ranging from $300 million to $1.3 billion. The portfolio
contains from 125-500 securities.
WILSHIRE REAL ESTATE SECURITIES INDEX - This is a market
capitalization-weighted index of publicly traded real estate securities,
such as real estate investment trusts (REITs), Real Estate Operating
Companies (REOCs) and partnerships. The index is composed of companies
whose charter is the equity ownership and operation of commercial real
estate. The index rebalances monthly and returns are calculated on a
buy-and-hold basis.
WILSHIRE SMALL COMPANY VALUE INDEX - The index is created by screening
the bottom 1,750 large companies of Wilshire Asset Management's Wilshire
2500 universe (the top companies and 99% of the market capitalization of
the Wilshire 5000). These companies have market capitalizations of at
least $70 million. Wilshire excludes companies with high price/earnings
ratios, low yields, or high price/book ratios. The portfolio contains from
125-500 securities.
DOW JONES(R) COMPOSITE AVERAGE AND ITS COMPONENT AVERAGES - This is a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
THE NEW YORK STOCK EXCHANGE COMPOSITE OR COMPONENT INDICES - This is an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
WILSHIRE 5000 EQUITY INDEX - This represents the return on the market
value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
LIPPER - MUTUAL FUND PERFORMANCE ANALYSIS - This measures total return
and average current yield for the mutual fund industry and rank individual
mutual fund performance over specified time periods, assuming reinvestment
of all distributions, exclusive of any applicable sales charges.
CDA MUTUAL FUND REPORT, published by CDA Investment Technologies, Inc. -
This analyzes price, current yield, risk, total return, and average rate
of return (average annual compounded growth rate) over specified time
periods for the mutual fund industry.
MUTUAL FUND SOURCE BOOK, published by Morningstar, Inc. - This analyzes
price, yield, risk, and total return for mutual funds.
Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
STOCKS, BONDS, BILLS, AND INFLATION, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
SAVINGS AND LOAN HISTORICAL INTEREST RATES - as published in the U.S.
Savings & Loan League Fact Book.
Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
MORNINGSTAR - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
SALOMON BROTHERS BROAD BOND INDEX OR ITS COMPONENT INDICES - This
measures yield, price and total return for Treasury, agency, corporate
and mortgage bonds.
LEHMAN BROTHERS AGGREGATE BOND INDEX OR ITS COMPONENT INDICES - This
measures yield, price and total return for Treasury, agency,
corporate, mortgage and Yankee bonds.
SALOMON BROTHERS COMPOSITE HIGH YIELD INDEX OR ITS COMPONENT INDICES -
This measures yield, price and total return for the Long-Term High-Yield
Index, Intermediate-Term High-Yield Index, and Long-Term Utility
High-Yield Index.
The manager's and its affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due to a
liberalization of securities laws and a reduction of foreign exchange
controls, and improving communication technology, of various countries as
published by various statistical organizations.
Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
Allegorical stories illustrating the importance of persistent long-term
investing.
A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type
of stocks or other securities.
Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing.
* Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the board on April
16, 1995. He is no longer involved with the investment management
process.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information may also compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------------------------------------------------
The Information Services & Technology division of Resources established a
Year 2000 Project Team in 1996. This team has already begun making necessary
software changes to help the computer systems that service the fund and its
shareholders to be Year 2000 compliant. After completing these modifications,
comprehensive tests are conducted in one of Resources' U.S. test labs to
verify their effectiveness. Resources continues to seek reasonable assurances
from all major hardware, software or data-services suppliers that they will
be Year 2000 compliant on a timely basis. Resources is also beginning to
develop a contingency plan, including identification of those mission
critical systems for which it is practical to develop a contingency plan.
However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice
and data lines are limited.
FUND SIMILARITY The investment objectives and policies of certain funds are
similar but not identical to those of certain public Franklin Templeton Funds
indicated in the table below. Because of differences in portfolio size, the
investments held, the timing of purchases of similar investments, cash flows,
minor differences in certain investment policies, insurance product related
tax diversification requirements, state insurance regulations, and additional
administrative and insurance costs associated with insurance company separate
accounts, the investment performance of the funds will differ from the
performance of the corresponding Franklin Templeton Funds:
FRANKLIN VALUEMARK FUNDS FRANKLIN TEMPLETON FUNDS
FRANKLIN CUSTODIAN FUNDS, INC.:
Capital Growth Fund - Growth Series
FRANKLIN STRATEGIC SERIES:
Global Health Care Securities - Franklin Global Health Care
Fund Fund
FRANKLIN STRATEGIC SERIES:
Global Utilities Securities Fund - Franklin Global Utilities Fund
FRANKLIN HIGH INCOME TRUST
High Income Fund AGE High Income Fund
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 Templeton Developing Markets
Equity Fund Trust
TEMPLETON VARIABLE PRODUCTS
SERIES FUND:
Templeton Global Asset - Templeton Asset Allocation
Allocation Fund Fund
Templeton Global Growth Fund Templeton Growth Fund, Inc.
FRANKLIN INVESTORS SECURITIES
TRUST:
Templeton Global Income - Franklin Global Government
Securities Fund 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
FRANKLIN VALUE INVESTORS TRUST
Value Securities Fund - Franklin Value Fund
DESCRIPTION OF BOND RATINGS
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service
payments are continuing. The C1 rating is reserved for income bonds on which
no interest is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN VALUEMARK FUNDS
File Nos. 33-23493 & 811-5583
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference, except Exhibits
i(i) and p(i), (ii), which are included, and exhibits j(i) and 27 which
will be filed in a later amendment.
(a) ARTICLES OF INCORPORATION.
(i) Agreement and Declaration of Trust dated April 20, 1988
Filing: Post-Effective Amendment No. 16 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated October 21, 1988
Filing: Post-Effective Amendment No. 16 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Certificate of Amendment of Agreement and Declaration of
Trust
(b) BY-LAWS.
(i) By-Laws
Filing: Post-Effective Amendment No. 16 to Registration
Statement 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 on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(d) INVESTMENT ADVISORY CONTRACTS.
(i) Management Agreement between the Fund and Franklin
Advisers, Inc. dated January 24, 1989
Filing: Post-Effective Amendment No. 16 to Registration
Statement of the Fund 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Management Agreement between the Fund, on Behalf of
International Equity Fund and Pacific Growth Fund, and
Franklin Advisers, Inc. dated January 22, 1992
Filing: Post-Effective Amendment No. 16 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iv) Subadvisory Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. dated January 1, 1993
Filing: Post-Effective Amendment No. 16 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(v) Management Agreement between the Fund 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(vi) Investment Management Agreement between the Fund, on
behalf of the Templeton Global Global Growth, and
Templeton, Galbraith & Hansberger Ltd. dated March 15, 1994
Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(viii)Investment Management Agreement between the Fund, 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 the Fund 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(x) Fund Administration Agreement between the Fund on behalf
of Templeton Global Asset Allocation Fund, and Franklin
Templeton Services, Inc. dated October 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xi) Management Agreement between the Fund, on Behalf of Small
Cap Fund dated October 11, 1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xii) Investment Management Agreement between the Fund, on
behalf of Templeton Developing Markets Equity Fund, dated
October 1, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: October 27, 1995
(xiii)Fund Administration Agreement between the Fund, on
behalf of International Smaller Companies Fund, and
Franklin Templeton Services, Inc., dated October 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xiv) Investment Management Agreement between the Fund, on
behalf of International Companies Fund and Templeton
Investment Counsel, Inc. dated January 18, 1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xv) Management Agreement between the Fund, on behalf of
Capital Growth Fund and Franklin Advisers, Inc. dated
January 18, 1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 14, 1996
(xvi) Amendment to Management Agreement between the Fund and
Franklin Advisers, Inc. dated August 1, 1995
Filing: Post-Effective Amendment No. 20 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: August 30, 1996
(xvii)Management Agreement between the Fund, on Behalf of
Mutual Discovery Securities Fund and Mutual Shares
Securities Fund, and Franklin Mutual Advisers, Inc. dated
October 18, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xviii)Fund Administration Agreement between the Fund, on
behalf of Mutual Discovery Securities Fund and Mutual
Shares Securities Fund, and Franklin Templeton Services,
Inc., dated October 18, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1997
(xix) Management Agreement between the Fund, on behalf of Global
Health Care Securities Fund dated December 9, 1997
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(xx) Management Agreement between the Fund, on behalf of Value
Securities Fund dated December 9, 1997
Filing: Post-Effective Amendment No. 23 to Registration
Statement of Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(xxi) Fund Administration Agreement between the Fund, on behalf
of Value Securities Fund Dated December 9, 1997
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(xxii)Fund Administration Agreement between the Fund, on
behalf of Global Health Care Securities Fund dated December
9, 1997
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 28, 1998
(xxiii)Amendment to Investment Management Agreement between
the Fund, on behalf of Templeton Developing Markets Equity
Fund, and Templeton Asset Management Ltd. dated October 1,
1995
Filing: Post-Effective Amendment No.23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: February 12, 1998
(xxiv)Addendum to Investment Management Agreement between
the Fund, on behalf of Templeton Developing Markets Equity
Fund, and Templeton Asset Management Ltd. dated December 9,
1997
Filing: Post-Effective Amendment No.24 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 30, 1998
(e) UNDERWRITING CONTRACTS.
(i) Distribution Agreement between the Fund and
Franklin/Templeton Distributors, Inc.
Filing: Post Effective Amendment No.26
File No. 33-23493
Filing Date November 30, 1998
(f) BONUS OR PROFIT SHARING CONTRACTS.
Not Applicable
(g) CUSTODIAN AGREEMENTS.
(i) 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Custody Agreement between the Fund, 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(iii) Master Custody Agreement between the Fund and the Bank of
New York, dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iv) Terminal Link Agreement between the Fund and Bank of New
York dated February 16, 1996.
Filing: Post-Effective Amendment No. 19 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(v) Amendment to Global Custody Agreement between the Fund and
The Chase Manhattan Bank, N.A. dated April 1, 1996
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(vi) Amendment to Master Custody Agreement between the Fund and
the Bank of New York, dated April 1, 1996
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(vii) Letter Agreement between the Fund and the Bank of New
York, dated April 22, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(viii)Custody Agreement between the Fund, on behalf of
Mutual Discovery Securities Fund and Mutual Shares
Securities Fund, and the State Street Bank and Trust
Company dated November 8, 1996
Filing: Post-Effective Amendment No. 23 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 29, 1997
(h) OTHER MATERIAL CONTRACTS.
Not Applicable
(i) LEGAL OPINION.
(i) Legal Opinion, Securities Act of 1933, dated February 5,
1999
(j) OTHER OPINIONS.
(i) Consent of independent auditors (to be filed in a later
amendment)
(k) OMITTED FINANCIAL STATEMENTS.
Not Applicable
(l) INITIAL CAPITAL AGREEMENT.
(i) Letter of Understanding dated April 11, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement of the Fund 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 the Fund 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 the Fund on Form N-1A
File No. 33-23493
Filing Date: April 24, 1996
(iv) Letter of Understanding dated October 21, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: October 31, 1996
(v) Letter of Understanding dated April 23, 1998
Filing: Post-Effective Amendment No. 24 to Registration
Statement of the Fund on Form N-1A
File No. 33-23493
Filing Date: April 30, 1998
(vi) Letter of Understanding dated xx
(m) RULE 12B-1 PLAN.
(i) Class 2 Distribution Plan pursuant to Rule 12b-1
Filing: Post Effective Amendment No.26
File No. 33-23493
Filing Date November 30, 1998
(o) RULE 18F-3PLAN.
(i) Multiple Class Plan for all series of the Fund
Filing: Post Effective Amendment No.26
File No. 33-23493
Filing Date November 30, 1998
(p) POWER OF ATTORNEY.
(i) Power of Attorney
(ii) Certificate of Secretary
(27) FINANCIAL DATA SCHEDULE.
To be filed by post-effective amendment
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
Item 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Fund pursuant to the foregoing provisions, or otherwise, the Fund 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 Fund of expenses
incurred or paid by a Trustee, officer or controlling person of the Fund 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 Fund 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 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(i) The officers and directors of the Fund's investment advisers also
serve as officers and/or directors or trustees for (1) the corporate parent
of Franklin Advisers, Inc., (" Advisers" ) the investment manager of 17 of
the Fund's series, Franklin Resources, Inc. (" Resources" ), and/or (2) other
investment companies in the Franklin Templeton 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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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 and Value Securities 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.
(vi) 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 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
(b) The information required by this Item 27 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this
N-1A and schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889).
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by
Section 31(a) [15 U.S.C. 80a-30(a)] are kept by the Fund or its shareholder
services agent, Franklin Templeton Investors Services, Inc., both of whose
address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
Not Applicable
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act of 1940, the Fund has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, duly authorized, in
the City of San Mateo and the State of California, on the 12th day of
February 1999.
FRANKLIN VALUEMARK FUNDS
(Fund)
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
Charles E. Johnson and Trustee
Dated: February 25, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 25, 1999
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: February 25, 1999
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: February 25, 1999
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 25, 1999
EDWARD J. BONACH* Trustee
Edward J. Bonach Dated: February 25, 1999
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 25, 1999
ROBERT F. CARLSON* Trustee
Robert F. Carlson Dated: February 25, 1999
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 25, 1999
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: February 25, 1999
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 25, 1999
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 25, 1999
*BY /S/ KAREN L. SKIDMORE, ATTORNEY-IN-FACT
(Pursuant to attached Power of Attorney)
FRANKLIN VALUEMARK FUNDS
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO DESCRIPTION LOCATION
EX-99.a(i) Agreement and Declaration of Trust *
EX-99.a(ii) Certificate of Amendment of Agreement and *
Declaration of Trust dated October 21, 1988
EX-99.a(iii) Certificate of Amendment of Agreement *
and Declaration of Trust
EX-99.b(i) By-Laws *
EX-99.b(ii) Certificate of Amendment of By-Laws dated
May 16, 1995 *
EX-99.d(i) Management Agreement between *
Registrant and Franklin Advisers, Inc. dated
January 24, 1989
EX-99.d(ii) Addendum to Investment Management *
Agreement dated March 14, 1989
EX-99.d(iii) Management Agreement between Registrant, *
on behalf of International Equity and Pacific
Growth Fund, and Franklin Advisers, Inc. dated
January 22, 1992
EX-99.d(iv) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, Inc. dated January 1, 1993.
EX-99.d(v) Management Agreement between Registrant on *
behalf of Franklin Rising Dividends Fund, and
Franklin Advisory Services, Inc. dated July 1,
1996
EX-99.d(vi) Investment Management Agreement between *
Registrant, on behalf of the Templeton Global
Growth Fund, and Templeton, Galbraith &
Hansberger Ltd., dated March 15, 1994
EX-99.d(vii) Subadvisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, on behalf of Global Income Fund dated
August 1, 1994
EX-99.d(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.d(ix) Subadvisory Agreement between Templeton, *
Galbraith & Hansberger Ltd and Templeton
Investment Counsel, on behalf of Templeton
Global Asset Allocation Fund dated April 19, 1995
EX-99.d(x) Fund Administration Agreement between *
Registrant, on behalf of Templeton Global
Asset Allocation Fund, and Franklin Templeton
Services, dated October 1, 1996
EX-99.d(xi) Management Agreement between Registrant, on *
behalf of Small Cap Fund, and Franklin
Advisers, Inc., dated October 11, 1995
EX-99.d(xii) Investment Management Agreement between *
Registrant, on behalf of Templeton Developing
Markets Equity Fund, and Templeton, Galbriath
& Hansberger, dated October 1, 1995
EX-99.d(xiii) Fund Administration Agreement between *
Registrant, on behalf of International Smaller
Companies Fund, and Franklin Templeton
Services, Inc., dated October 1, 1996
EX-99.d(xiv) Investment Management Agreement between *
Registrant, on behalf of International Smaller
Companies Fund and Templeton Investment
Counsel, Inc., dated January 18, 1996
EX-99.d(xv) Management Agreement between Registrant, on *
behalf of Capital Growth Fund, and Franklin
Advisers, Inc., dated January 18, 1996
EX-99.d(xvi) Amendment to Management Agreement between *
Registrant and Franklin Advisers, Inc., Dated
August 1, 1995
EX-99.d(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
EX-.d(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
EX-99.d(xix) Management Agreement between Registrant, on *
behalf of Global Health Care Securities Fund
dated December 9, 1997
EX-99.d(xx) Management Agreement between Registrant, on *
behalf of Value Securities Fund dated December
9, 1997
EX-99.d(xxi) Fund Administration Agreement between *
Registrant, on behalf of Value Securities Fund
dated December 9, 1997
EX-99.d(xxii) Fund Administration Agreement between *
Registrant, on behalf of Global Health Care
Securities Fund dated December 9, 1997
EX-99.d(xxiii) Amendment to Investment Management Agreement *
between Registrant and Templeton Developing
Markets Equity Fund dated October 1, 1995
EX-99.d(xxiv) Addendum to Management Agreement *
between Registrant, on behalf of Templeton
Developing Markets Equity Fund, and Templeton
Asset Management Ltd. dated December 9, 1997
EX-99.g(i) Distribution Agreement between Registrant *
and Franklin/Templeton Distributors, Inc.
EX-99.g(i) 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.g(ii) 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.g(iii) Custody Agreement between the Registrant, 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.g(iv) Master Custody Agreement between the *
Registrant and the Bank of New York, dated
February 16, 1996
EX-99.g(v) Terminal Link Agreement between Registrant *
and Bank of New York, dated February 16, 1996
EX-99.g(vi) Amendment to Global Custody Agreement between *
Franklin Valuemark Funds and the Chase
Manhattan Bank, N.A. dated April 1, 1996
EX-99.g(vii) Amendment to Master Custody Agreement *
between Franklin Valuemark Funds and the
Bank of New York, dated April 1, 1996
EX-99.g(viii) Letter Agreement between Franklin Valuemark *
Funds and the Bank of New York, dated April
22, 1996
EX-99.g(ix) Custody Agreement between Registrant, on *
behalf of Mutual Discovery Investments Fund
and Mutual Shares Investments Fund, and the
State Street Bank and Trust Company dated
November 8, 1996
EX-99.g(x) Amendment to Master Custody Agreement *
between Registrant and the Bank of New York
dated as of February 16, 1996
EX-99.i(i) Legal Opinion Securities Act of 1933 Attached
dated February 5, 1999
EX-99.j(i) Consent of Independent Accountants **
EX-99.l(i) Letter of Understanding dated April 11, 1995 *
EX-99.l(ii) Letter of Understanding dated September
12, 1995 *
EX-99.l(iii) Letter of Understanding dated April 4, 1996 *
EX-99.l(iv) Letter of Understanding dated October 21, 1996*
EX-99.l(v) Letter of Understanding dated April 23, 1998 *
EX-99.m(i) Class 2 Distribution Plan Pursuant to Rule
12b-1 *
EX-99.o(i) Multiple Class Plan for all series of
Registrant *
EX-99.p(i) Power of Attorney from Officers and Attached
Directors of the Registrant
EX-99.97(ii) Certificate of Secretary Attached
EX-27 Financial Data Schedule **
* Incorporated by reference to previous filings
** To be filed by amendment
Exhibit i(i)
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
February 5, 1999
Franklin Valuemark Funds
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust, as
amended, (the "Declaration of Trust") of the Franklin Valuemark Funds (the
"Trust"), a business trust organized under the laws of the Commonwealth of
Massachusetts on May 23, 1988, the By-Laws of the Trust, and the resolutions
adopted by the Trust's Board of Trustees organizing the business of the
Trust, all as amended to date, and the various pertinent proceedings we deem
material. We have also examined the Notification of Registration and the
Registration Statements filed under the Investment Company Act of 1940 (the
"Investment Company Act") and the Securities Act of 1933 (the "Securities
Act"), all as amended to date, as well as other items we deem material to
this opinion.
The Trust is authorized by its Declaration of Trust to issue an
unlimited number of shares of beneficial interest with a par value of $.01
per Share. The Trust issues shares of series designated the Capital Growth
Fund, Global Health Care Securities Fund, Global Utilities Securities Fund,
Growth and Income Fund, High Income Fund, Income Securities Fund, Money
Market Fund, Mutual Shares Securities Fund, Mutual Discovery Securities Fund,
Natural Resources Securities Fund, Real Estate Securities Fund, Rising
Dividends Fund, Small Cap Fund, Templeton Developing Markets Equity Fund,
Templeton Global Asset Allocation Fund, Templeton Global Growth Fund,
Templeton Global Income Securities Fund, Templeton International Equity Fund,
Templeton International Smaller Companies Fund, Templeton Pacific Growth
Fund, U.S. Government Securities Fund, Value Securities Fund, Zero Coupon
Fund - 2000, Zero Coupon Fund - 2005, and Zero Coupon Fund - 2010. The
Declaration of Trust designates, or authorizes the Trustees to designate, one
or more series or classes of shares of the Trust, and allocates, or
authorizes the Trustees to allocate, shares of beneficial interest to each
such series or class. The Declaration of Trust also empowers the Trustees to
designate any additional series or classes and allocate shares to such series
or classes.
The Trust has filed with the U.S. Securities and Exchange
Commission (the "Commission"), a Registration Statement under the Securities
Act, which Registration Statement is deemed to register an indefinite number
of shares of the Trust pursuant to the provisions of Rule 24f-2 under the
Investment Company Act. You have further advised us that the Trust has
filed, and each year hereafter will timely file, a Notice pursuant to Rule
24f-2 perfecting the registration of the shares sold by the Trust during each
fiscal year during which such registration of an indefinite number of shares
remains in effect.
You have also informed us that the shares of the Trust have been,
and will continue to be, sold in accordance with the Trust's usual method of
distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in
accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long as
the Trust remains a valid and subsisting trust under the laws of the
Commonwealth of Massachusetts, and the registration of an indefinite number
of shares of the Trust remains effective, the authorized shares of the Trust
when issued for the consideration set by the Board of Trustees pursuant to
the Declaration of Trust, and subject to compliance with Rule 24f-2, will be
legally outstanding, fully-paid, and non-assessable shares, and the holders
of such shares will have all the rights provided for with respect to such
holding by the Declaration of Trust and the laws of the Commonwealth of
Massachusetts.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement of the Trust, and any amendments thereto, covering the
registration of the shares of the Trust under the Securities Act and the
applications, registration statements or notice filings, and amendments
thereto, filed in accordance with the securities laws of the several states
in which shares of the Trust are offered, and we further consent to reference
in the registration statement of the Trust to the fact that this opinion
concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /S/ BRUCE G. LETO
Bruce G. Leto
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN VALUEMARK FUNDS (the
"Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to each of
them to act alone) his attorney-in-fact and agent, in all capacities, to
execute, and to file any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority.
Each of the undersigned grants to each of said attorneys, full authority to
do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes as he could do if personally present, thereby
ratifying all that said attorneys-in-fact and agents, may lawfully do or
cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of this 12th day of January, 1999.
/s/ Frank H. Abbott, III
Frank H. Abbott, III, Trustee
/s/ Harris J. Ashton /s/ Edward J. Bonach
Harris J. Ashton, Trustee Edward J. Bonach, Trustee
/s/ Robert F. Carlson /s/ Joseph S. Fortunato
Robert F. Carlson, Trustee S. Joseph Fortunato, Trustee
/s/ Charles B. Johnson /s/ Rupert H. Johnson, Jr.
Charles B. Johnson, Trustee Rupert H. Johnson, Jr., Trustee
/s/ Frank W.T. LaHaye /s/ Gordon S. Macklin
Frank W.T. LaHaye, Trustee Gordon S. Macklin, Trustee
/s/ Martin L. Flanagan /s/ Diomedes Loo-Tam
Martin L. Flanagan, Principal Diomedes Loo-Tam, Principal
Financial Officer Acccounting Officer
Charles E. Johnson, officer and trustee, hereby execute this Power of
Attorney as of this 1st day of February, 1999.
/s/ Charles E. Johnson
Charles E. Johnson, Principal
Executive Officer and Trustee
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of FRANKLIN VALUEMARK FUNDS
(the "Fund")
As Secretary of the Fund, I further certify that the following resolution was
adopted by a majority of the Trustees of the Fund present at a meeting held
at 777 Mariners Island Boulevard, San Mateo, California, on January 12, 1999.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon E.
Burns, Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene and
Mark H. Plafker as attorneys-in-fact for the purpose of filing
documents with the Securities and Exchange Commission, be executed
by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: 1/15/99 /s/ Deborah R. Gatzek
Deborah R. Gatzek
Secretary
