As filed with the Securities and Exchange Commission on December 31, 1996
File Nos.
33-41340
811-6336
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 9
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ]immediately upon filing pursuant to paragraph (b)
[X] on January 1, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date)pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuers most recent fiscal year was filed on December 20, 1996.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
CROSS REFERENCE SHEET
FORM N- 1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(TEMPLETON PACIFIC GROWTH FUND-CLASS I AND II)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "How does the Fund Measure
Performance?"
4. General Description of Registrant "How is the Trust Organized?";
"How does the Fund Invest its
Assets?"; "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and Other Securities "How is the Trust Organized?";
"Services to Help You Manage
Your Account"; "What
Distributions Might I
Receive from the Fund?"; "How
Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; May I
Offered Exchange Shares for Shares of;
Another Fund?; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and SpecialRequirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TEMPLETON INTERNATIONAL TRUST
CROSS REFERENCE SHEET
FORM N- 1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(TEMPLETON FOREIGN SMALLER COMPANIES FUND-CLASS I)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "How does the Fund Measure
Performance?"
4. General Description of Registrant "How is the Trust Organized?";
"How does the Fund Invest its
Assets?"; "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and Other Securities "How is the Trust Organized?";
"Services to Help You Manage
Your Account"; "What
Distributions Might I
Receive from the Fund?"; "How
Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; May I
Offered Exchange Shares for Shares of;
Another Fund?; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and SpecialRequirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N- 1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(TEMPLETON PACIFIC GROWTH FUND - ADVISOR CLASS)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "How does the Fund Measure
Performance?"
4. General Description of Registrant "How is the Trust Organized?";
"How does the Fund Invest its
Assets?"; "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and Other Securities "How is the Trust Organized?";
"Services to Help You Manage
Your Account"; "What
Distributions Might I
Receive from the Fund?"; "How
Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; May I
Offered Exchange Shares for Shares of;
Another Fund?; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and SpecialRequirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N- 1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(TEMPLETON FOREIGN SMALLER COMPANIES FUND -
ADVISOR CLASS)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "How does the Fund Measure
Performance?"
4. General Description of Registrant "How is the Trust Organized?";
"How does the Fund Invest its
Assets?";"What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and Other Securities "How is the Trust Organized?";
"Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects You and the
Fund"
7. Purchase of Securities Being "How Do I Buy Shares?"; May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Pending Legal Proceedings Not Applicable
CROSS REFERENCE SHEET
FORM N- 1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(TEMPLETON PACIFIC GROWTH FUND - CLASS I AND II AND
TEMPLETON FOREIGN SMALLER COMPANIES FUND - CLASS I)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its Assets?";
Policies "Investment Restrictions"
14. Management of the Fund "Officers and Trustees"; "Investment
Management and Other Services"
15. Control Persons and Principal "Officers and Trustees"; "Investment
Holders of Securities Management and Other Services";
"Miscellaneous Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How does the Fund Buy Securities for
Practices its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Trust
Securities Organized?"
19. Purchase, Redemption and Pricing "How Do I Buy, Sell and Exchange
of Securities Being Offered Shares?"; "How are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
CROSS REFERENCE SHEET
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(TEMPLETON PACIFIC GROWTH FUND AND
TEMPLETON FOREIGN SMALLER COMPANIES FUND -
ADVISOR CLASS)
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History See Prospectus "How is the Trust
Organized?"
13. Investment Objectives and "How does the Fund Invest its Assets?";
Policies "Investment Restrictions"
14. Management of the Fund "Officers and Trustees"; "Investment
Management and Other Services"
15. Control Persons and Principal "Officers and Trustees"; "Investment
Holders of Securities Management and Other Services";
"Miscellaneous Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How does the Fund Buy Securities for
Practices its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Trust
Securities Organized?"
19. Purchase, Redemption and Pricing "How Do I Buy, Sell and Exchange
of Securities Being Offered Shares?"; "How are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
Templeton
Pacific Growth
Fund
Franklin Templeton
International Trust
JANUARY 1, 1997
Investment Strategy:
Global Growth
This prospectus describes Class I and Class II shares of the Templeton Pacific
Growth Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund's SAI, dated January 1, 1997, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Shares of the Fund involve investment risks, including the possible
loss of principal.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TEMPLETON
PACIFIC GROWTH FUND
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
When reading this prospectus, you will see certain terms beginning with
capitalized letters. This means the term is explained in our glossary
section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary
Financial Highlights
How does the Fund Invest its Assets?
What are the Fund's Potential Risks?
Who Manages the Fund?
How does the Fund Measure Performance?
How is the Trust Organized?
How Taxation Affects You and the Fund
ABOUT YOUR ACCOUNT
How Do I Buy Shares?
May I Exchange Shares for Shares
of Another Fund?
How Do I Sell Shares?
What Distributions Might I Receive from
the Fund?
Transaction Procedures and Special
Requirements
Services to Help You Manage Your
Account
GLOSSARY
Useful Terms and Definitions
Templeton
Pacific
Growth
Fund
January 1, 1997
700 Central Avenue
St. Petersburg, Florida 33701-3628
1-800/DIAL BEN
About the Fund
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of Class I shares for the fiscal
year ended October 31, 1996. Your actual expenses may vary.
Class I Class II
A.SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) 5.75% 1.99%
Paid at time of purchase 5.75%++ 1.00%+++
Paid at redemption++++ None 0.99%
B.Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.00% 1.00%
Rule 12b-1 Fees 0.17%* 1.00%*
Other Expenses 0.35% 0.35%
Total Fund Operating Expenses 1.52% 2.35%
C. Example
Assume the annual return for each class is 5% and operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 Year 3 Years 5 Years 10 Years
Class I $72** $103 $136 $228
Class II $44 $83 $134 $276
For the same Class II investment, you would pay projected expenses of $34 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends of each class and are not directly charged to
your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++There is no
front-end sales charge if you invest $1 million or more in Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy." ++++A Contingent
Deferred Sales Charge may apply to any Class II purchase if you sell the shares
within 18 months and to Class I purchases of $1 million or more if you sell the
shares within one year. The charge is 1% of the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less. The number in the
table shows the charge as a percentage of Offering Price. While the percentage
is different depending on whether the charge is shown based on the Net Asset
Value or the Offering Price, the dollar amount paid by you would be the same.
See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
*These fees may not exceed 0.25% for Class I. The combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charge permitted under
the NASD's rules. **Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
Class I
Year Ended October 31, 1996 1995 1994 1993 1992 1991+
PER SHARE OPERATING PERFORMANCE
Net Asset Value at Beginning
of Year $14.11 $15.40 $14.44 $10.90 $10.07 $10.01
Net Investment Income .12 .15 .21 .19 .14 .06
Net Realized & Unrealized
Gain (Loss) on Securities 1.410 (1.013) 1.008 3.825 .836 -
Total From Investment
Operations 1.530 (.863) 1.218 4.015 .976 .060
Distributions From Net
Investment Income (.213) (.156) (.198) (.193) (.146) -
Distributions From
Capital Gains (.927) (.271) (.060) (.282) - -
Total Distributions (1.140) (.427) (.258) (.475) (.146) -
Net Asset Value at
End of Year $14.50 $14.11 $15.40 $14.44 $10.90 $10.07
Total Return++ 11.27% (5.54)% 8.46% 38.46% 9.77% .60%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of Year (in 000's) $59,740 $50,247 $58,241 $22,619 $5,724 $1,165
Ratio of Expenses to
Average Net Assets 1.52% 1.72% 1.22%** .50%** .29%** -%**
Ratio of Net Investment
Income to Average Net Assets 1.06% 1.04% 1.54% 2.03% 1.80% 5.01%*
Portfolio Turnover Rate 13.48% 36.21% 9.16% 47.52% 62.96% -%
Average Commission Rate $.0092 - -- - -
+For the period September 20, 1991 (effective date of registration) to October
31, 1991.
++Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end sales
charge or the Contingent Deferred Sales Charge and assumes reinvestment of
dividends and capital gains, if any, at Net Asset Value.
*Annualized.
**During the periods indicated, Advisers agreed in advance to limit its
management fees. Had such action not been taken, the ratio of expenses to
average net assets would have been as follows:
Ratio of expenses
to average net assets
1991+............2.50%*
1992.............2.50
1993.............2.31
1994.............1.72
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's principal investment objective is to seek to provide long-term growth
of capital. The objective is a fundamental policy of the Fund and may not be
changed without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund expects to invest at least 65% of its
total assets in equity securities that trade on markets in the Pacific Rim and
are issued by companies (i) domiciled in the Pacific Rim or (ii) that derive at
least 50% of their revenues or pre-tax income from activities in the Pacific
Rim. The Fund may, from time to time, hold significant cash positions until
suitable investment opportunities, consistent with the Fund's objective and
policies, are available.
For purposes of this policy, the countries in the Pacific Rim are Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea and Thailand. It is currently expected that
under normal conditions at least 65% of the Fund's total assets will be invested
in securities of foreign issuers in at least three of the countries listed
above.
The Fund may invest up to 35% of its assets in the securities of issuers
domiciled outside of the Pacific Rim. These investments may include securities
of issuers (i) in countries that are not located in the Pacific Rim but are
linked by tradition, economic markets, cultural similarities, or geography to
countries in the Pacific Rim; and (ii) located elsewhere in the world that have
operations in the Pacific Rim or that stand to benefit from political and
economic events in the Pacific Rim. For example, the Fund may invest in a
company when the Sub-advisor believes at the time of investment that the value
of the company's securities may be enhanced by conditions or developments in the
Pacific Rim even though the company's production facilities are located outside
of the Pacific Rim.
Under normal market conditions, the Fund's assets are substantially invested in
equity securities. The Fund may invest in common and preferred stock, bonds or
preferred stock convertible into common stock, warrants and securities
representing certain underlying international securities such as American
Depositary Receipts or ("ADRs") and Global Depositary Receipts or ("GDRs"), as
discussed below.
Up to 35% of the Fund's total assets may be invested in investment grade bonds,
fixed-income debt securities, and synthetic convertible securities, as discussed
below, rated "Baa" or better by Moody's or "BBB" or better by S&P or that are
unrated but deemed to be of comparable quality by the Managers. The Fund may
seek capital appreciation by investing in these debt securities. Appreciation in
the value of these investments may result from changes in relative foreign
currency exchange rates, interest rates or improvement in the creditworthiness
of an issuer. The receipt of income from these debt securities is incidental to
the Fund's investment objective of long-term growth of capital. Debt obligations
in which the Fund may invest include U.S. and foreign government securities and
corporate debt securities, including Samurai and Yankee bonds, Eurobonds and
depositary receipts. The issuers of these debt securities may or may not be
domiciled in the Pacific Rim.
Fixed-income debt securities rated within the top three ratings categories
("AAA," "AA" and "A" by S&P or "Aaa," "Aa" or "A" by Moody's) are generally
known as high-grade debt securities and are regarded as having a strong capacity
to pay principal and interest. Medium-grade debt securities ("BBB" by S&P or
"Baa" by Moody's) are regarded as having an adequate capacity to pay principal
and interest but with greater vulnerability to adverse economic conditions and
some speculative characteristics.
In the event the rating on an issue held in the Fund's portfolio is lowered by a
rating service, the change will be considered by the Fund in its evaluation of
the overall investment merits of that security but will not necessarily result
in an automatic sale of the security. An Appendix discussing these ratings is
included in the SAI.
CURRENCY TECHNIQUES AND HEDGING. In order to hedge against currency exchange
rate risks, the Fund may enter into forward currency exchange contracts,
currency futures contracts and options on such futures contracts, as well as buy
put or call options and write covered put and call options on currencies traded
in U.S. or foreign markets.
The Fund may also buy put and call options and write ("sell") covered put and
call options on securities and securities indices that are traded on U.S. or
foreign exchanges or over-the-counter. The Fund will not buy puts, calls,
straddles, spreads or any combinations thereof if the value of its aggregate
investment in these securities will exceed 5% of its total assets. For more
information on options, please see the SAI.
Options, futures, options on futures and forward contracts are
generally considered "derivative securities."
WARRANTS. A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before the expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. If the Fund does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless. The Fund may invest
up to 10% of its net assets in warrants, including warrants that are not listed
on an exchange.
CONVERTIBLE SECURITIES. Convertible securities are, in general, debt obligations
or preferred stocks 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 may also be subject to redemption by the issuer but only
after a specified date and under circumstances established at the time the
security is issued. A convertible security provides a fixed-income stream and
the opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. Though the Fund intends to invest in liquid convertible securities there
can be no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
SYNTHETIC CONVERTIBLES. The fund may invest up to 35% of its assets in synthetic
convertible securities. A synthetic convertible is created by combining distinct
securities which together possess the two principle characteristics of a true
convertible security, i.e., fixed income and the right to acquire the underlying
equity security. This combination is achieved by investing in nonconvertible
fixed-income securities and in warrants, or stock or stock index call options
that grant the holder the right to buy 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. The Fund presently has no intention of investing more
than 5% of its net assets in synthetic convertible securities. Please see the
SAI for more information about these securities.
ADRS AND GDRS. ADRs evidence ownership of and represent the right to receive
securities of a foreign issuer deposited in a U.S. bank or a correspondent bank,
while GDRs are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S.
corporation.
OTHER INVESTMENT POLICIES OF THE FUND
SHORT-TERM INVESTMENTS. Occasionally, pending investment of proceeds from new
sales of Fund shares, to honor redemptions, or to satisfy other short-term
needs, the Fund may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high quality
money-market instruments. In any period of market weakness or uncertain market
or economic conditions, or while awaiting attractive investment opportunities,
the Fund may establish a temporary defensive position by investing in high
quality money-market instruments if the Managers anticipate that developments in
any market may seriously jeopardize the value of the Fund's equity securities in
such market. Any decision to substantially withdraw from the equity market is
reviewed by the Board. Money-market instruments in which the Fund may invest
include, but are not limited to, the following instruments of U.S. or foreign
issuers: government securities; commercial paper; bank certificates of deposit;
bankers' acceptances; and repurchase agreements secured by any of the foregoing.
All such securities will be rated "A-1" or "A-2" by S&P or "P-1" or "P-2" by
Moody's or, if unrated, determined by the Managers to be of comparable quality.
It is impossible to predict when or for how long the Fund would employ defensive
strategies.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 331/3% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund may borrow up to 10% of the value
of its assets for temporary or emergency, but not investment purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets, at the time of purchase, in illiquid securities. Illiquid securities
are generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the Fund has valued
them.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by the Managers.
A repurchase agreement is deemed to be a loan by the Fund under the 1940 Act.
The U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian bank approved by the Board and will be held
pursuant to a written agreement.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the 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 market as a whole.
FOREIGN SECURITIES. Foreign securities involve certain risks that you should
consider carefully. These risks include political, social, or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities may be subject to greater fluctuations
in price than securities issued by U.S. corporations or issued or guaranteed by
the U.S. government, its instrumentalities or agencies. The markets on which
foreign securities trade may have less volume and liquidity, and may be more
volatile than securities markets in the U.S. In addition, there may be less
publicly available information about a foreign company than about a U.S.
domiciled company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies abroad than in
the U.S. Confiscatory taxation or diplomatic developments could also affect
investment in foreign securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, however, these investments may be less liquid than
the securities of U.S. corporations and are certainly less liquid than
securities issued or guaranteed by the U.S. government, its instrumentalities or
agencies. Finally, in the event of a default of any foreign debt obligation, it
may be more difficult for the Fund to obtain or to enforce a judgment against
the issuer of the security.
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 one or more countries. You should
consider the greater risk of this policy versus the safety that may come with an
investment that involves a wider range of geographic localities and countries.
Accordingly, an investor should compare the Fund with other investment vehicles
before making an investment decision.
Some of the countries in which the Fund invests may not permit direct
investment. Investments in these countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve duplicative or layered fees or expenses and may, as well, be subject to
limitations under the 1940 Act. Under the 1940 Act, the Fund may invest up to
10% of its assets in shares of other investment companies and up to 5% of its
assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
Investments in Depositary Receipts reduce but do not eliminate the risks
associated with foreign investments. To the extent that the Fund acquires
Depositary Receipts through banks which do not have a contractual relationship
with the foreign issuer of the security underlying the Depositary Receipt to
issue and service such Depositary Receipts, there may be an increased
possibility that the Fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner.
MARKET, CURRENCY AND INTEREST RATE RISK. If there is a general market decline in
any country where the Fund is invested, the Fund's share price may also decline.
Changes in currency valuations will also affect the price of Fund shares. To the
extent the 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. The value of worldwide stock markets, interest rates
and currency valuations has increased and decreased in the past. These changes
are unpredictable and may happen again in the future.
CURRENCY FLUCTUATIONS. The Fund's investments may be denominated in foreign
currencies. Fluctuations in foreign exchange rates may significantly increase or
decrease the value of the Fund's foreign investments. These fluctuations may
increase or offset any return on the underlying investment.
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
TICI intends to manage the Fund's exposure to various currencies to take
advantage of different yield, risk, and return characteristics that different
currencies, currency denominations, and countries can provide for U.S.
investors.
DEVELOPING MARKETS. Many of the countries in which the Fund may invest are
considered developing or emerging markets. Investments in these markets are
subject to all of the risks of foreign investing generally, and have additional
and heightened risks due to the small size and lesser liquidity of these markets
and other factors.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, Advisers and its affiliates manage
over $150 billion in assets. Please see "Investment Management and
Other Services" and "Miscellaneous Information" in the SAI for
information on securities transactions and a summary of the Fund's Code
of Ethics.
TICI, an indirect subsidiary of Templeton Worldwide, Inc., subadvises the Fund.
Templeton Worldwide, Inc., operating through its subsidiaries, is a major
investment management organization with approximately $69 billion in assets
currently under management and a long history of global investing.
Until December 31, 1992, Advisers received portfolio advice and management
assistance from BZWIM. Since January 1, 1993, TICI has provided these services
under a subadvisory agreement between Advisers and TICI. TICI recommends the
optimal equity allocation and provides advice regarding the Fund's investments.
TICI also determines which securities will be purchased, retained or sold and
executes these transactions. TICI's activities are subject to the Board's review
and control as well as Advisers' instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of
the Fund's portfolio is: William T. Howard, Jr. since 1993, Mark R.
Beveridge since 1994, and Gary Clemons since 1993.
William T. Howard, Jr.
Vice President of TICI
Mr. Howard is a Chartered Financial Analyst and holds a Master of Business
Administration degree from Emory University. He earned his Bachelor of Arts
degree from Rhodes College. Prior to joining the Franklin Templeton Group in
1993, Mr. Howard was the international portfolio manager for the State of
Tennessee Consolidated Retirement System.
Mark R. Beveridge
Vice President of TICI
Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of
Business Administration degree in finance from the University of Miami.
He joined the Franklin Templeton Group in 1985.
Gary Clemons
Portfolio Manager of TICI
Mr. Clemons is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Wisconsin at Madison. He earned his
Bachelor of Science degree in Earth Science from the University of Nevada at
Reno. Mr. Clemons was a research analyst for Structured Asset Management. He
joined the Franklin Templeton Group in 1990.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 1.00% of the average net assets of the Fund were paid to Advisers.
Total expenses of Class I shares, including fees paid to Advisers, were 1.52%.
The management fee is higher than the management fees paid by most mutual funds,
although the Board believes it to be comparable to fees paid by many
international funds having similar investment objectives and policies.
PORTFOLIO TRANSACTIONS. The Managers try to obtain the best execution on all
transactions. If the Managers believe more than one broker or dealer can provide
the best execution, consistent with internal policies, the Managers may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Each class has a distribution plan or "Rule 12b-1 Plan" under which it may pay
or reimburse Distributors or others for activities primarily intended to sell
shares of the class. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements, and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measure of performance is total return. Performance figures are
usually calculated using the maximum sales charge, but certain figures may not
include the sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Templeton International Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust on March 22, 1991, and is
registered with the SEC under the 1940 Act. Prior to February 1, 1996, the Trust
was known as Franklin International Trust. As of January 1, 1997, the Fund began
offering two new classes of shares, "Templeton Pacific Growth Fund - Class II"
and "Templeton Pacific Growth Fund - Advisor Class." All Fund shares outstanding
before the offering of Class II shares and Advisor Class shares have been
designated Templeton Pacific Growth Fund - Class I shares and will retain their
previous rights and privileges. Class I, Class II and Advisor Class differ as to
sales charges, expenses and services. Different fees and expenses will affect
performance. Advisor Class is described in a separate prospectus relating only
to that class. For more information concerning Advisor Class, contact your
investment representative or Distributors. Additional classes and series of
shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state law, or (3) required to be voted on
separately by the 1940 Act. 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.
The Trust has noncumulative voting rights. 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. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to these investments. To the extent possible, the Fund will
avoid this treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether these
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate shareholders, it is anticipated that only a small portion of the
Fund's dividends during the current fiscal year will qualify for the corporate
dividends-received deduction because of the Fund's policy of investing in
foreign equity securities and non-equity investments. To the extent that the
Fund pays dividends which qualify for this deduction, the availability of the
deduction is subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of these dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
The Fund's investment in options, futures and forward contracts, foreign
securities and currencies and in multiple combinations of these securities are
subject to many complex and special tax rules. More information on the tax
treatment of these securities is included under "Additional Information on
Distributions and Taxes" in the SAI.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. Please indicate which class of shares you want to buy. If you do not
specify a class, your purchase will be automatically invested in Class I shares.
Minimum
Investments*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares. Currently, the Fund does not allow investments by Market Timers.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $50,000 in the Franklin Templeton
Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
Total Sales Charge Amount Paid
as a Percentage of to Dealer as a
Amount of Purchase Offering Net Amount Percentage of
at Offering Price Price Invested Offering Price
CLASS I
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than
$100,000 4.50% 4.71% 3.75%
$100,000 but less than
$250,000 3.50% 3.63% 2.80%
$250,000 but less than
$500,000 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.60%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I
purchases of $1 million or more and any Class II purchase. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge." Please also
see "Other Payments to Securities Dealers" below for a discussion of
payments Distributors may make out of its own resources to Securities
Dealers for certain purchases. Purchases of Class II shares are limited
to purchases below $1 million. Please see "Deciding Which Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH EACH
PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
CUMULATIVE QUANTITY DISCOUNTS - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your shares in other Franklin
Templeton Funds, as well as those of your spouse, children under the age of 21
and grandchildren under the age of 21. If you are the sole owner of a company,
you may also add any company accounts, including retirement plan accounts.
Companies with one or more retirement plans may add together the total plan
assets invested in the Franklin Templeton Funds to determine the sales charge
that applies.
LETTER OF INTENT - Class I Only. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
By completing the Letter of Intent section of the shareholder application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on any
tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to Class I purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in
a fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to
invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b) or 457 plans, must also meet the requirements described under
"Group Purchases - Class I Only" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of
payments by the Fund on arbitrage rebate calculations.
10. Broker-dealers, registered investment advisors or certified financial
planners, who have entered into a supplemental agreement with Distributors
for clients participating in comprehensive fee programs.
11. Registered Securities Dealers and their affiliates, for their
investment accounts only
12. Current employees of Securities Dealers and their affiliates and
their family members, as allowed by the internal policies of their
employer
13. Officers, trustees, directors and full-time employees of the
Franklin Templeton Funds or the Franklin Templeton Group, and their
family members, consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant
to a merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for Class II purchases and certain Class I purchases made without a sales
charge. A Securities Dealer may only receive one of these payments for each
qualifying purchase. Securities Dealers who receive payments under items 1, 2 or
3 below will earn the Rule 12b-1 fee associated with the purchase starting in
the thirteenth calendar month after the purchase. The payments described below
are paid by Distributors or one of its affiliates, at its own expense, and not
by the Fund or its shareholders.
1. Securities Dealers may receive up to 1% of the purchase price for
Class II purchases.
2. Securities Dealers will receive up to 1% of the purchase price for Class I
purchases of $1 million or more.
3. Securities Dealers may, in the sole discretion of Distributors, receive up
to 1% of the purchase price for Class I purchases made under waiver category
8 above.
4. Securities Dealers may receive up to 0.25% of the purchase price for Class I
purchases made under waiver categories 6, 9 and 10 above.
Please see "How Do I Buy, Sell and Exchange Shares - Other Payments to
Securities Dealers" in the SAI for any breakpoints that may apply.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs, or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Class II shares.
Method Steps to Follow
By Mail 1. Send us written instructions
signed by all account owners
2. Include any outstanding share
certificates for the shares you're
exchanging
By Phone Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to
exchange by phone to apply to your account,
please let us know.
Through Your Dealer Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. We believe the proportional method of exchanging Class II shares
more closely reflects the expectations of Class II shareholders if shares are
sold during the Contingency Period. The tax consequences of a sale or exchange
are determined by the Code and not by the method used by the Fund to transfer
shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS.
o The accounts must be identically registered. You may exchange shares
from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one
signature for all transactions. Please notify us in writing if you do
not want this option to be available on your account(s). Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
How Do I Sell Shares?
You may sell (redeem) your shares at any time.
Method Steps to Follow
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have additional requirements
BY PHONE
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call Institutional
Services to receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was
changed by phone within the last 30 days
THROUGH YOUR DEALER Call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT. If you
later decide you would like this option, send us written instructions signed by
all account owners.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on
shares held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain
distributions, and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance
of $1 million in Class I shares, you can withdraw up to $120,000 annually
through a systematic withdrawal plan free of charge. Likewise, if you maintain
an annual balance of $10,000 in Class II shares, $1,200 may be withdrawn
annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of each class.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund. Many shareholders find this a
convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price of the class you wish to purchase, unless
you qualify to buy shares at a reduced sales charge or with no sales charge. The
Offering Price of each class is based on the Net Asset Value per share of the
class and includes the maximum sales charge. We calculate it to two decimal
places using standard rounding criteria. You sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the
registered owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
Type of Account Documents Required
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership
agreement that identify the general partners,
or
2. A certification for a partnership
agreement
TRUST 1. The pages from the trust document
that identify the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems, or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. Beginning with your February 1997 payment,
however, you will generally receive your payment by the end of the month in
which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular
basis. Shares sold under the plan may also be subject to a Contingent
Deferred Sales Charge. Please see "Contingent Deferred Sales Charge"
under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the code number for each class to use TeleFACTS. The code numbers
for Class I and Class II are 190 and 290, respectively.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
Advisers is also located at this address. The Fund and Distributors are located
at 700 Central Avenue, St. Petersburg, Florida 33701-3628. You may also contact
us by phone at one of the numbers listed below.
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
Useful Terms and Definitions
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
BZWIM - Barclays de Zoete Wedd Investment Management Inc.
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II" and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans, if any.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter. The SAI lists the officers and Board members who
are affiliated with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R)
except Franklin Valuemark Funds and the Franklin Government Securities
Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment
companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGERS - Franklin Advisers, Inc., the Fund's investment manager and Templeton
Investment Counsel, Inc., the Fund's Sub-advisor.
Market Timer(s) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - 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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
SUB-ADVISOR - Templeton Investment Counsel, Inc., the Fund's
sub-advisor.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton
Group of Funds except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
TICI - Templeton Investment Counsel, Inc., the Fund's Sub-advisor.
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of
Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS
& APPLICATION
TEMPLETON FOREIGN SMALLER
COMPANIES FUND
FRANKLIN TEMPLETON
INTERNATIONAL TRUST
JANUARY 1, 1997
INVESTMENT STRATEGY:
GLOBAL GROWTH
This prospectus describes Class I shares of the Templeton Foreign Smaller
Companies Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund's SAI, dated January 1, 1997, as may be amended from time to time,
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at the address shown.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TEMPLETON FOREIGN
SMALLER COMPANIES FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED
IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY
SECTION.
TEMPLETON
FOREIGN
SMALLER COMPANIES
FUND
JANUARY 1, 1997
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary 2
Financial Highlights 3
How does the Fund Invest its Assets? 4
What are the Fund's Potential Risks? 8
Who Manages the Fund? 10
How does the Fund Measure Performance? 12
How is the Trust Organized? 12
How Taxation Affects You and the Fund 13
ABOUT YOUR ACCOUNT
How Do I Buy Shares? 14
May I Exchange Shares for Shares of
Another Fund? 19
How Do I Sell Shares? 21
What Distributions Might I Receive from
the Fund? 23
Transaction Procedures and Special
Requirements 24
Services to Help You Manage Your
Account 28
GLOSSARY
Useful Terms and Definitions 31
700 Central Avenue
St. Petersburg, Florida 33701-3628
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the Fund's historical expenses for the fiscal year ended
October 31, 1996. Your actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge
(as a percentage of Offering Price) 5.75%++
Deferred Sales Charge None+++
Exchange Fee (per transaction) $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees 1.00%
Rule 12b-1 Fees 0.18%**
Other Expenses 0.35%
-----
Total Fund Operating Expenses 1.53%
C. EXAMPLE
Assume the Fund's annual return is 5% and its operating expenses are as
described above. For each $1,000 investment, you would pay the following
projected expenses if you sold your shares after the number of years shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$72*** $103 $136 $229
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. Actual expenses and returns may be more or less than those shown. The
Fund pays its operating expenses. The effects of these expenses are reflected
in its Net Asset Value or dividends and are not directly charged to your
account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++There is no
front-end sales charge if you invest $1 million or more. +++A Contingent
Deferred Sales Charge of 1% may apply to purchases of $1 million or more if you
sell the shares within one year. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge" for details. *$5.00 fee is only for Market Timers. We
process all other exchanges without a fee. **These fees may not exceed 0.25%.
The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charge permitted under the NASD's rules. ***Assumes a Contingent
Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements in the Trust's Annual Report to Shareholders for the fiscal
year ended October 31, 1996. The Annual Report to Shareholders also includes
more information about the Fund's performance. For a free copy, please call Fund
Information.
FOR THE YEAR
ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991+
- -------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE*
Net Asset Value
at Beginning of Year
$13.23 $13.83 $12.28 $10.02 $10.07 $10.01
Net Investment
Income
0.35 0.25 0.23 0.42 0.19 0.06
Net Realized &
Unrealized Gain
(Loss) on Securities
1.880 (0.077) 1.540 2.253 (0.038) -
Total From Investment
Operations
2.230 0.173 1.770 2.673 0.152 0.060
Distributions From
Net Investment Income
(0.254) (0.190) (0.220) (0.413) (0.202) -
Distributions From
Capital Gains (1.026) (0.588) - - - -
Total Distributions (1.280) (0.778) (0.220) (0.413) (0.202) -
Net Asset Value at
End of Year 14.18 13.23 13.83 12.28 10.02 10.07
Total Return** 18.49% 1.75% 14.56% 27.40% 1.46% 0.60%
RATIOS/SUPPLEMENTAL DATA
Net Assets at End
of Year $67,967 $50,947 $57,854 $19,217 $6,944 1,286
Ratio of Expenses
to Average Net Assets 1.53% 1.63% 1.22%++ 0.50%++ 0.29%++ -%++
Ratio of Net Investment
Income to Average
Net Assets 2.50% 1.86% 1.99% 4.22% 2.36% 4.92%***
Portfolio Turnover
Rate 40.45% 9.12% 21.80% 52.99% 48.78% -
Average Commission
Rate $0.0026 - - - - -
*Selected data for a share of beneficial interest outstanding throughout the
year. **Total return measures the change in value of an investment over the
periods indicated. It is not annualized. It does not include the maximum
front-end sales charge or the Contingent Deferred Sales Charges and assumes
reinvestment of dividends and capital gains, if any, at Net Asset Value.
***Annualized +For the period September 20, 1991 (effective date of
registration) to October 31, 1991. ++During the periods indicated, Advisers
agreed in advance to waive a portion of its management fees. Had such action not
been taken, the ratio of expenses to average net assets would have been as
follows:
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
1991+ 2.50%***
1992 2.50
1993 2.27
1994 1.76
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund expects to invest at least 65% of its
portfolio in smaller capitalization, foreign equity securities of issuers
located in, or deriving a significant portion of their revenues from, or for
which the principal securities trading market is in any foreign country,
including developing market countries. These issuers will have market
capitalizations of $1 billion or less at the time of the most recent purchase.
Companies of this size are generally considered "small cap companies." The Fund
may, from time to time, hold significant cash positions until suitable
investment opportunities, consistent with the Fund's objective and policies, are
available.
The Managers believe that international small cap companies may provide
attractive investment opportunities. These securities make up most of the
world's equity securities and are frequently overlooked by investors and
undervalued in relation to their perceived earning power. In addition, because
the performance of these securities may differ relative to the market for U.S.
small cap stocks and from the larger capitalization stocks of many countries,
these securities may allow investors to diversify their overall investment
portfolio. Equity securities of small cap companies may include common stocks,
preferred stocks, warrants for the purchase of common stocks, and convertible
securities. The Fund may also invest in foreign securities through American
Depositary Receipts ("ADRs"). As a non-fundamental policy, the Fund will limit
its investments in Russian securities to no more than 5% of its total assets.
The Fund may invest up to 35% of its total assets, in the aggregate, in (i)
equity securities of larger capitalized issuers outside the U.S., (ii) debt
obligations issued by companies or governments in any nation that are rated at
least "C" by Moody's or S&P or unrated debt obligations deemed to be of
comparable quality by the Managers, or (iii) equity securities of issuers within
the U.S., although these investments are not currently expected to represent
more than 5% of the Fund's total assets. The Fund will not invest more than 5%
of its total assets in debt obligations rated lower than "BBB" by S&P or "Baa"
by Moody's, including defaulted securities, or in debt obligations deemed to be
of comparable quality by the Managers, as defined below. These investments may
cause the Fund's performance to vary from that of the international smaller
capitalization equity market as a whole.
CURRENCY TECHNIQUES AND HEDGING. The Fund may, but with respect to equity
securities does not currently intend to, employ certain active currency
management techniques. These techniques may include investments in foreign
currency futures contracts, forward foreign currency exchange contracts
("forward contracts"), and currency-related options. The Fund will not enter
into forward contracts if, as a result, the Fund would have more than 20% of its
total assets committed to these contracts.
The Fund may also enter into options on securities and securities indices, other
types of futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the Fund. Options, futures, options on futures
and forward contracts are generally considered "derivative securities." For more
information on the Fund's investment policies regarding these securities, please
see the SAI.
WARRANTS. A warrant is typically a long-term option issued by a corporation that
gives the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
the expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If the Fund does not exercise or dispose of a
warrant before its expiration, it will expire worthless.
COMMON AND PREFERRED CONVERTIBLE SECURITIES. Convertible securities are, in
general, debt obligations or preferred stocks that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like common stock, the value of a convertible security
tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
its value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
AMERICAN DEPOSITARY RECEIPTS. ADRs are certificates issued by U.S. banks. They
give their holders the right to receive the securities of a foreign issuer
deposited with the bank or a correspondent bank. The Fund may buy both sponsored
and unsponsored ADRs. With a sponsored ADR, the issuing facility is established
with the participation of the issuer and the depositary institution under a
deposit agreement which sets forth the rights and responsibilities of the
issuer, the depositary and the ADR holder. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions. This ensures ADR holders will be able to exercise
voting rights through the depositary with respect to the deposited securities.
An unsponsored ADR has no sponsorship by the issuing facility and more than one
depositary institution may be involved in its issuance. An unsponsored ADR
typically clears through a depositary, such as the Depository Trust Company, so
there should be no additional delays in selling the security or in obtaining
dividends. Although not required, the depositary normally requests a letter of
non-objection from the issuer and is not required to distribute notices of
shareholder meetings or financial information to the ADR holder.
OTHER INVESTMENT POLICIES OF THE FUND
TEMPORARY DEFENSIVE INVESTMENTS. In any period of market weakness or of
uncertain market or economic conditions, or while awaiting suitable investment
opportunities, the Fund may establish a temporary defensive position by
investing in high quality money market investments. These investments include
U.S. government securities, bank obligations, the highest quality commercial
paper, and repurchase agreements. The Fund may also invest in non-U.S. currency,
short-term instruments denominated in non-U.S. currencies, and 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.
CONCENTRATION. The Fund reserves the right to invest more than 25% of its assets
in any one country, but the Fund will not invest more than 25% of its total
assets in any one industry (excluding the U.S.
government).
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Managers. A repurchase agreement is deemed to be a loan by the Fund under
the 1940 Act. The U.S. government security subject to resale (the collateral)
will be held on behalf of the Fund by a custodian bank approved by the Board and
will be held pursuant to a written agreement.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 331/3% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund may borrow up to 10% of the value
of its assets for temporary or emergency, but not investment purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets, at the time of purchase, in illiquid securities. Illiquid securities
are generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the Fund has valued
them.
The Managers, based on a continuing review of the trading markets, may consider
certain restricted securities which may otherwise be deemed to be illiquid, that
are offered and sold to "qualified institutional buyers," to be liquid. The
Board has adopted guidelines and delegated to the Managers the daily function of
determining and monitoring the liquidity of restricted securities. The Board,
however, will oversee and be ultimately responsible for the determinations. If
the Fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the Fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
PORTFOLIO TURNOVER. The Fund may buy and sell securities without regard to the
length of time the security has been held. Consequently, the frequency of Fund
transactions (turnover rate) will vary from year to year, depending on market
conditions. Portfolio turnover could be greater in periods of unusual market
movement and volatility. The Managers will weigh the potential benefits of any
short-term trading against the higher transaction costs associated with a higher
turnover rate. It is anticipated that the Fund's annual turnover rate generally
will not exceed 100%.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the 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 market as a whole.
MARKET, CURRENCY AND INTEREST RATE RISK. If there is a general market decline in
any country where the Fund is invested, the Fund's share price may also decline.
Changes in currency valuations will also affect the price of Fund shares. To the
extent the 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. The value of worldwide stock markets, interest rates
and currency valuations has increased and decreased in the past. These changes
are unpredictable and may happen again in the future.
SMALL CAPITALIZATION ISSUERS. The Fund may invest in a variety of small
capitalization issuers which include relatively new or unseasoned companies
which are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. These companies typically have a market capitalization of
less than $1 billion, which is considered to be a "small capitalization."
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these 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. You should therefore expect that the shares of a fund that invests a
substantial portion of its net assets in small company stocks to be more
volatile than the shares of a fund that invests solely in larger capitalization
stocks.
FOREIGN SECURITIES. The Fund is not restricted geographically in its selection
of securities. The Managers believe this can improve the Fund's ability to meet
its objective of long-term growth of capital, as many of today's quality
industry leaders are domiciled outside the U.S. You should consider the risks of
foreign securities before buying shares of the Fund.
While foreign securities are subject to many of the same influences as U.S.
securities, such as general economic conditions and individual company and
industry earnings prospects, they involve additional risks that can increase the
potential for losses in the Fund. These risks can be significantly greater for
investments in emerging markets.
CURRENCY FLUCTUATIONS. The Fund's investments may be denominated in foreign
currencies. Fluctuations in foreign exchange rates may significantly increase or
decrease the value of the Fund's foreign investments. These fluctuations may
increase or offset any return on the underlying investment.
TRADING COSTS. It is more expensive for the Fund to trade in foreign markets
than in the U.S. Brokerage and custodial costs are often higher, as are other
related costs. While the Fund offers an efficient way for you to invest in
smaller companies across the world, its overall expense ratio may be higher than
funds investing exclusively in U.S. securities.
POLITICAL AND ECONOMIC FACTORS. The political, economic and social structures of
some countries in which the Fund invests may not compare favorably with the U.S.
and may be less stable and more volatile. The risks of investing in these
countries include the possibility of the imposition of exchange controls,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, and punitive taxes.
LEGAL, REGULATORY AND OPERATIONAL FACTORS. There may be less publicly available
information about a foreign company or government than about a U.S. company or
public entity. Certain countries may not have uniform accounting, auditing and
financial reporting standards and may have less government supervision of
financial markets. Foreign securities markets may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S., and may have settlement practices that
result in delays.
DEVELOPING MARKETS. Many of the countries in which the Fund may invest are
considered developing or emerging markets. Investments in these markets are
subject to all of the risks of foreign investing generally, and have additional
and heightened risks due to the small size and lesser liquidity of these markets
and other factors.
Russian securities involve additional significant risks, including political and
social uncertainty (for example, regional conflicts and risk of war), currency
exchange rate volatility, pervasiveness of corruption and crime in the Russian
economic system, delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody. For more
information on these and other risks associated with Russian securities, please
see the SAI.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day
operations.
INVESTMENT MANAGERS. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $150 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
TICI, an indirect subsidiary of Templeton Worldwide, Inc., subadvises the Fund.
Templeton Worldwide, Inc., operating through its subsidiaries, is a major
investment management organization with approximately $69 billion in assets
currently under management and a long history of global investing.
Until December 31, 1992, Advisers received portfolio advice and management
assistance from BZWIM. Since January 1, 1993, TICI has provided these services
under a sub-advisory agreement between Advisers and TICI. TICI recommends the
optimal equity allocation and provides advice regarding the Fund's investments.
TICI also determines which securities will be purchased, retained or sold and
executes these transactions. TICI's activities are subject to the Board's review
and control as well as Advisers' instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of
the Fund's portfolio is: Marc S. Joseph since 1993, Mark R. Beveridge
since 1994, and Gary Clemons since 1993.
Marc S. Joseph
Vice President of TICI
Mr. Joseph holds a Doctor of Jurisprudence degree from Harvard Law School. He
earned a Master of Business Administration degree from Harvard Business School
and a Bachelor of Science degree in computer science from William and Mary.
Prior to joining Templeton, Mr. Joseph was a vice president with Pacific
Financial Research and a management consultant at McKinsey Co. He joined the
Franklin Templeton Group in September 1993. Mr. Joseph is also the portfolio
manager of the Templeton Global Smaller Companies Fund.
Mark R. Beveridge
Vice President of TICI
Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business
Administration degree in finance from the University of Miami. He has been with
the Franklin Templeton Group since 1985. He is a member of several securities
industry-related associations.
Gary Clemons
Portfolio Manager of TICI
Mr. Clemons is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Wisconsin at Madison. He earned his
Bachelor of Science degree in Earth Science from the University of Nevada at
Reno. He joined the Franklin Templeton Group in 1990 as a research analyst for
Structured Asset Management, a subsidiary of Templeton International.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 1.00% of the average net assets of the Fund were paid to Advisers.
Total expenses of the Fund, including fees paid to Advisers, were 1.53%.
Portfolio Transactions. The Managers try to obtain the best execution on all
transactions. If the Managers believe more than one broker or dealer can provide
the best execution, consistent with internal policies it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE FUND'S RULE 12B-1 PLAN
The Fund has a distribution plan or "Rule 12b-1 Plan" under which it may
reimburse Distributors or others for activities primarily intended to sell
shares of the Fund. These expenses may include, among others, distribution or
service fees paid to Securities Dealers or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates, printing prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and advertisements and a prorated portion of Distributors' overhead expenses.
Payments by the Fund under the plan may not exceed 0.25% per year of the Fund's
average daily net assets. All distribution expenses over this amount will be
borne by those who have incurred them. During the first year after certain
purchases made without a sales charge, Distributors may keep the Rule 12b-1 fees
associated with the purchase. For more information, please see "The Fund's
Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measure of performance is total return. Performance figures are usually
calculated using the maximum sales charge, but certain figures may not include
the sales charge.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Templeton International Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust, and is registered with the
SEC under the 1940 Act. Prior to February 1, 1996, the Trust was known as
Franklin International Trust. Before October 1, 1996, the Fund was known as the
Franklin International Equity Fund. Along with the name change, the Fund shifted
its focus from investing primarily in larger capitalization foreign equity
securities to smaller capitalization foreign equity securities.
As of January 1, 1997, the Fund began offering a new class of shares designated
"Templeton Foreign Smaller Companies Fund - Advisor Class." All Fund shares
outstanding before the offering of Advisor Class shares have been designated as
Templeton Foreign Smaller Companies Fund Class I shares and will retain their
previous rights and privileges. Class I and Advisor Class shares differ as to
sales charges, expenses and services. Different fees and expenses will affect
performance. Advisor Class shares are described in a separate prospectus
relating only to that class. For more information concerning Advisor Class
shares of the Fund, contact your investment representative or Distributors.
Additional classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund on matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters (1) affecting only that class, (2) expressly
required to be voted on separately by state business trust law, or (3) required
to be voted on separately by the 1940 Act.
Shares of each series of the Trust have equal and exclusive rights to dividends
and distributions declared by that series and the net assets of the series in
the event of liquidation or dissolution. In the future, additional series and
classes of shares may be offered.
The Trust has noncumulative voting rights. 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. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to such investments. To the extent possible, the Fund will
avoid such treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate shareholders, it is anticipated that only a small portion of the
Fund's dividends during the current fiscal year will qualify for the corporate
dividends-received deduction because of the Fund's policy of investing in
foreign equity securities and non-equity investments. To the extent that the
Fund pays dividends that qualify for this deduction, the availability of the
deduction is subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisors with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
The Fund's investment in options, futures and forward contracts, foreign
securities and currencies and in multiple combinations of these securities are
subject to many complex and special tax rules. More information on the tax
treatment of these securities is included under "Additional Information on
Distributions and Taxes" in the SAI.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check.
MINIMUM INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse
any order to buy shares.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify to buy shares under one of the sales charge reduction or waiver
categories described below, please include a written statement with each
purchase order explaining which privilege applies. If you don't include this
statement, we cannot guarantee that you will receive the sales charge reduction
or waiver.
QUANTITY DISCOUNTS. The sales charge you pay depends on the dollar
amount you invest, as shown in the table below.
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
MOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than
$100,000 4.50% 4.71% 3.75%
$100,000 but less than
$250,000 3.50% 3.63% 2.80%
$250,000 but less than
$500,000 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.60%
$1,000,000 or more* None None None
*If you invest $1 million or more, a Contingent Deferred Sales Charge may be
imposed on an early redemption. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge." Please also see "Other Payments to Securities Dealers"
below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers
for certain purchases.
CUMULATIVE QUANTITY DISCOUNTS. To determine if you may pay a reduced sales
charge, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your shares in other Franklin Templeton Funds, as
well as those of your spouse, children under the age of 21 and grandchildren
under the age of 21. If you are the sole owner of a company, you may also add
any company accounts, including retirement plan accounts. Companies with one or
more retirement plans may add together the total plan assets invested in the
Franklin Templeton Funds to determine the sales charge that applies.
LETTER OF INTENT. You may buy shares at a reduced sales charge by completing the
Letter of Intent section of the shareholder application. A Letter of Intent is a
commitment by you to invest a specified dollar amount during a 13 month period.
The amount you agree to invest determines the sales charge you pay.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Fund shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Fund
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's sales charges (front-end and contingent
deferred) will not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges will not apply if you are buying shares with money from
the following sources:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a REIT sponsored or advised by Franklin Properties, Inc.
2. Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity Fund,
the Templeton Variable Products Series Fund, or the Franklin Government
Securities Trust. You should contact your tax advisor for information on any
tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account, in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
5. Redemptions from other mutual funds
If you sold shares of a fund that is not a Franklin Templeton Fund within the
past 60 days, you may invest the proceeds without any sales charge if (a) the
investment objectives were similar to the Fund's, and (b) your shares in that
fund were subject to any front-end or contingent deferred sales charges at the
time of purchase. You must provide a copy of the statement showing your
redemption.
The Fund's sales charges will also not apply to purchases by:
6. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
7. Group annuity separate accounts offered to retirement plans
8. Retirement plans that (i) are sponsored by an employer with at least 100
employees, (ii) have plan assets of $1 million or more, or (iii) agree to
invest at least $500,000 in the Franklin Templeton Funds over a 13 month
period. Retirement plans that are not Qualified Retirement Plans or SEPS,
such as 403(b) or 457 plans, must also meet the requirements described under
"Group Purchases" above.
9. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of
payments by the Fund on arbitrage rebate calculations.
10. Broker-dealers, registered investment advisors or certified
financial planners, who have entered into a supplemental agreement
with Distributors for clients participating in comprehensive fee
programs
11. Registered Securities Dealers and their affiliates, for their
investment accounts only
12. Current employees of Securities Dealers and their affiliates and
their family members, as allowed by the internal policies of their
employer
13. Officers, trustees, directors and full-time employees of the
Franklin Templeton Funds or the Franklin Templeton Group, and their
family members, consistent with our then-current policies
14. Investment companies exchanging shares or selling assets pursuant
to a merger, acquisition or exchange offer
15. Accounts managed by the Franklin Templeton Group
16. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments below apply to Securities Dealers who initiate and are responsible
for certain purchases made without a sales charge. A Securities Dealer may only
receive one of these payments for each qualifying purchase. Securities Dealers
who receive payments under items 1 or 2 below will earn the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase. The payments described below are paid by Distributors or one of its
affiliates, at its own expense, and not by the Fund or its shareholders.
1. Securities Dealers will receive up to 1% of the purchase price for
purchases of $1 million or more.
2. Securities Dealers may, in the sole discretion of Distributors, receive up
to 1% of the purchase price for purchases made under waiver category 8
above.
3. Securities Dealers may receive up to 0.25% of the purchase price for
purchases made under waiver categories 6, 9 and 10 above.
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI FOR ANY BREAKPOINTS THAT MAY APPLY.
Securities Dealers may receive additional compensation from Distributors or an
affiliated company in connection with selling shares of the Franklin Templeton
Funds. Compensation may include financial assistance for conferences,
shareholder services, automation, sales or training programs or promotional
activities. Registered representatives and their families may be paid for travel
expenses, including lodging, in connection with business meetings or seminars.
In some cases, this compensation may only be available to Securities Dealers
whose representatives have sold or are expected to sell significant amounts of
shares. Securities Dealers may not use sales of the Fund's shares to qualify for
this compensation if prohibited by the laws of any state or self-regulatory
agency, such as the NASD.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates
for the shares you are selling
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to exchange
by phone to apply to your account, please let us know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred Sales
Charge when you exchange shares. Any shares subject to a Contingent Deferred
Sales Charge at the time of exchange, however, will remain so in the new fund.
For accounts with shares subject to a Contingent Deferred Sales Charge, shares
are exchanged into the new fund in the order they were purchased. If you
exchange shares into one of our money funds, the time your shares are held in
that fund will not count towards the completion of any Contingency Period. For
more information about the Contingent Deferred Sales Charge, please see that
section under "How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS.
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii)
exchange shares equal to at least $5 million, or more than 1% of the Fund's
net assets. Shares under common ownership or control are combined for these
limits. If you exchange shares as described in this paragraph, you will be
considered a Market Timer. Each exchange by a Market Timer, if accepted, will
be charged $5.00. Some of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed
by all account owners
2. Include any outstanding share
certificates for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust
accounts may need to send additional
documents. Accounts under court jurisdiction
may have additional requirements.
BY PHONE
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed
$50,000 by completing a separate agreement.
Call Institutional Services to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have
already
returned them to the Fund
o Unless you are selling shares in a
Trust Company retirement plan account
o Unless the address on your account was
changed by phone within the last 30 days
THROUGH YOUR DEALER call your investment representative
Beginning on or about May 1, 1997, you will automatically be able to redeem
shares by telephone without completing a telephone redemption agreement. PLEASE
NOTIFY US IF YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON YOUR ACCOUNT. If you
later decide you would like this option, send us written instructions signed by
all account owners.
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
CONTINGENT DEFERRED SALES CHARGE
If you did not pay a front-end sales charge because you invested $1 million or
more or agreed to invest $1 million or more under a Letter of Intent, a
Contingent Deferred Sales Charge may apply if you sell all or a part of your
investment within the Contingency Period. Once you have invested $1 million or
more, any additional investments you make without a sales charge may also be
subject to a Contingent Deferred Sales Charge if they are sold within the
Contingency Period. The charge is 1% of the value of the shares sold or the Net
Asset Value at the time of purchase, whichever is less.
We will first redeem shares not subject to the charge in the following order:
1) A calculated number of shares equal to the capital appreciation on
shares held less than the Contingency Period,
2) Shares purchased with reinvested dividends and capital gain
distributions, and
3) Shares held longer than the Contingency Period.
We then redeem shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Redemptions by the Fund when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% a month of an account's Net Asset Value (3% quarterly, 6%
semiannually or 12% annually). For example, if you maintain an annual balance
of $1 million, you can withdraw up to $120,000 annually through a systematic
withdrawal plan free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Distributions from employee benefit plans, including those due to
termination or plan transfer
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge) by
reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge).
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers" under
"Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. For Trust Company retirement plans, special forms are required to
receive distributions in cash. You may change your distribution option at any
time by notifying us by mail or phone. Please allow at least seven days prior to
the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value and Offering
Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares at the Offering Price, unless you qualify to buy shares at a
reduced sales charge or with no sales charge. The Offering Price is based on the
Net Asset Value per share and includes the maximum sales charge. We calculate it
to two decimal places using standard rounding criteria. You sell shares at Net
Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the
registered owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send written
instructions to us, as described elsewhere in this prospectus. If you are unable
to execute a transaction by telephone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership
agreement that identify the general partner, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions. We can accept electronic instructions directly from your dealer or
representative without further inquiry. Electronic instructions may be processed
through the services of the NSCC, which currently include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems or through Franklin/Templeton's
PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION
You may have money transferred from your paycheck to the Fund to buy additional
shares. Your investments will continue automatically until you instruct the Fund
and your employer to discontinue the plan. To process your investment, we must
receive both the check and payroll deduction information in required form. Due
to different procedures used by employers to handle payroll deductions, there
may be a delay between the time of the payroll deduction and the time we receive
the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers" below.
You will generally receive your payment by the fifth business day of the month
in which a payment is scheduled. Beginning with your February 1997 payment,
however, you will generally receive your payment by the end of the month in
which a payment is scheduled. When you sell your shares under a systematic
withdrawal plan, it is a taxable transaction.
Because of the Fund's front-end sales charge, you may not want to set up a
systematic withdrawal plan if you plan to buy shares on a regular basis. Shares
sold under the plan may also be subject to a Contingent Deferred Sales Charge.
Please see "Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions from the Fund or
payments under a systematic withdrawal plan sent directly to a checking account.
If the checking account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips.
You will need the Fund's code number to use TeleFACTS. The Fund's code is 191.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. Please verify the
accuracy of your statements when you receive them.
Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. For further information, call Institutional
Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
Advisers is also located at this address. The Fund and Distributors are located
at 700 Central Avenue, St. Petersburg, Florida 33701-3628. You may also contact
us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 A.M. TO 5:00 P.M.
Dealer Services 1-800/524-4040 5:30 A.M. TO 5:00 P.M.
Fund Information 1-800/DIAL BEN 5:30 A.M. TO 8:00 P.M.
(1-800/342-5236) 6:30 A.M. TO 2:30 P.M. (Saturday)
Retirement Plans 1-800/527-2020 5:30 A.M. TO 5:00 P.M.
Institutional Services 1-800/321-8563 6:00 A.M. TO 5:00 P.M.
TDD (hearing impaired) 1-800/851-0637 5:30 A.M. TO 5:00 P.M.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
BZWIM - Barclays de Zoete Wedd Investment Management Inc.
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - Certain funds in the Franklin Templeton
Funds offer three classes of shares, designated "Class I," "Class II" and
"Advisor Class." The three classes have proportionate interests in the same
portfolio of investment securities. They differ, however, primarily in their
sales charge structures and Rule 12b-1 plans. Because the Fund's sales charge
structure and Rule 12b-1 plan are similar to those of Class I shares, shares of
the Fund are considered Class I shares for redemption, exchange and other
purposes.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R)
except Franklin Valuemark Funds and the Franklin Government Securities
Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment
companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGERS - Franklin Advisers, Inc., the Fund's investment manager, and
Templeton Investment Counsel, Inc., the Fund's Sub-advisor
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - 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.
NSCC - National Securities Clearing Corporation
NYSE- New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 5.75% sales charge.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
SUB-ADVISOR - Templeton Investment Counsel, Inc., the Fund's Sub-advisor
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
TICI - Templeton Investment Counsel, Inc., the Fund's Sub-advisor
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
TEMPLETON PACIFIC GROWTH FUND
FRANKLIN TEMPLETON INTERNATIONAL TRUST JANUARY 1, 1997 INVESTMENT
STRATEGY: GLOBAL GROWTH
ADVISOR
This prospectus describes the Advisor Class shares of Templeton Pacific Growth
Fund (the "Fund"). It contains information you should know before investing in
the Fund. Please keep it for future reference.
The Fund's Advisor Class SAI, dated January 1, 1997, as may be amended from time
to time, includes more information about the Fund's procedures and policies. It
has been filed with the SEC and is incorporated by reference into this
prospectus. For a free copy or a larger print version of this prospectus, call
1-800/DIAL BEN or write the Fund at the address shown.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain financial institutions (such as banks, trust
companies, savings institutions and credit unions); government and tax-exempt
entities; pension, profit sharing and employee benefit plans; certain qualified
groups, including family trusts, endowments, foundations and corporations;
Franklin Templeton Fund Allocator Series; and directors, trustees, officers and
full-time employees (and their family members) of Franklin Templeton Group and
the Franklin Templeton Group of Funds.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TEMPLETON PACIFIC GROWTH FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED
IN ANY STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
- ----------------------------------------------------------------------
WHEN READING THIS PROSPECTUS, YOU WILL SEE CERTAIN TERMS BEGINNING WITH CAPITAL
LETTERS. THIS MEANS THE TERM IS EXPLAINED IN OUR GLOSSARY
SECTION.
TEMPLETON TABLE OF CONTENTS
PACIFIC ABOUT THE FUND
GROWTH FUND - Expense Summary 2
ADVISOR CLASS How does the Fund Invest its
- ------------- Assets? 2
JANUARY 1, 1997 What are the Fund's
Potential Risks? 7
Who Manages the Fund? 8
How does the Fund Measure
Performance? 10
How is the Trust Organized? 10
How Taxation Affects You and the
Fund 12
ABOUT YOUR ACCOUNT
How Do I Buy Shares? 13
May I Exchange Shares for Shares
of Another Fund? 1 5
How Do I Sell Shares? 17
What Distributions Might I Receive
from the Fund? 19
Transaction Procedures and Special
Requirements 20
Services to Help You Manage Your
Account 24
GLOSSARY
Useful Terms and Definitions 26
700 Central Avenue
St. Petersburg, Florida 33701-3628
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. Because Advisor Class shares were not offered to the public before January
1, 1997, the table is based on the historical expenses of the Class I shares of
the Fund for the fiscal year ended October 31, 1996.+ Your actual expenses may
vary.
A. SHAREHOLDER TRANSACTION EXPENSES++
Maximum Sales Charge Imposed on Purchases None
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees 1.00%
Rule 12b-1 Fees None
Other Expenses 0.35%
Total Fund Operating Expenses 1.35%
C. EXAMPLE
Assume the annual return for Advisor Class shares is 5% and operating expenses
are as described above. For each $1,000 investment, you would pay the
following projected expenses if you sold your shares after the number of years
shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$14 $43 $74 $162
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effect of these expenses is reflected in
the Net Asset Value of or the dividends paid on Advisor Class shares and are
not directly charged to your account.
+Unlike Advisor Class shares, the Class I shares of the Fund have a front-end
sales charge and Rule 12b-1 fees. ++If your transaction is processed through
your Securities Dealer, you may be charged a fee by your Securities Dealer for
these services.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's principal investment objective is to seek to provide long-term growth
of capital. The objective is a fundamental policy of the Fund and may not be
changed without shareholder approval. Of course, there is no assurance that the
Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund expects to invest at least 65% of its
portfolio in equity securities that trade on markets in the Pacific Rim and are
issued by companies (i) domiciled in the Pacific Rim or (ii) that derive at
least 50% of their revenues or pre-tax income from activities in the Pacific
Rim. The Fund may, from time to time, hold significant cash positions until
suitable investment opportunities, consistent with the Fund's objective and
policies, are available.
For purposes of this policy, the countries in the Pacific Rim are Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea and Thailand. It is currently expected that
under normal conditions at least 65% of the Fund's total assets will be invested
in securities of foreign issuers in at least three of the countries listed
above.
The Fund may invest up to 35% of its assets in the securities of issuers
domiciled outside of the Pacific Rim. These investments may include securities
of issuers (i) in countries that are not located in the Pacific Rim but are
linked by tradition, economic markets, cultural similarities, or geography to
countries in the Pacific Rim; and (ii) located elsewhere in the world that have
operations in the Pacific Rim or that stand to benefit from political and
economic events in the Pacific Rim. For example, the Fund may invest in a
company outside of the Pacific Rim when the Sub-advisor believes at the time of
investment that the value of the company's securities may be enhanced by
conditions or developments in the Pacific Rim even though the company's
production facilities are located outside of the Pacific Rim.
Under normal market conditions, the Fund's assets are substantially invested in
equity securities. The Fund may invest in common and preferred stock, bonds or
preferred stock convertible into common stock, warrants and securities
representing certain underlying international securities such as American
Depositary Receipts or ("ADRs") and Global Depositary Receipts or ("GDRs"), as
discussed below.
Up to 35% of the Fund's total assets may be invested in investment grade bonds,
fixed-income debt securities, and synthetic convertible securities rated "Baa"
or better by Moody's or "BBB" or better by S&P or that are unrated but deemed to
be of comparable quality by the Managers. The Fund may seek capital appreciation
by investing in these debt securities. Appreciation in the value of these
investments may result from changes in relative foreign currency exchange rates,
interest rates or improvement in the creditworthiness of an issuer. The receipt
of income from these debt securities is incidental to the Fund's investment
objective of long-term growth of capital. Debt obligations in which the Fund may
invest include U.S. and foreign government securities and corporate debt
securities, including Samurai and Yankee bonds, Eurobonds and depositary
receipts. The issuers of these debt securities may or may not be domiciled in
the Pacific Rim.
Fixed-income debt securities rated within the top three ratings categories
("AAA," "AA" and "A" by S&P or "Aaa," "Aa" or "A" by Moody's) are generally
known as high-grade debt securities and are regarded as having a strong capacity
to pay principal and interest. Medium-grade debt securities ("BBB" by S&P or
"Baa" by Moody's) are regarded as having an adequate capacity to pay principal
and interest but with greater vulnerability to adverse economic conditions and
some speculative characteristics. An Appendix discussing these ratings is
included in the SAI.
In the event the rating on an issue held in the Fund's portfolio is lowered by a
rating service, the change will be considered by the Fund in its evaluation of
the overall investment merits of that security but will not necessarily result
in an automatic sale of the security.
CURRENCY TECHNIQUES AND HEDGING. In order to hedge against currency exchange
rate risks, the Fund may enter into forward currency exchange contracts,
currency futures contracts and options on such futures contracts, as well as buy
put or call options and write covered put and call options on currencies traded
in U.S. or foreign markets.
The Fund may also buy put and call options and write ("sell") covered put and
call options on securities and securities indices that are traded on U.S. or
foreign exchanges or over-the-counter. The Fund will not buy puts, calls,
straddles, spreads or any combinations thereof if the value of its aggregate
investment in these securities will exceed 5% of its total assets. For more
information on options, please see the SAI.
Options, futures, options on futures and forward contracts are
generally considered "derivative securities."
WARRANTS. A warrant is typically a long-term option issued by a corporation
which gives the holder the privilege of buying a specified number of shares of
the underlying common stock at a specified exercise price at any time on or
before the expiration date. Stock index warrants entitle the holder to receive,
upon exercise, an amount in cash determined by reference to fluctuations in the
level of a specified stock index. If the Fund does not exercise or dispose of a
warrant prior to its expiration, it will expire worthless. The Fund may invest
up to 10% of its net assets in warrants, including warrants that are not listed
on an exchange.
CONVERTIBLE SECURITIES. Convertible securities are, in general, debt obligations
or preferred stocks 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 may also be subject to redemption by the issuer but only
after a specified date and under circumstances established at the time the
security is issued. A convertible security provides a fixed-income stream and
the opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. Though the Fund intends to invest in liquid convertible securities there
can be no assurance that this will always be achieved. For more information on
convertible securities, including liquidity issues, please see the SAI.
SYNTHETIC CONVERTIBLES. The Fund may invest up to 35% of its assets in synthetic
convertible securities. A synthetic convertible is created by combining distinct
securities which together possess the two principle characteristics of a true
convertible security, i.e., fixed income and the right to acquire the underlying
equity security. This combination is achieved by investing in nonconvertible
fixed-income securities and in warrants, or stock or stock index call options
that grant the holder the right to buy 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. The Fund presently has no intention of investing more
than 5% of its net assets in synthetic convertible securities. Please see the
SAI for more information about these securities.
ADRS AND GDRS. ADRs evidence ownership of and represent the right to receive
securities of a foreign issuer deposited in a U.S. bank or a correspondent bank,
while GDRs are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S.
corporation.
OTHER INVESTMENT POLICIES OF THE FUND
SHORT-TERM INVESTMENTS. Occasionally, pending investment of proceeds from new
sales of Fund shares, to honor redemptions, or to satisfy other short-term
needs, the Fund may hold cash (U.S. dollars, foreign currencies or multinational
currency units) and/or invest a portion of its assets in high quality
money-market instruments. In any period of market weakness or uncertain market
or economic conditions, or while awaiting attractive investment opportunities,
the Fund may establish a temporary defensive position by investing in high
quality money-market instruments if the Managers anticipate that developments in
any market may seriously jeopardize the value of the Fund's equity securities in
such market. Any decision to substantially withdraw from the equity market is
reviewed by the Board. Money-market instruments in which the Fund may invest
include, but are not limited to, the following instruments of U.S. or foreign
issuers: government securities, commercial paper, bank certificates of deposit,
bankers' acceptances, and repurchase agreements secured by any of the foregoing.
All such securities will be rated "A-1" or "A-2" by S&P or "P-1" or "P-2" by
Moody's or, if unrated, determined by the Managers to be of comparable quality.
It is impossible to predict when or for how long the Fund would employ defensive
strategies.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 331/3% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund may borrow up to 10% of the value
of its assets for temporary or emergency, but not investment purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets, at the time of purchase, in illiquid securities. Illiquid securities
are generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the Fund has valued
them.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund might
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed creditworthy by the Managers.
A repurchase agreement is deemed to be a loan by the Fund under the 1940 Act.
The U.S. government security subject to resale (the collateral) will be held on
behalf of the Fund by a custodian bank approved by the Board and will be held
pursuant to a written agreement.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the 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 market as a whole.
FOREIGN SECURITIES. Foreign securities involve certain risks that you should
consider carefully. These risks include political, social, or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities may be subject to greater fluctuations
in price than securities issued by U.S. corporations or issued or guaranteed by
the U.S. government, its instrumentalities or agencies. The markets on which
foreign securities trade may have less volume and liquidity, and may be more
volatile than securities markets in the U.S. In addition, there may be less
publicly available information about a foreign company than about a U.S.
domiciled company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies abroad than in
the U.S. Confiscatory taxation or diplomatic developments could also affect
investment in foreign securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers that have similar maturities and quality. Under
certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its instrumentalities or agencies.
Finally, in the event of a default of any foreign debt obligation, it may be
more difficult for the Fund to obtain or to enforce a judgment against the
issuer of the security.
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 one or more countries. You should
consider the greater risk of this policy versus the safety that may come with an
investment that involves a wider range of geographic localities and countries.
Accordingly, an investor should compare the Fund with other investment vehicles
before making an investment decision.
Some of the countries in which the Fund invests may not permit direct
investment. Investments in these countries may only be permitted through
government approved investment vehicles. Investing through such vehicles may
involve duplicative or layered fees or expenses and may, as well, be subject to
limitations under the 1940 Act. Under the 1940 Act, the Fund may invest up to
10% of its assets in shares of other investment companies and up to 5% of its
assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
Investments in Depositary Receipts reduce but do not eliminate the risks
associated with foreign investments. To the extent that the Fund acquires
Depositary Receipts through banks which do not have a contractual relationship
with the foreign issuer of the security underlying the Depositary Receipt to
issue and service such Depositary Receipts, there may be an increased
possibility that the Fund would not become aware of and be able to respond to
corporate actions such as stock splits or rights offerings involving the foreign
issuer in a timely manner.
MARKET, CURRENCY AND INTEREST RATE RISK. If there is a general market decline in
any country where the Fund is invested, the Fund's share price may also decline.
Changes in currency valuations will also affect the price of Fund shares. To the
extent the 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. The value of worldwide stock markets, interest rates
and currency valuations has increased and decreased in the past. These changes
are unpredictable and may happen again in the future.
CURRENCY FLUCTUATIONS. The Fund's investments may be denominated in foreign
currencies. Fluctuations in foreign exchange rates may significantly increase or
decrease the value of the Fund's foreign investments. These fluctuations may
increase or offset any return on the underlying investment.
The relative performance of foreign currencies in which securities held by the
Fund are denominated is an important factor in the Fund's overall performance.
TICI intends to manage the Fund's exposure to various currencies to take
advantage of different yield, risk, and return characteristics that different
currencies, currency denominations, and countries can provide for U.S.
investors.
DEVELOPING MARKETS. Many of the countries in which the Fund may invest are
considered developing or emerging markets. Investments in these markets are
subject to all of the risks of foreign investing generally, and have additional
and heightened risks due to the small size and lesser liquidity of these markets
and other factors.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, Advisers and its affiliates manage
over $150 billion in assets. Please see "Investment Management and
Other Services" and "Miscellaneous Information" in the SAI for
information on securities transactions and a summary of the Fund's Code
of Ethics.
TICI, an indirect subsidiary of Templeton Worldwide, Inc., subadvises the Fund.
Templeton Worldwide, Inc., operating through its subsidiaries, is a major
investment management organization with approximately $69 billion in assets
currently under management and a long history of global investing.
Until December 31, 1992, Advisers received portfolio advice and management
assistance from BZWIM. Since January 1, 1993, TICI has provided these services
under a subadvisory agreement between Advisers and TICI. TICI recommends the
optimal equity allocation and provides advice regarding the Fund's investments.
TICI also determines which securities will be purchased, retained or sold and
executes these transactions. TICI's activities are subject to the Board's review
and control as well as Advisers' instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of
the Fund's portfolio is: William T. Howard, Jr. since 1993, Mark R. Beveridge
since 1994, and Gary Clemons since 1993.
William T. Howard, Jr.
Vice President of TICI
Mr. Howard is a Chartered Financial Analyst and holds a master of business
administration degree from Emory University. He earned his bachelor of arts
degree from Rhodes College. Prior to joining the Franklin Templeton Group in
1993, Mr. Howard was the international portfolio manager for the State of
Tennessee Consolidated Retirement System.
Mark R. Beveridge
Vice President of TICI
Mr. Beveridge is a Chartered Financial Analyst and holds a bachelor of business
administration degree in finance from the University of Miami. He joined the
Franklin Templeton Group in 1985.
Gary Clemons
Portfolio Manager of TICI
Mr. Clemons is a Chartered Financial Analyst and holds a master of business
administration degree from the University of Wisconsin at Madison. He earned
his bachelor of science degree in earth science from the University of Nevada at
Reno. Mr. Clemons was a research analyst for Structured Asset Management. He
joined the Franklin Templeton Group
in 1990.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 1.00% of the average net assets of the Fund were paid to Advisers. The
management fee is higher than the management fees paid by most mutual funds,
although the Board believes it to be comparable to fees paid by many
international funds having similar investment objectives and policies.
PORTFOLIO TRANSACTIONS. The Managers try to obtain the best execution on all
transactions. If the Managers believe more than one broker or dealer can provide
the best execution, consistent with internal policies, the Managers may consider
research and related services and the sale of Fund shares, as well as shares of
other funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. The more
commonly used measure of performance is total return. Performance figures are
usually calculated using the maximum sales charge, if applicable. Certain
performance figures may not include any applicable sales charges or Rule 12b-1
fees.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Templeton International Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust on March 22, 1991, and is
registered with the SEC under the 1940 Act. Prior to February 1, 1996, the Trust
was known as Franklin International Trust.
As of January 1, 1997, the Fund began offering two new classes of shares,
"Templeton Pacific Growth Fund - Class II" and "Templeton Pacific Growth Fund -
Advisor Class." All Fund shares outstanding before the offering of Class II
shares and Advisor Class shares have been designated Templeton Pacific Growth
Fund - Class I and will retain their previous rights and privileges. Class I,
Class II and Advisor Class shares differ as to sales charges, expenses and
services. Different fees and expenses will affect performance. Additional
classes and series may be offered in the future. A further description of Class
I and Class II is set forth below.
For matters that only affect one class, however, only shareholders of that class
may vote. Each class will vote separately on matters (1) affecting only that
class, (2) expressly required to be voted on separately by state law, or (3)
required to be voted on separately by the 1940 Act. 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.
The Trust has noncumulative voting rights. 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. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
CLASS I AND CLASS II. Class I and Class II shares of the Fund are described in a
separate prospectus relating only to those classes. You may buy Class I and
Class II shares through your investment representative or directly by contacting
the Trust. If you would like a prospectus relating to the Fund's Class I and
Class II shares, contact your investment representative or Distributors.
Class I and Class II shares of the Fund have sales charges and Rule 12b-1
charges that may affect performance. Class I shares have a front-end sales
charge of 5.75% (6.10% of the net amount invested) that is reduced on certain
transactions of $50,000 or more. Class I shares are subject to Rule 12b-1 fees
up to a maximum of 0.25% per year of Class I's average daily net assets. Class
II shares have a 1.00% (1.01% of the amount invested) front-end sales charge and
are subject to Rule 12b-1 fees up to a maximum of 1.00% per year of Class II's
average daily net assets. Shares of Class I may be subject to, and shares of
Class II are generally subject to, a Contingent Deferred Sales Charge upon
redemption.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to these investments. To the extent possible, the Fund will
avoid this treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends which you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether these
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate shareholders, it is anticipated that only a small portion of the
Fund's dividends during the current fiscal year will qualify for the corporate
dividends-received deduction because of the Fund's policy of investing in
foreign equity securities and non-equity investments. To the extent that the
Fund pays dividends which qualify for this deduction, the availability of the
deduction is subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of these dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisor regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisor with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
The Fund's investment in options, futures and forward contracts, foreign
securities and currencies and in multiple combinations of these securities are
subject to many complex and special tax rules. More information on the tax
treatment of these securities is included under "Additional Information on
Distributions and Taxes" in the SAI.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
You may buy shares with a minimum initial investment of $5 million (in the
aggregate) in one or more Advisor Class shares of the Franklin Templeton Funds
($25 for subsequent investments) except if you fall in one of the following
categories of investors satisfying one of the following criteria:
(a) Broker-dealers, qualified registered investment advisors or certified
financial planners who have entered into a supplemental agreement with
Distributors for clients participating in comprehensive fee programs;
(b) Qualified registered investment advisors or registered certified financial
planners who have clients invested in Mutual Series on October 31, 1996;
(c) Qualified registered investment advisors or registered certified financial
planners who did not have clients invested in Mutual Series on October 31, 1996,
may buy through a broker-dealer or service agent who has entered into an
agreement with Distributors;
(d) Employer stock, bonus, pension or profit-sharing plans that meet the
requirements for qualification under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code (are subject to no
initial investment requirement if the number of employees is 5,000 or more or
the plan has assets of $50 million or more);
(e) Effective on or about February 1, 1997, participants in Franklin Templeton's
401(k) and Franklin Templeton's Profit Sharing Plans;
(f) Trust companies and bank trust departments initially investing in any of the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or participants,
in the case of certain retirement plans, have full or shared investment
discretion;
(g) Governments, municipalities and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code (subject to an
initial investment in Advisor Class shares of $1 million);
(h) Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
Advisor Class shares of the Fund if the group as a whole meets the required
minimum initial investment of $5 million;
(i) Directors, trustees, officers and full-time employees (and members of their
immediate family) of the Franklin Templeton Group and Franklin Templeton Group
of Funds who invest $100 or more;
(j) Accounts managed by the Franklin Templeton Group;
(k) Class I shareholders of the Fund who qualify under one of the above
categories, may have their existing Class I shares invested in the Fund's
Advisor Class by sending written instructions indicating that they wish to do
so, by June 20, 1997. Instructions should be addressed to Investor Services.
Generally, for federal income tax purposes, there will be no recognition of gain
or loss associated with such a transaction. You may wish to consult with your
tax advisor to determine whether there are any state income tax consequences to
such a transaction.
(l) Each series of Franklin Templeton Fund Allocator Series that invests $1,000
or more.
The qualified group referred to in item (h) above, is one that:
oWas formed at least six months ago,
oHas a purpose other than buying Fund shares at a discount,
oHas more than 10 members,
oCan arrange for meetings between our representatives and group members,
oAgrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
oAgrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
oMeets other uniform criteria that allow Distributors to achieve cost savings in
distributing shares.
If you are subject to the $5 million minimum investment requirement, the cost or
current value (whichever is higher) of your investment in other funds in the
Franklin Templeton Funds will be included for purposes of determining compliance
with the required minimum investment amount, provided that at least $1 million
is invested in the Advisor Class shares of the Franklin Templeton Funds.
The minimum for subsequent investments in Advisor Class shares is: $25 for most
purchases of Advisor Class shares of the Fund and for purchases by directors,
trustees, officers and full-time employees (and members of their immediate
family) of Franklin Templeton Group and Franklin Templeton Funds; and $1,000 for
each series of Franklin Templeton Fund Allocator Series.
PURCHASE PRICE OF FUND SHARES
Advisor Class shares are purchased at Net Asset Value without a sales charge.
Securities Dealers may receive compensation up to 0.25% of the amount invested
from Distributors or an affiliated company.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Advisor Class shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you're exchangeing
BY PHONE Call Shareholder Services
If you do not want the ability to exchange by phone
to apply to your account, please let us know.
THROUGH YOUR
DEALER call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
HOW WE PROCESS YOUR EXCHANGE
If you are exchanging your Advisor Class shares of the Fund you may:
o exchange into any of our money funds except Franklin Templeton Money Fund II.
o exchange into the other Advisor Class shares of the Franklin Templeton Funds
(excluding Templeton Developing Markets Trust, Templeton Foreign Fund and
Templeton Growth Fund, except as described below), Mutual Series Class Z
shares and Templeton Institutional Funds, Inc., if you meet the investment
requirements of the fund to be acquired.
o exchange into the Advisor Class shares of Templeton Developing Markets Trust,
Templeton Foreign Fund and Templeton Growth Fund if you fall into one of the
following categories: (i) you are a broker-dealer or a qualified registered
investment advisor who has entered into a special agreement with Distributors
for your clients who are participating in comprehensive fee programs; (ii) you
are a qualified registered investment advisor or certified financial planner
who has clients invested in Mutual Series on October 31, 1996; (iii) you are a
qualified registered investment advisor or registered certified financial
planner who did not have clients invested in Mutual Series on October 31, 1996
and are buying through a broker-dealer or service agent who has entered into
an agreement with Distributors; (iv) you are a director, trustee, officer or
full-time employee (or a family member) of the Franklin Templeton Group or the
Franklin Templeton Funds; (v) you are a participant in Franklin Templeton's
401(k) or Franklin Templeton's Profit Sharing Plans; (vi) the exchanging
shareholder is an account managed by the Franklin Templeton Group; or (vii)
the exchanging shareholder is a series of the Franklin Templeton Fund
Allocator Series.
o If the fund you are exchanging into does not offer Advisor Class shares, you
may exchange into the Class I shares of the fund at Net Asset Value.
Please be aware that the following restrictions may apply to exchanges:
o The accounts must be identically registered. You may exchange shares
from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one
signature for all transactions. Please notify us in writing if you do
not want this option to be available on your account(s). Additional
procedures may apply. Please see "Transaction Procedures and Special
Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy upon 60 days' written notice.
o Currently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed
by all account owners
2. Include any outstanding share
certificates for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have additional
requirements.
METHOD STEPS TO FOLLOW
BY PHONE
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy.
o If there are no share certificates issued for
the shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust
Company retirement plan account
o Unless the address on your account was changed
by phone within the last 30 days
o Beginning on or about May 1, 1997, you will
automatically be able to redeem shares by
telephone without completing a telephone
redemption agreement. PLEASE NOTIFY US IF
YOU DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. If you later decide you would like
this option, send us written instructions signed
by all account owners.
THROUGH YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month. Capital
gains, if any, may be distributed annually, usually in December. Dividends and
capital gains are calculated and distributed the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the applicable Rule 12b-1 fees of any class. Advisor Class
shares are not subject to Rule 12b-1 fees.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy Advisor Class shares or Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN ADVISOR CLASS
SHARES OF THE FUND. For Trust Company retirement plans, special forms are
required to receive distributions in cash. You may change your distribution
option at any time by notifying us by mail or phone. Please allow at least seven
days prior to the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares of Advisor Class at the Net Asset Value per share. We calculate
it to two decimal places using standard rounding criteria.
You also sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the
registered owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership
agreement that identify the general
partners, or
2. A certification for a partnership
agreement
TRUST 1. The pages from the trust document
that identify the trustees, or
2. A certification for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions received directly from your dealer or representative without
further inquiry. Electronic instructions may be processed through the services
of the NSCC, which currently include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems, or through Franklin/Templeton's PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is $50 or less, except for investors
under categories (d), (e), (j) and (l) under "Opening Your Account." We will do
this if the value of your account falls below this minimum because you
voluntarily sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of your
account to at least $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the account application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. You will generally receive your payment by the
fifth business day of the month in which a payment is scheduled. Beginning with
your February 1997 payment, however, you will generally receive your payment by
the end of the month in which a payment is scheduled. When you sell your shares
under a systematic withdrawal plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
BROKERS AND DEALERS AND PLAN ADMINISTRATORS
You may buy and sell Fund shares through registered broker-dealers. The Fund
does not impose a sales or service charge but your broker-dealer may charge you
a transaction fee. Transaction fees and services may vary among broker-dealers,
and your broker-dealer may impose higher initial or subsequent investment
requirements than those established by the Fund. Services provided by
broker-dealers may include allowing you to establish a margin account and borrow
on the value of the Fund's shares in that account. If your broker-dealer
receives your order before pricing on a given day, the broker-dealer is required
to forward the order to the Fund before pricing closes on that day. A
broker-dealer's failure to timely forward an order may give rise to a claim by
the investor against the broker.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. In such cases, the
Fund may pay the third party an annual sub-transfer agency fee that is not
greater than the Fund otherwise would have paid for such services.
INSTITUTIONAL ACCOUNTS
Institutional investors will likely be required to complete an institutional
account application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Fund available for
institutional accounts. To obtain an institutional application or additional
information regarding institutional accounts, contact Franklin Templeton
Institutional Services at 1-800/321-8563 Monday through Friday, from 6:00 a.m.
to 5:00 p.m. Pacific time.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
Advisers is also located at this address. The Fund and Distributors are located
at 700 Central Avenue, St. Petersburg, Florida 33701-3628. You may also contact
us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder
Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund
Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement
Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional
Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing
impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
BZWIM - Barclays de Zoete Wedd Investment Management Inc.
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. Class I and Class II differ,
however, primarily in their sales charge structures and Rule 12b-1 plans.
Advisor Class shares are purchased without a sales charge and do not have a Rule
12b-1 plan.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter. The SAI lists the officers and Board members who
are affiliated with Distributors. See "Officers and Trustees."
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R)
except Franklin Valuemark Funds and the Franklin Government Securities
Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment
companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MANAGERS - Franklin Advisers, Inc., the Fund's investment manager and
Templeton Investment Counsel, Inc., the Fund's Sub-advisor
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
MUTUAL SERIES - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly the Mutual Series Fund Inc. Each series of Mutual Series
began offering three classes of shares on November 1, 1996; Class I, Class II
and Class Z. All shares sold before that time are designated Class Z shares.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - 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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for Class I and 1% for Class II. Advisor Class
has no front-end sales charge.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SUB-ADVISOR - Templeton Investment Counsel, Inc., the Fund's sub-advisor
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton
Group of Funds except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
TICI - Templeton Investment Counsel, Inc., the Fund's Sub-advisor
Trust Company - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of
Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
TEMPLETON FOREIGN SMALLER COMPANIES FUND
FRANKLIN TEMPLETON INTERNATIONAL TRUST
JANUARY 1, 1997
INVESTMENT STRATEGY: GLOBAL GROWTH
ADVISOR
This prospectus describes the Advisor Class shares of Templeton Foreign Smaller
Companies Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund's Advisor Class SAI, dated January 1, 1997, as may be amended from time
to time, includes more information about the Fund's procedures and policies. It
has been filed with the SEC and is incorporated by reference into this
prospectus. For a free copy or a larger print version of this prospectus, call
1-800/DIAL BEN or write the Fund at the address shown.
Advisor Class shares are only available for purchase by certain persons,
including, among others, certain financial institutions (such as banks, trust
companies, savings institutions and credit unions); government and tax-exempt
entities; pension, profit sharing and employee benefit plans; certain qualified
groups, including family trusts, endowments, foundations and corporations;
Franklin Templeton Fund Allocator Series; and directors, trustees, officers and
full-time employees (and their family members) of Franklin Templeton Group and
the Franklin Templeton Group of Funds.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TEMPLETON FOREIGN
SMALLER COMPANIES FUND
This prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations other than those contained in this prospectus. Further
information may be obtained from Distributors.
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TEMPLETON
FOREIGN SMALLER COMPANIES
FUND -
ADVISOR CLASS
JANUARY 1, 1997
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary 2
How does the Fund Invest its Assets? 2
What are the Fund's Potential Risks? 7
Who Manages the Fund? 8
How does the Fund Measure Performance? 10
How is the Trust Organized? 10
How Taxation Affects You and the Fund 11
ABOUT YOUR ACCOUNT
How Do I Buy Shares? 13
May I Exchange Shares for Shares
of Another Fund? 15
How Do I Sell Shares? 18
What Distributions Might I Receive
from the Fund? 19
Transaction Procedures and Special
Requirements 20
Services to Help You Manage
Your Account 24
GLOSSARY
Useful Terms and Definitions 26
700 Central Avenue
St. Petersburg, Florida 33701-3628
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. Because Advisor Class shares were not offered to the public before January
1, 1997, the table is based on the historical expenses of the Class I shares of
the Fund for the fiscal year ended October 31, 1996.+ Your actual expenses may
vary.
A. Shareholder Transaction Expenses++
Maximum Sales Charge Imposed on Purchases None
Exchange Fee (per transaction) $5.00+++
B. Annual Fund Operating Expenses
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 1.00%
Rule 12b-1 Fees None
Other Expenses 0.35%
Total Fund Operating Expenses 1.35%
C. Example
Assume the annual return for Advisor Class shares is 5% and operating expenses
are as described above. For each $1,000 investment, you would pay the
following projected expenses if you sold your shares after the number of years
shown.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$14 $43 $74 $162
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effect of these expenses is reflected in
the Net Asset Value of or the dividends paid on Advisor Class shares and are
not directly charged to your account.
+Unlike Advisor Class shares, the Class I shares of the Fund have a front-end
sales charge and Rule 12b-1 fees. ++If your transaction is processed through
your Securities Dealer, you may be charged a fee by your Securities Dealer for
these services. +++$5.00 fee is only for Market Timers. We process all other
exchanges without a fee.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks long-term growth of capital. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval. Of
course, there is no assurance that the Fund's objective will be achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Under normal market conditions, the Fund expects to invest at least 65% of its
portfolio in smaller capitalization, foreign equity securities of issuers
located in, or deriving a significant portion of their revenues from, or for
which the principal securities trading market is in any foreign country,
including developing market countries. These issuers will have market
capitalizations of $1 billion or less at the time of the most recent purchase.
Companies of this size are generally considered "small cap companies." The Fund
may, from time to time, hold significant cash positions until suitable
investment opportunities, consistent with the Fund's objective and policies, are
available.
The Managers believe that international small cap companies may provide
attractive investment opportunities. These securities make up most of the
world's equity securities and are frequently overlooked by investors and
undervalued in relation to their perceived earning power. In addition, because
the performance of these securities may differ relative to the market for U.S.
small cap stocks and from the larger capitalization stocks of many countries,
these securities may allow investors to diversify their overall investment
portfolio. Equity securities of small cap companies may include common stocks,
preferred stocks, warrants for the purchase of common stocks, and convertible
securities. The Fund may also invest in foreign securities through American
Depositary Receipts ("ADRs"). As a non-fundamental policy, the Fund will limit
its investments in Russian securities to no more than 5% of its total assets.
The Fund may invest up to 35% of its total assets, in the aggregate, in (i)
equity securities of larger capitalized issuers outside the U.S., (ii) debt
obligations issued by companies or governments in any nation that are rated at
least "C" by Moody's or S&P or unrated debt obligations deemed to be of
comparable quality by the Managers, or (iii) equity securities of issuers within
the U.S., although these investments are not currently expected to represent
more than 5% of the Fund's total assets. The Fund will not invest more than 5%
of its total assets in debt obligations rated lower than "BBB" by S&P or "Baa"
by Moody's, including defaulted securities, or in debt obligations deemed to be
of comparable quality by the Managers, as defined below. These investments may
cause the Fund's performance to vary from that of the international smaller
capitalization equity market as a whole.
CURRENCY TECHNIQUES AND HEDGING. The Fund may, but with respect to equity
securities, does not currently intend to, employ certain active currency
management techniques. These techniques may include investments in foreign
currency futures contracts, forward foreign currency exchange contracts
("forward contracts"), and currency-related options. The Fund will not enter
into forward contracts if, as a result, the Fund would have more than 20% of its
total assets committed to these contracts.
The Fund may also enter into options on securities and securities indices, other
types of futures contracts and related options. The value of the underlying
securities on which futures contracts will be written at any one time will not
exceed 25% of the total assets of the Fund. Options, futures, options on futures
and forward contracts are generally considered "derivative securities." For more
information on the Fund's investment policies regarding these securities, please
see the SAI.
WARRANTS. A warrant is typically a long-term option issued by a corporation that
gives the holder the privilege of buying a specified number of shares of the
underlying common stock at a specified exercise price at any time on or before
the expiration date. Stock index warrants entitle the holder to receive, upon
exercise, an amount in cash determined by reference to fluctuations in the level
of a specified stock index. If the Fund does not exercise or dispose of a
warrant before its expiration, it will expire worthless.
COMMON AND PREFERRED CONVERTIBLE SECURITIES. Convertible securities are, in
general, debt obligations or preferred stocks that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like common stock, the value of a convertible security
tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
its value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rates as a similar
fixed-income security, nor is it as sensitive to changes in share price as its
underlying stock.
AMERICAN DEPOSITARY RECEIPTS. ADRs are certificates issued by U.S. banks. They
give their holders the right to receive the securities of a foreign issuer
deposited with the bank or a correspondent bank. The Fund may buy both sponsored
and unsponsored ADRs. With a sponsored ADR, the issuing facility is established
with the participation of the issuer and the depositary institution under a
deposit agreement which sets forth the rights and responsibilities of the
issuer, the depositary and the ADR holder. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions. This ensures ADR holders will be able to exercise
voting rights through the depositary with respect to the deposited securities.
An unsponsored ADR has no sponsorship by the issuing facility and more than one
depositary institution may be involved in its issuance. An unsponsored ADR
typically clears through a depositary, such as the Depository Trust Company, so
there should be no additional delays in selling the security or in obtaining
dividends. Although not required, the depositary normally requests a letter of
non-objection from the issuer and is not required to distribute notices of
shareholder meetings or financial information to the ADR holder.
OTHER INVESTMENT POLICIES OF THE FUND
TEMPORARY DEFENSIVE INVESTMENTS. In any period of market weakness or of
uncertain market or economic conditions, or while awaiting suitable investment
opportunities, the Fund may establish a temporary defensive position by
investing in high quality money market investments. These investments include
U.S. government securities, bank obligations, the highest quality commercial
paper, and repurchase agreements. The Fund may also invest in non-U.S. currency,
short-term instruments denominated in non-U.S. currencies, and 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.
CONCENTRATION. The Fund reserves the right to invest more than 25% of its assets
in any one country, but the Fund will not invest more than 25% of its total
assets in any one industry (excluding the U.S.
government).
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked-to-market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Managers. A repurchase agreement is deemed to be a loan by the Fund under
the 1940 Act. The U.S. government security subject to resale (the collateral)
will be held on behalf of the Fund by a custodian bank approved by the Board and
will be held pursuant to a written agreement.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
provided that such loans do not exceed 331/3% of the value of the Fund's total
assets at the time of the most recent loan. The borrower must deposit with the
Fund's custodian bank collateral with an initial market value of at least 102%
of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. This
collateral shall consist of cash, securities issued by the U.S. government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
BORROWING. As a fundamental policy, the Fund may borrow up to 10% of the value
of its assets for temporary or emergency, but not investment purposes. While
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
additional investments.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets, at the time of purchase, in illiquid securities. Illiquid securities
are generally securities that cannot be sold within seven days in the normal
course of business at approximately the amount at which the Fund has valued
them.
The Managers, based on a continuing review of the trading markets, may consider
certain restricted securities which may otherwise be deemed to be illiquid, that
are offered and sold to "qualified institutional buyers," to be liquid. The
Board has adopted guidelines and delegated to the Managers the daily function of
determining and monitoring the liquidity of restricted securities. The Board,
however, will oversee and be ultimately responsible for the determinations. If
the Fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the Fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts.
PORTFOLIO TURNOVER. The Fund may buy and sell securities without regard to the
length of time the security has been held. Consequently, the frequency of Fund
transactions (turnover rate) will vary from year to year, depending on market
conditions. Portfolio turnover could be greater in periods of unusual market
movement and volatility. The Managers will weigh the potential benefits of any
short-term trading against the higher transaction costs associated with a higher
turnover rate. It is anticipated that the Fund's annual turnover rate generally
will not exceed 100%.
PERCENTAGE RESTRICTIONS. If a percentage restriction noted above is adhered to
at the time of investment, a later increase or decrease in the percentage
resulting from a change in value of portfolio securities or the amount of net
assets will not be considered a violation of any of the foregoing policies.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the 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 market as a whole.
MARKET, CURRENCY AND INTEREST RATE RISK. If there is a general market decline in
any country where the Fund is invested, the Fund's share price may also decline.
Changes in currency valuations will also affect the price of Fund shares. To the
extent the 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. The value of worldwide stock markets, interest rates
and currency valuations has increased and decreased in the past. These changes
are unpredictable and may happen again in the future.
SMALL CAPITALIZATION ISSUERS. The Fund may invest in a variety of small
capitalization issuers which include relatively new or unseasoned companies
which are in their early stages of development, or small companies positioned in
new and emerging industries where the opportunity for rapid growth is expected
to be above average. These companies typically have a market capitalization of
less than $1 billion, which is considered to be a "small capitalization."
Historically, small capitalization stocks have been more volatile in price than
larger capitalization stocks. Among the reasons for the greater price volatility
of these securities are the less certain growth prospects of smaller firms, the
lower degree of liquidity in the markets for these 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. You should therefore expect that the shares of a fund that invests a
substantial portion of its net assets in small company stocks to be more
volatile than the shares of a fund that invests solely in larger capitalization
stocks.
FOREIGN SECURITIES. The Fund is not restricted geographically in its selection
of securities. The Managers believe this can improve the Fund's ability to meet
its objective of long-term growth of capital, as many of today's quality
industry leaders are domiciled outside the U.S. You should consider the risks of
foreign securities before buying shares of the Fund.
While foreign securities are subject to many of the same influences as U.S.
securities, such as general economic conditions and individual company and
industry earnings prospects, they involve additional risks that can increase the
potential for losses in the Fund. These risks can be significantly greater for
investments in emerging markets.
CURRENCY FLUCTUATIONS. The Fund's investments may be denominated in foreign
currencies. Fluctuations in foreign exchange rates may significantly increase or
decrease the value of the Fund's foreign investments. These fluctuations may
increase or offset any return on the underlying investment.
TRADING COSTS. It is more expensive for the Fund to trade in foreign markets
than in the U.S. Brokerage and custodial costs are often higher, as are other
related costs. While the Fund offers an efficient way for you to invest in
smaller companies across the world, its overall expense ratio may be higher than
funds investing exclusively in U.S. securities.
POLITICAL AND ECONOMIC FACTORS. The political, economic and social structures of
some countries in which the Fund invests may not compare favorably with the U.S.
and may be less stable and more volatile. The risks of investing in these
countries include the possibility of the imposition of exchange controls,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, and punitive taxes.
LEGAL, REGULATORY AND OPERATIONAL FACTORS. There may be less publicly available
information about a foreign company or government than about a U.S. company or
public entity. Certain countries may not have uniform accounting, auditing and
financial reporting standards and may have less government supervision of
financial markets. Foreign securities markets may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S., and may have settlement practices that
result in delays.
DEVELOPING MARKETS. Many of the countries in which the Fund may invest are
considered developing or emerging markets. Investments in these markets are
subject to all of the risks of foreign investing generally, and have additional
and heightened risks due to the small size and lesser liquidity of these markets
and other factors.
Russian securities involve additional significant risks, including political and
social uncertainty (for example, regional conflicts and risk of war), currency
exchange rate volatility, pervasiveness of corruption and crime in the Russian
economic system, delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody. For more
information on these and other risks associated with Russian securities, please
see the SAI.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
classes of shares. While none is expected, the Board will act appropriately to
resolve any material conflict that may arise.
INVESTMENT MANAGERS. Advisers manages the Fund's assets and makes its
investment decisions. Advisers also performs similar services for other
funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries.
Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. Together, Advisers and its affiliates manage
over $150 billion in assets. Please see "Investment Management and
Other Services" and "Miscellaneous Information" in the SAI for
information on securities transactions and a summary of the Fund's Code
of Ethics.
TICI, an indirect subsidiary of Templeton Worldwide, Inc., subadvises the Fund.
Templeton Worldwide, Inc., operating through its subsidiaries, is a major
investment management organization with approximately $69 billion in assets
currently under management and a long history of global investing.
Until December 31, 1992, Advisers received portfolio advice and management
assistance from BZWIM. Since January 1, 1993, TICI has provided these services
under a sub-advisory agreement between Advisers and TICI. TICI recommends the
optimal equity allocation and provides advice regarding the Fund's investments.
TICI also determines which securities will be purchased, retained or sold and
executes these transactions. TICI's activities are subject to the Board's review
and control as well as Advisers' instruction and supervision.
MANAGEMENT TEAM. The team responsible for the day-to-day management of
the Fund's portfolio is: Marc S. Joseph since 1993, Mark R. Beveridge
since 1994, and Gary Clemons since 1993.
Marc S. Joseph
Vice President of TICI
Mr. Joseph holds a Doctor of Jurisprudence degree from Harvard Law
School. He earned a Master of Business Administration degree from
Harvard Business School and a Bachelor of Science degree in computer
science from William and Mary. Prior to joining Templeton, Mr. Joseph
was a vice president with Pacific Financial Research and a management
consultant at McKinsey Co. He joined the Franklin Templeton Group in
September 1993. Mr. Joseph is also the portfolio manager of the
Templeton Global Smaller Companies Fund.
Mark R. Beveridge
Vice President of TICI
Mr. Beveridge is a Chartered Financial Analyst and holds a Bachelor of Business
Administration degree in finance from the University of Miami. He has been with
the Franklin Templeton Group since 1985. He is a member of several securities
industry-related associations.
Gary Clemons
Portfolio Manager of TICI
Mr. Clemons is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Wisconsin at Madison. He earned his
Bachelor of Science degree in Earth Science from the University of Nevada at
Reno. He joined the Franklin Templeton Group in 1990 as a research analyst for
Structured Asset Management, a subsidiary of Templeton International.
MANAGEMENT FEES. During the fiscal year ended October 31, 1996, management fees
totaling 1.00% of the average net assets of the Fund were paid to Advisers.
PORTFOLIO TRANSACTIONS. The Managers try to obtain the best execution on all
transactions. If the Managers believe more than one broker or dealer can provide
the best execution, consistent with internal policies, it may consider research
and related services and the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer. Please see "How does the Fund Buy Securities for its Portfolio?" in the
SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Fund advertises its performance. The more commonly used
measure of performance is total return. Performance figures are usually
calculated using the maximum sales charge, if applicable. Certain performance
figures may not include the sales charges, if applicable, or Rule 12b-1 fees.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The Fund's investment results will vary. Performance figures are always based on
past performance and do not guarantee future results. For a more detailed
description of how the Fund calculates its performance figures, please see "How
does the Fund Measure Performance?" in the SAI.
HOW IS THE TRUST ORGANIZED?
The Fund is a diversified series of Franklin Templeton International Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust, and is registered with the
SEC under the 1940 Act. Prior to February 1, 1996, the Trust was known as
Franklin International Trust. Before October 1, 1996, the Fund was known as the
Franklin International Equity Fund. Along with the name change, the Fund shifted
its focus from investing primarily in larger capitalization foreign equity
securities to smaller capitalization foreign equity securities.
As of January 1, 1997, the Fund began offering a new class of shares designated
"Templeton Foreign Smaller Companies Fund - Advisor Class." All Fund shares
outstanding before the offering of Advisor Class shares have been designated as
Templeton Foreign Smaller Companies Fund Class I shares and will retain their
previous rights and privileges. Class I and Advisor Class shares differ as to
sales charges, expenses and services. Different fees and expenses will affect
performance. Additional classes of shares may be offered in the future. A
further description of Class I is set forth below.
Shares of each series of the Trust have equal and exclusive rights to dividends
and distributions declared by that series and the net assets of the series in
the event of liquidation or dissolution.
The Trust has noncumulative voting rights. 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. It may hold a
special meeting of a series, however, for matters requiring shareholder approval
under the 1940 Act. A meeting may also be called by the Board in its discretion
or by shareholders holding at least 10% of the outstanding shares. The 1940 Act
requires that we help you communicate with other shareholders in connection with
removing members of the Board.
CLASS I. Class I shares are described in a separate prospectus relating only to
that class. You may buy Class I shares through your investment representative or
directly by contacting the Trust. If you would like a prospectus relating to the
Fund's Class I shares, contact your investment representative or Distributors.
Class I shares of the Fund have sales charges and Rule 12b-1 charges that may
affect performance. Class I shares have a front-end sales charge of 5.75% (6.10%
of the net amount invested) that is reduced on certain transactions of $50,000
or more. Class I shares are subject to Rule 12b-1 fees up to a maximum of 0.25%
per year of the Fund's average daily net assets. Class I shares may be subject
to a Contingent Deferred Sales Charge upon redemption.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
Foreign securities that meet the definition in the Code of a Passive Foreign
Investment Company ("PFIC") may subject the Fund to an income tax and interest
charge with respect to such investments. To the extent possible, the Fund will
avoid such treatment by not investing in PFIC securities or by adopting other
tax strategies for any PFIC securities it does purchase.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions that are declared in October,
November or December but which, for operational reasons, may not be paid to you
until the following January, will be treated for tax purposes as if paid by the
Fund and received by you on December 31 of the calendar year in which they are
declared.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or a loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to such shares.
For corporate shareholders, it is anticipated that only a small portion of the
Fund's dividends during the current fiscal year will qualify for the corporate
dividends-received deduction because of the Fund's policy of investing in
foreign equity securities and non-equity investments. To the extent that the
Fund pays dividends that qualify for this deduction, the availability of the
deduction is subject to certain holding period and debt financing restrictions
imposed under the Code on the corporation claiming the deduction.
The Fund will inform you of the source of your dividends and distributions at
the time they are paid, and will promptly after the close of each calendar year
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person for purposes of federal income taxation, you should
consult with your financial or tax advisors regarding the applicability of U.S.
withholding or other taxes on distributions received by you from the Fund and
the application of foreign tax laws to these distributions.
You should consult your tax advisors with respect to the applicability of state
and local intangible property or income taxes to your shares in the Fund and to
distributions and redemption proceeds received from the Fund.
The Fund's investment in options, futures and forward contracts, foreign
securities and currencies and in multiple combinations of these securities are
subject to many complex and special tax rules. More information on the tax
treatment of these securities is included under "Additional Information on
Distributions and Taxes" in the SAI.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
You may buy shares with a minimum initial investment of $5 million (in the
aggregate) in one or more Advisor Class shares of the Franklin Templeton Funds
($25 for subsequent investments) except if you fall in one of the following
categories of investors satisfying one of the following criteria:
(a) Broker-dealers, qualified registered investment advisors or certified
financial planners who have entered into a supplemental agreement with
Distributors for clients participating in comprehensive fee programs;
(b) Qualified registered investment advisors or registered certified financial
planners who have clients invested in Mutual Series on October 31, 1996;
(c) Qualified registered investment advisors or registered certified financial
planners who did not have clients invested in Mutual Series on October 31, 1996,
may buy through a broker-dealer or service agent who has entered into an
agreement with Distributors;
(d) Employer stock, bonus, pension or profit-sharing plans that meet the
requirements for qualification under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code (are subject to no
initial investment requirement if the number of employees is 5,000 or more or
the plan has assets of $50 million or more);
(e) Effective on or about February 1, 1997, participants in Franklin Templeton's
401(k) and Franklin Templeton's Profit Sharing Plans;
(f) Trust companies and bank trust departments initially investing in any of the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or participants,
in the case of certain retirement plans, have full or shared investment
discretion;
(g) Governments, municipalities and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code (subject to an
initial investment in Advisor Class shares of $1 million);
(h) Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of a qualified group may also purchase
Advisor Class shares of the Fund if the group as a whole meets the required
minimum initial investment of $5 million;
(i) Directors, trustees, officers and full-time employees (and members of their
immediate family) of the Franklin Templeton Group and Franklin Templeton Group
of Funds who invest $100 or more;
(j) Accounts managed by the Franklin Templeton Group;
(k) Class I shareholders of the Fund who qualify under one of the above
categories, may have their existing Class I shares invested into the Fund's
Advisor Class by sending written instructions indicating that they wish to do
so, by June 30, 1997. Instructions should be addressed to Investor Services.
Generally, for federal income tax purposes, there will be no recognition of gain
or loss associated with such a transaction. You may wish to consult with your
tax advisor to determine whether there are any state income tax consequences to
such a transaction.
(l) Each series of Franklin Templeton Fund Allocator Series that invests $1,000
or more.
The qualified group referred to in item (h) above, is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include sales and other Franklin Templeton Fund materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
If you are subject to the $5 million minimum investment requirement, the cost or
current value (whichever is higher) of your investment in other funds in the
Franklin Templeton Funds will be included for purposes of determining compliance
with the required mini mum investment amount, provided that at least $1 million
is invested in the Advisor Class shares of the Franklin Templeton Funds.
The minimum for subsequent investments in Advisor Class shares is: $25 for most
purchases of Advisor Class shares of the Fund and for purchases by directors,
trustees, officers and full-time employees (and members of their immediate
family) of Franklin Templeton Group and Franklin Templeton Funds; and $1,000 for
each series of Franklin Templeton Fund Allocator Series.
PURCHASE PRICE OF FUND SHARES
Advisor Class shares are purchased at Net Asset Value without a sales charge.
Securities Dealers may receive compensation up to 0.25% of the amount invested
from Distributors or an affiliated company.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, please call our Retirement Plans Department.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund and its rules and
requirements for exchanges. For example, some Franklin Templeton Funds do not
accept exchanges and others may have different investment minimums. Some
Franklin Templeton Funds do not offer Advisor Class shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed
by all account owners
2. Include any outstanding share certificates
for the shares you're exchanging
BY PHONE Call Shareholder Services
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
THROUGH YOUR DEALER Call your investment representative
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
HOW WE PROCESS YOUR EXCHANGE
If you are exchanging your Advisor Class shares of the Fund you may:
o exchange into any of our money funds except Franklin Templeton Money Fund II.
o exchange into the other Advisor Class shares of the Franklin Templeton Funds
(excluding Templeton Developing Markets Trust, Templeton Foreign Fund and
Templeton Growth Fund, except as described below), Mutual Series Class Z
shares and Templeton Institutional Funds, Inc., if you meet the investment
requirements of the fund to be acquired.
o exchange into the Advisor Class shares of Templeton Developing Markets Trust,
Templeton Foreign Fund and Templeton Growth Fund if you fall into one of the
following categories: (i) you are a broker-dealer or a qualified registered
investment advisor who has entered into a special agreement with Distributors
for your clients who are participating in comprehensive fee programs; (ii) you
are a qualified registered investment advisor or certified financial planner
who has clients invested in Mutual Series on October 31, 1996; (iii) you are a
qualified registered investment advisor or registered certified financial
planner who did not have clients invested in Mutual Series on October 31, 1996
and are buying through a broker-dealer or service agent who has entered into
an agreement with Distributors; (iv) you are a director, trustee, officer or
full-time employee (or a family member) of the Franklin Templeton Group or the
Franklin Templeton Funds; (v) you are a participant in Franklin Templeton's
401(k) or Franklin Templeton's Profit Sharing Plans; (vi) the exchanging
shareholder is an account managed by the Franklin Templeton Group; or (vii)
the exchanging shareholder is a series of the Franklin Templeton Fund
Allocator Series.
o If the fund you are exchanging into does not offer Advisor Class shares, you
may exchange into the Class I shares of the fund at Net Asset Value.
Please be aware that the following restrictions may apply to exchanges:
o The accounts must be identically registered. You may exchange shares from a
Fund account requiring two or more signatures into an identically registered
money fund account requiring only one signature for all transactions. Please
notify us in writing if you do not want this option to be available on your
account(s). Additional procedures may apply. Please see "Transaction
Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact our Retirement Plans Department for information on exchanges
within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy upon 60 days' written notice.
o Your exchange may be restricted or refused if you: (i) request an exchange out
of the Fund within two weeks of an earlier exchange request, (ii) exchange
shares out of the Fund more than twice in a calendar quarter, or (iii)
exchange shares equal to at least $5 million, or more than 1% of the Fund's
net assets. Shares under common ownership or control are combined for these
limits. If you exchange shares as described in this paragraph, you will be
considered a Market Timer. Each exchange by a Market Timer, if accepted, will
be charged $5.00. Some of our funds do not allow investments by Market Timers.
Because excessive trading can hurt Fund performance and shareholders, we may
refuse any exchange purchase if (i) we believe the Fund would be harmed or
unable to invest effectively, or (ii) the Fund receives or anticipates
simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed
by all account owners
2. Include any outstanding share certificates
for the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts
may need to send additional documents.
Accounts under court jurisdiction may have
additional requirements.
BY PHONE
(Only available if you have completed and sent to us the telephone redemption
agreement included with this prospectus)
Call Shareholder Services
Telephone requests will be accepted:
o If the request is $50,000 or less.
Institutional accounts may exceed $50,000 by
completing a separate agreement. Call
Institutional Services to receive a copy;
o If there are no share certificates
issued for the shares you want to sell or
you have already returned them to the Fund;
o Unless you are selling shares in a Trust
Company retirement plan account; or
o Unless the address on your account was changed
by phone within the last 30 days
o Beginning on or about May 1, 1997, you
will automatically be able to redeem shares by
telephone without completing a telephone
redemption agreement. PLEASE NOTIFY US IF YOU
DO NOT WANT THIS OPTION TO BE AVAILABLE ON
YOUR ACCOUNT. If you later decide you would
like this option, send us written instructions
signed by all account owners.
THROUGH YOUR DEALER Call your investment representative
We will send your redemption check within seven days after we receive your
request in proper form. If you sell your shares by phone, the check may only be
made payable to all registered owners on the account and sent to the address of
record. We are not able to receive or pay out cash in the form of currency.
If you sell shares you just purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call our Retirement Plans Department.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semiannually in June
and December to shareholders of record on the first business day before the 15th
of the month and pays them on or about the last day of that month. Capital
gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the Fund
by reinvesting capital gain distributions, or both dividend and capital gain
distributions. This is a convenient way to accumulate additional shares and
maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy Advisor Class shares or Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN ADVISOR CLASS
SHARES OF THE FUND. For Trust Company retirement plans, special forms are
required to receive distributions in cash. You may change your distribution
option at any time by notifying us by mail or phone. Please allow at least seven
days prior to the record date for us to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value and Offering
Price of the Fund in many newspapers.
To calculate Net Asset Value per share, the Fund's assets are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares outstanding. The Fund's assets are valued as
described under "How are Fund Shares Valued?" in the SAI.
THE PRICE WE USE WHEN YOU BUY OR SELL SHARES
You buy shares of Advisor Class at the Net Asset Value per share. We calculate
it to two decimal places using standard rounding criteria.
You also sell shares at Net Asset Value.
We will use the Net Asset Value next calculated after we receive your
transaction request in proper form. If you buy or sell shares through your
Securities Dealer, however, we will use the Net Asset Value next calculated
after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o A description of the request,
o For exchanges, the name of the fund you're exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening if
preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the
registered owners,
3) The proceeds are not being sent to the address of record,
preauthorized bank account or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential
claims based on the instructions received.
A signature guarantee verifies the authenticity of your signature and may be
obtained from certain banks, brokers or other eligible guarantors. YOU SHOULD
VERIFY THAT THE INSTITUTION IS AN ELIGIBLE GUARANTOR PRIOR TO SIGNING. A
NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form. In this case, you should send the certificate and assignment
form in separate envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We will also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. You may not sell shares or change
distribution options on Trust Company retirement plans by phone. While you may
exchange shares of Trust Company IRA and 403(b) retirement accounts by phone,
certain restrictions may be imposed on other retirement plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call our Retirement Plans Department.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, you need to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, all owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, you will not be able
to change owners on the account unless all owners agree in writing. If you would
like another person or owner to sign for you, please send us a current power of
attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. If you register your account as a trust, you should have a valid written
trust document to avoid future disputes or possible court action over who owns
the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION CORPORATE RESOLUTION
PARTNERSHIP 1. The pages from the partnership
agreement that identify the general
partners, or
2. A certification for a partnership
AGREEMENT
TRUST 1. The pages from the trust document
that identify the trustees, or
2. A CERTIFICATION FOR TRUST
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we will not process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
ELECTRONIC INSTRUCTIONS. If there is a Securities Dealer or other representative
of record on your account, we are authorized to use and execute electronic
instructions received directly from your dealer or representative without
further inquiry. Electronic instructions may be processed through the services
of the NSCC, which currently include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems, or through Franklin/Templeton's PCTrades II(TM) System.
TAX IDENTIFICATION NUMBER
For tax reasons, we must have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is $50 or less, except for investors
under categories (d), (e), (j) and (l) under "Opening Your Account." We will do
this if the value of your account falls below this minimum because you
voluntarily sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of your
account to at least $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the account application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person or to a checking account. You will generally receive your payment by the
fifth business day of the month in which a payment is scheduled. Beginning with
your February 1997 payment, however, you will generally receive your payment by
the end of the month in which a payment is scheduled. When you sell your shares
under a systematic withdrawal plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports or an interim quarterly
report.
BROKERS AND DEALERS AND PLAN ADMINISTRATORS
You may buy and sell Fund shares through registered broker-dealers. The Fund
does not impose a sales or service charge but your broker-dealer may charge you
a transaction fee. Transaction fees and services may vary among broker-dealers,
and your broker-dealer may impose higher initial or subsequent investment
requirements than those established by the Fund. Services provided by
broker-dealers may include allowing you to establish a margin account and borrow
on the value of the Fund's shares in that account. If your broker-dealer
receives your order before pricing on a given day, the broker-dealer is required
to forward the order to the Fund before pricing closes on that day. A
broker-dealer's failure to timely forward an order may give rise to a claim by
the investor against the broker.
Third party plan administrators of tax-qualified retirement plans and other
entities may provide sub-transfer agent services to the Fund. In such cases, the
Fund may pay the third party an annual sub-transfer agency fee that is not
greater than the Fund otherwise would have paid for such services.
INSTITUTIONAL ACCOUNTS
Institutional investors will likely be required to complete an institutional
account application. There may be additional methods of opening accounts and
purchasing, redeeming or exchanging shares of the Fund available for
institutional accounts. To obtain an institutional application or additional
information regarding institutional accounts, contact Franklin Templeton
Institutional Services at 1-800/321-8563 Monday through Friday, from 6:00 a.m.
to 5:00 p.m. Pacific time.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
Advisers is also located at this address. The Fund and Distributors are located
at 700 Central Avenue, St. Petersburg, Florida 33701-3628. You may also contact
us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
SHAREHOLDER SERVICES 1-800/632-2301 5:30 A.M. TO 5:00 P.M.
DEALER SERVICES 1-800/524-4040 5:30 A.M. TO 5:00 P.M.
FUND INFORMATION 1-800/DIAL BEN 5:30 A.M. TO 8:00 P.M.
(1-800/342-5236) 6:30 A.M. TO 2:30 P.M.(SATURDAY)
RETIREMENT PLANS 1-800/527-2020 5:30 A.M. TO 5:00 P.M.
INSTITUTIONAL SERVICES 1-800/321-8563 6:00 A.M. TO 5:00 P.M.
TDD (HEARING IMPAIRED) 1-800/851-0637 5:30 A.M. TO 5:00 P.M.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
BZWIM - Barclays de Zoete Wedd Investment Management Inc.
CD - Certificate of deposit
CLASS I AND ADVISOR CLASS - The Fund offers two classes of shares, designated
"Class I" and "Advisor Class." The two classes have proportionate interests in
the Fund's portfolio. Class I shares are purchased with a sales charge and have
a Rule 12b-1 plan. Advisor Class shares are purchased without a sales charge and
do not have a Rule 12b-1 plan.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - The 12 month period during which a Contingent Deferred
Sales Charge may apply. Regardless of when during the month you purchased
shares, they will age one month on the last day of that month and each following
month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN FUNDS - The mutual funds in the Franklin Group of Funds(R)
except Franklin Valuemark Funds and the Franklin Government Securities
Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment
companies in the Franklin Group of Funds(R) and the Templeton Group of
Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MANAGERS - Franklin Advisers, Inc., the Fund's investment manager, and
Templeton Investment Counsel, Inc., the Fund's Sub-Advisor
MARKET TIMER(S) - Market Timers generally include market timing or allocation
services, accounts administered so as to buy, sell or exchange shares based on
predetermined market indicators, or any person or group whose transactions seem
to follow a timing pattern.
MOODY'S - Moody's Investors Service, Inc.
MUTUAL SERIES - Franklin Mutual Series Fund Inc., a member of the Franklin Group
of Funds, formerly the Mutual Series Fund Inc. Each series of Mutual Series
began offering three classes of shares on November 1, 1996; Class I, Class II
and Class Z. All shares sold before that time are designated Class Z shares.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - 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.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share and includes the 5.75% sales charge. Advisor Class has no front-end sales
charge.
QUALIFIED RETIREMENT PLAN(S) - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
REIT - Real Estate Investment Trust
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SUB-ADVISOR - Templeton Investment Counsel, Inc., the Fund's sub-advisor
TEMPLETON FUNDS - The U.S. registered mutual funds in the Templeton
Group of Funds except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund and Templeton Variable Products Series
Fund
TICI - Templeton Investment Counsel, Inc., the Fund's Sub-Advisor
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an
affiliate of Distributors and both are wholly owned subsidiaries of
Resources.
U.S. - United States
We/Our/Us - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors or other wholly owned
subsidiaries of Resources.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?........................
What are the Fund's Potential Risks?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management and Other Services.....................
How does the Fund Buy Securities for its Portfolio?........
How Do I Buy, Sell and Exchange Shares?......................
How are Fund Shares Valued?..................................
Additional Information on Distributions and Taxes............
The Fund's Underwriter.......................................
How does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix
Description of Ratings.......................................
- -------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
- -------------------------------------------------------------
The Templeton Foreign Smaller Companies Fund (the "Smaller Companies Fund") and
the Templeton Pacific Growth Fund (the "Pacific Fund") are diversified series'
of the Franklin Templeton International Trust (the "Trust"), an open-end
management investment company. The investment objective of each Fund is to seek
long-term growth of capital. The Smaller Companies Fund seeks to achieve its
objective by investing primarily in equity securities of smaller capitalization
companies outside the U.S., including developing markets. The Pacific Fund seeks
to achieve its objective by investing primarily in equity securities that trade
on markets in the Pacific Rim and are issued by companies (i) domiciled in the
Pacific Rim or (ii) that derive at least 50% of their revenues or pre-tax income
from activities in the Pacific Rim. References to the "Fund" in this SAI refer
to each fund individually, unless the context indicates otherwise.
The Prospectus, dated January 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- -------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF
THE U.S. GOVERNMENT;
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK;
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
- -------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
FOREIGN INVESTMENTS. The Fund invests in securities of foreign issuers.
Investing in the securities of foreign issuers involves certain special
considerations, that are not typically associated with investing in U.S.
issuers. Since investments in the securities of foreign issuers may involve
currencies of foreign countries, and since the Fund may temporarily hold funds
in bank deposits in foreign currencies during completion of investment programs,
the Fund may be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations and may incur costs in connection with
conversions between various currencies.
As noted in the Fund's prospectus, on occasion the Fund may invest more than 25%
of its assets in the securities of issuers in one industrialized country that,
in the view of the Sub-advisor, poses no unique investment risk. Consistent with
this policy, the Fund may invest up to 30% of its assets in securities issued by
Hong Kong companies. However, the Fund will not invest more than 25% of its
assets in any one industry or securities issued by any foreign government.
CURRENCY TRANSACTIONS. In order to hedge against currency exchange rate risks,
the Fund may enter into forward currency exchange contracts ("forward
contracts") and currency futures contracts and options on these futures
contracts, as well as buy put or call options and write covered put and call
options on currencies traded in U.S. or foreign markets.
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).
The Fund may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if the Managers determine that there is a pattern of
correlation between the two currencies. The Fund may also buy and sell forward
contracts (to the extent they are not deemed "commodities") for non-hedging
purposes when the Managers anticipate that the foreign currency will appreciate
or depreciate in value, but securities denominated in that currency do not
present attractive investment opportunities and are not held in the Fund's
portfolio.
The Fund's custodian bank will place cash or liquid high grade debt securities
(securities rated in one of the top three ratings categories by Moody's or S&P
or, if unrated, deemed by the Managers to be of comparable quality) into a
segregated account of the Fund maintained by its custodian bank in an amount
equal to the value of the Fund's total assets committed to the forward foreign
currency exchange contracts requiring the Fund to purchase foreign currencies.
If the value of the securities placed in the segregated account declines,
additional cash or securities is placed in the account on a daily basis so that
the value of the account equals the amount of the Fund's commitments with
respect to such contracts. The segregated account is marked-to-market on a daily
basis. Although the contracts are not presently regulated by the Commodity
Futures Trading Commission (the "CFTC"), the CFTC may in the future assert
authority to regulate these contracts. In such event, the Fund's ability to
utilize forward foreign currency exchange contracts may be restricted.
The Fund, generally will not enter into a forward contract with a term of
greater than one year.
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. The Fund may enter into currency futures contracts traded on
regulated commodity exchanges, including non-U.S. exchanges.
The Fund may either accept or make delivery of the currency specified at the
maturity of a forward or futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to forward contracts are usually effected with
the currency trader who is a party to the original forward contract.
The Fund may enter into forward currency exchange contracts and currency futures
contracts in several circumstances. For example, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency (or options contracts with respect to such futures contracts), or when
the Fund anticipates the receipt in a foreign currency of dividends or interest
payments on such a security that it holds, it may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. In addition, when the Sub-advisor believes
that the currency of a particular country may suffer a substantial decline
against the U.S. dollar, it may enter into a forward or futures contract to
sell, for a fixed amount of U.S. dollars, the amount of that currency
approximating the value of some or all of the Fund's portfolio securities
denominated in that currency. The precise matching of the forward contract
amounts and the value of the securities involved is not generally possible
because the future value of these securities in foreign currencies changes as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. Using
forward contracts to protect the value of the Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that the Fund can achieve at some future point in time. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of only a portion
of the Fund's foreign assets.
The Fund may write covered put and call options and buy put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of portfolio securities and against increases in the dollar cost of
securities to be acquired. The Fund may use options on currency to cross-hedge,
which involves writing or purchasing options on one currency to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. In addition, the Fund may buy call options on currency for
non-hedging purposes when the Managers anticipate that the currency will
appreciate in value, but the securities denominated in that currency do not
present attractive investment opportunities and are not included in the Fund's
portfolio.
A call option written by a Fund obligates the Fund to sell specified currency to
the holder of the option at a specified price at any time before the expiration
date. A put option written by the Fund would obligate the Fund to buy specified
currency from the option holder at a specified time before the expiration date.
The writing of currency options involves risk that the Fund will, upon exercise
of the option, be required to sell currency subject to a call at a price that is
less than the currency's market value or be required to buy currency subject to
a put at a price that exceeds the currency's market value.
The Fund may terminate its obligations under a call or put option by buying an
option identical to the one it has written. Such purchases are referred to as
"closing purchase transactions." A Fund would also be able to enter into closing
sale transactions in order to realize gains or minimize losses on options bought
by the Fund.
The Fund would normally buy call options in anticipation of an increase in the
dollar value of the currency in which securities to be acquired by the Fund are
denominated. The purchase of a call option would entitle the Fund, in return for
the premium paid, to purchase specified currency at a specified price during the
option period. The Fund would ordinarily realize a gain if, during the option
period, the value of such currency exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Fund would realize either no
gain or a loss on the purchase of the call option. A Fund may forfeit the entire
amount of the premium plus related transaction costs if exchange rates move in a
manner adverse to the Fund's position.
The Fund would normally buy put options in anticipation of a decline in the
dollar value of currency in which securities in its portfolio are denominated
("protective puts"). Buying a put option would entitle the Fund, in exchange for
the premium paid, to sell specific currency at a specified price during the
option period. Buying protective puts is designed merely to offset or hedge
against a decline in the dollar value of the Fund's portfolio securities due to
currency exchange rate fluctuations. The Fund would ordinarily realize a gain
if, during the option period, the value of the underlying currency decreased
below the exercise price sufficiently to more than cover the premium and
transaction costs; otherwise, the Fund would realize either no gain or a loss on
the purchase of the put option. The Fund will buy and sell foreign currency
options traded on U.S. or foreign exchanges or over-the-counter.
The Fund will not enter into forward currency exchange contracts or currency
futures contracts or buy or write such options or maintain a net exposure to
such contracts where the completion of the contracts would obligate the Fund to
deliver an amount of currency other than U.S. dollars in excess of the value of
the Fund's portfolio securities or other assets denominated in that currency or,
in the case of cross-hedging, in a currency closely correlated to that currency.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING CALL AND PUT OPTIONS ON SECURITIES. The Fund may write options to
generate additional income and to hedge its investment portfolio against
anticipated adverse market and/or exchange rate movements. The Fund may write
covered call and put options on any securities in which it may invest. The Fund
may buy and write these options on securities that are listed on domestic or
foreign securities exchanges or traded in the over-the-counter market. Call
options written by the Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price. Put options written by the
Fund give the holder the right to sell the underlying security to the Fund at a
stated exercise price. All options written by the Fund will be "covered." The
purpose of writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, in writing
covered call options for additional income, the Fund may forego the opportunity
to profit from an increase in the market price of the underlying security.
A call option written by the Fund is covered if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(i) is equal to or less than the exercise price of the call written or (ii) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high-grade debt securities in a segregated
account with its custodian bank.
A put option written by the Fund is "covered" if the Fund maintains cash and
high-grade debt securities with a value equal to the exercise price in a
segregated account with its custodian bank, or else holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held is equal to or greater than the exercise price of the put
written. The premium paid by the buyer of an option will reflect, among other
things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand, and interest rates.
The writer of an option that wishes to terminate its obligation may effect a
closing purchase transaction. A writer may not effect a closing purchase
transaction after being notified of the exercise of an option. Likewise, an
investor who is the holder of an option may liquidate its position by effecting
a closing sale transaction. This is accomplished by selling an option of the
same series as the option previously purchased.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option; the Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund. There
is no guarantee that either a closing purchase or a closing sale transaction can
be effected when the Fund so desires.
BUYING PUT OPTIONS. The Fund may buy put options on securities in order to
protect against a decline in the market value of the underlying security below
the exercise price less the premium paid for the option. A put option gives the
holder the right to sell the underlying security at the option exercise price at
any time during the option period. The ability to buy put options will allow the
Fund to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. In addition, the Fund will continue to
receive interest or dividend income on the security. The Fund may sell a put
option that it has previously purchased prior to the sale of the securities
underlying that option. These sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option that is sold. This gain or loss
may be wholly or partially offset by a change in the value of the underlying
security that the Fund owns or has the right to acquire.
BUYING CALL OPTIONS. The Fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of this security. The Fund may also buy call options on securities held in its
portfolio and on which it has written call options. A call option gives the
holder the right to buy the underlying securities from the option writer at a
stated exercise price. Prior to its expiration, a call option may be sold in a
closing sale transaction. Profit or loss from such a sale will depend on whether
the amount received is more or less than the premium paid for the call option
plus the related transaction costs.
OPTIONS ON STOCK INDICES. The Fund may buy and write 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 Fund. Call and put options
on stock indices are similar to options on securities except that, rather than
the right to buy or sell particular securities at a specified price, options on
a stock index give the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the underlying stock index is greater
than (or less than, in the case of puts) the exercise price of the option. This
amount of cash is equal to the difference between the closing price of the index
and the exercise price of the option, expressed in dollars multiplied by a
specified number. Thus, unlike options on individual securities, all settlements
are in cash, and gain or loss depends on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in individual securities.
All options written on stock indices must be covered. When the Fund writes an
option on a stock index, it will establish a segregated account containing cash
or high quality, fixed-income securities with its custodian bank in an amount at
least equal to the market value of the option and will maintain the account
while the option is open or will otherwise cover the transaction.
OVER-THE-COUNTER OPTIONS ON SECURITIES ("OTC OPTIONS"). The Fund may write
covered put and call options and buy put and call options that trade in the
over-the-counter market to the same extent that it 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, as is the case
with exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. However, OTC
options are available for a greater variety of securities and in a wider range
of expiration dates and exercise prices than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer.
The Fund understands the current position of the staff of the SEC to be that
purchased OTC options and the assets used as "cover" for written OTC options are
illiquid securities. The Fund and its Managers disagree with this position.
Nevertheless, pending a change in the staff's position, the Funds will treat OTC
options as subject to its limitation on illiquid securities. Please see
"Illiquid Investments" below.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since, with regard to certain options, the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer must
fulfill its obligation to buy the underlying security at the exercise price,
which will usually exceed the then market value of the underlying security.
FORWARD CONVERSIONS. In a forward conversion, the Fund will buy securities and
write call options and buy put options on these securities. All options written
by the Fund will be covered. By buying puts, the Fund protects the underlying
security from depreciation in value. By selling or writing calls on the same
security, the Fund receives premiums that 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. The Fund will not exercise a put it has
purchased while a call option on the same security is outstanding. The use of
options in connection with forward conversions is intended to hedge against
fluctuations in the market value of the underlying security. Although it is
generally intended in forward conversion transactions that the exercise price of
put and call options would be identical, situations might occur in which some
option positions are acquired with different exercise prices. Therefore, the
Fund's return may depend in part on movements in the price of the underlying
security because of the different exercise prices of the call and put options.
These price movements may also affect a Fund's total return if the conversion is
terminated prior to the expiration date of the options. In this event, the
Fund's return may be greater or less than it would otherwise have been if it had
hedged the security only by buying put options.
SPREAD AND STRADDLE TRANSACTIONS. The Fund may engage in "spread" transactions
in which it buys and writes a put or call option on the same underlying
security, with the options having different exercise prices and/or expiration
dates. All options written by the Fund will be covered. The Fund may also engage
in so-called "straddles," in which it buys or writes combinations of put and
call options on the same security. Because buying options in connection with
these transactions may, under certain circumstances, involve a limited degree of
investment leverage, the Fund will not enter into any spreads or straddles if,
as a result, more than 5% of its net assets will be invested at any time in
these options transactions. The Fund's ability to engage in spread or straddle
transactions may be further limited by state securities laws.
FUTURES TRANSACTIONS
The Fund may buy or sell (i) financial futures contracts such as interest rate
futures contracts; (ii) options on interest rate futures contracts; (iii) stock
index futures contracts; and (iv) options on stock index futures contracts
(collectively, "Futures Transactions") for bona fide hedging purposes. The Fund
may enter into these Futures Transactions on domestic exchanges and, to the
extent these transactions have been approved by the CFTC for sale to customers
in the U.S., on foreign exchanges. The Fund will not engage in Futures
Transactions for speculation but only as a hedge against changes resulting from
market conditions such as changes in interest rates, currency exchange rates, or
securities that it intends to buy. The Fund will not enter into any Futures
Transactions if, immediately thereafter, more than 20% of the Fund's net assets
would be represented by futures contracts or options thereon. In addition, the
Fund will not engage in any Futures Transactions if, immediately thereafter, the
sum of the amount of initial margin deposits on the Fund's futures positions and
premiums paid for options on its futures contracts would exceed 5% of the market
value of the Fund's total assets.
To the extent the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank, cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. Should
the value of the futures contract decline relative to the Fund's position, the
Fund will be required to pay to the futures commission merchant an amount equal
to this change in value.
A futures contract may generally be described as an agreement between two
parties to buy and sell particular financial instruments for an agreed price
during a designated month (or to deliver the final cash settlement price, in the
case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the Fund can
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
the Fund, through the purchase of futures contracts, can attempt to secure
better rates or prices than might later be available in the market when it
affects anticipated purchases. Similarly, the Fund can sell futures contracts on
a specified currency to protect against a decline in the value of this currency
and its portfolio securities that are denominated in this currency. The Fund can
buy futures contracts on foreign currency to fix the price in U.S. dollars of a
security denominated in this currency that the Fund has acquired or expects to
acquire.
Although futures contracts by their terms generally call for the actual delivery
or acquisition of underlying 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 this delivery. The contractual obligation is
offset by buying (or selling, as the case may be) on a commodities exchange, an
identical futures contract calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels the
obligation to make or take delivery of the securities or the cash value of the
index underlying the contractual obligations. The Fund may incur brokerage fees
when it buys or sells futures contracts.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions that may result in a
profit or a loss. While the Fund's futures contracts on securities or currency
will usually be liquidated in this manner, the Fund may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for it to do so. A clearing corporation associated
with the exchange on which futures on securities or currency are traded
guarantees that, if still open, the buying or selling will be performed on the
settlement date.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures
contracts will give the Fund the right, but not the obligation, for a specified
price, to sell or to buy, respectively, the underlying futures contract at any
time during the option period. As the purchaser of an option on a futures
contract, the Fund obtains the benefit of the futures position if prices move in
a favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
FINANCIAL FUTURES CONTRACTS. Financial futures are contracts that obligate the
holder to take or make delivery of a specified quantity of a financial
instrument, such as a U.S. Treasury security or foreign currencies, during a
specified future period at a specified price. A "sale" of a financial 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 financial 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. Examples of financial futures contracts
include interest rate futures contracts and stock index futures contracts.
INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are futures
contracts on debt securities. The value of these instruments changes in response
to changes in the value of the underlying debt security, that depends primarily
on prevailing interest rates. The Fund may enter into interest rate futures
contracts in order to protect its portfolio securities from fluctuations in
interest rates without necessarily buying or selling the underlying fixed-income
securities. For example, if the Fund owns bonds, and interest rates are expected
to increase, it might sell futures contracts on debt securities having
characteristics similar to those held in the portfolio. A sale would have much
the same effect as selling an equivalent value of the bonds owned by the Fund.
If interest rates did increase, the value of the debt securities in the
portfolio would decline, but the value of the futures contracts to the Fund
would increase at approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise could have.
STOCK INDEX FUTURES CONTRACTS. A stock index futures contract obligates the
seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement was made. Open futures contracts are valued on a daily
basis, and the Fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline in an attempt to offset the decrease in market value of its
equity securities that might otherwise result. When the Fund is not fully
invested in stocks and anticipates a significant market advance, it may buy
stock index futures in order to gain rapid market exposure that may offset
increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Call and put options on stock index
futures are similar to options on securities except that, rather than the right
to buy or sell stock at a specified price, options on a stock index futures
contract give the holder the right to receive cash. Upon exercise of the option,
the delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account that represents the amount by which the market
price of the futures contract, at exercise, exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date.
HEDGING STRATEGIES WITH FUTURES. Hedging by use of futures contracts seeks to
establish with more certainty, than would otherwise be possible, the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. The Fund may, for example,
take a "short" position in the futures market by selling futures contracts in
order to hedge against an anticipated rise in interest rates or a decline in
market prices of foreign currency rates that would adversely affect the dollar
value of the Fund's portfolio securities. These futures contracts may include
contracts for the future delivery of securities held by the Fund or securities
with characteristics similar to those of the Fund's portfolio securities.
Similarly, the Fund may sell futures contracts on currency in which its
portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies.
If, in the opinion of the Managers, there is a sufficient degree of correlation
between price trends for the Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into these futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in the Fund's
portfolio may be more or less volatile than prices of these futures contracts,
the Managers will attempt to estimate the extent of this difference in
volatility based on historical patterns and to compensate for it by having the
Fund enter into a greater or fewer number of futures contracts or by attempting
to achieve only a partial hedge against price changes affecting the Fund's
securities portfolio. When hedging of this character is successful, any
depreciation in the value of the portfolio securities will substantially be
offset by appreciation in the value of the futures position. On the other hand,
any unanticipated appreciation in the value of a Fund's portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, the Fund may take a "long" position by buying these futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent buy of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices or rates that are currently available.
The CFTC and U.S. commodities exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position that
any person may hold or control in a particular futures contract. Trading limits
are imposed on the maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. The Fund does not believe that these trading and positions limits
will have an adverse impact on their strategies for hedging their securities.
The need to hedge against these risks will depend on the extent of
diversification of a Fund's common stock portfolio and the sensitivity of these
investments to factors influencing the stock market as a whole.
OTHER CONSIDERATIONS. In certain cases, the options and futures markets provide
investment or risk management opportunities that are not available from direct
investments in securities. In addition, some strategies can be performed more
effectively and at a lower cost by utilizing the options and futures markets
rather than purchasing or selling portfolio securities. However, there are risks
involved in these transactions as discussed below. The Fund will engage in
futures and related options transactions only for bona fide hedging or other
appropriate risk management purposes in accordance with CFTC regulations that
permit principals of an investment company registered under the 1940 Act to
engage in these transactions without registering as commodity pool operators.
"Appropriate risk management purposes" means activities in addition to bona fide
hedging that the CFTC deems appropriate for operators of entities, including
registered investment companies, that are excluded from the definition of
commodity pool operator. The Fund is not permitted to engage in speculative
futures trading. The Fund will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
which it expects to buy.
Except as stated below, the Fund's futures transactions will be entered into for
traditional hedging purposes -- that is, futures contracts will be sold to
protect against a decline in the price of securities it intends to buy (or the
currency will be purchased to protect the Fund against an increase in the price
of the securities (or the currency in which they are denominated)). As evidence
of this hedging intent, the Fund expects that on 75% or more of the occasions on
which it takes a long futures (or option) position involving the purchase of
futures contracts, the Fund will have bought, or will be in the process of
buying, equivalent amounts of related securities (or assets denominated in the
related currency) in the cash market at the time when the futures (or option)
position is closed out. However, in particular cases when it is economically
advantageous for the Fund to do so, a long futures position may be terminated
(or an option may expire) without the corresponding purchase of securities or
other assets. In the alternative, a CFTC regulation permits the Fund to elect to
comply with a different test, under which (i) the Fund's long futures positions
will be used as part of its portfolio management strategy and will be incidental
to its activities in the underlying cash market and (ii) the aggregate initial
margin and premiums required to establish these positions will not exceed 5% of
the liquidation value of the Fund's investment portfolio (a) after taking into
account unrealized profits and losses on any such contracts into which the Fund
has entered and (b) excluding the in-the-money amount with respect to any option
that is in-the-money at the time of purchase.
The Fund will engage in transactions in futures contracts and related options
only to the extent these transactions are consistent with the requirements of
the Code for maintaining its qualification as a regulated investment company for
federal income tax purposes. Please see "How Taxation Affects You and the Fund"
in the Prospectus.
The Fund will not buy or sell futures contracts or buy or sell related options,
except for closing purchase or sale transactions, if immediately thereafter the
sum of the amount of margin deposits on the Fund's outstanding futures and
related options positions and the amount of premiums paid for outstanding
options on futures would exceed 5% of the market value of the Fund's total
assets. These transactions involve brokerage costs, require margin deposits and,
in the case of contracts and options obligating the Fund to buy securities or
currencies, require the Fund to segregate assets to cover these contracts and
options.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures 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 Managers may still not
result in a successful transaction.
Perfect correlation between the Fund's futures positions and portfolio positions
may be difficult to achieve because no futures contracts based on corporate
fixed-income securities are currently available. In addition, it is not possible
to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of these
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
OTHER INVESTMENT POLICIES
CONVERTIBLE SECURITIES. As with a straight fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
decrease in value when interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value of the
underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by both interest
rate and market movements, a convertible security is not as sensitive to
interest rates as a similar fixed-income security, nor is it as sensitive to
changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a convertible
security may be important in determining the security's true value. This is
because the holder of a convertible security will have recourse only to the
issuer.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), that
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock that generally features a mandatory conversion date, as well as
a capital appreciation limit that is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at that time they
are convertible into common stock of the issuer (PERCS are generally not
convertible into cash at maturity). Under a typical arrangement, if after three
years the issuer's common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one share of common
stock. If, however, the issuer's common stock is trading at a price above that
set by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional share of
common stock received by the PERCS holder is determined by dividing the price
set by the capital appreciation limit of the PERCS by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However if called early the issuer must
pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other 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 the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three 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 whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein that may be similar to those described above in
which the Fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
these securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
REPURCHASE TRANSACTIONS. The Fund may enter into repurchase agreements. A
repurchase agreement is an agreement in which the seller of a security agrees to
repurchase the security sold at a mutually agreed upon time and price. Under the
1940 Act, a repurchase agreement is deemed to be the loan of money by a Fund to
the seller, collateralized by the underlying security. The resale price is
normally in excess of the purchase price, reflecting an agreed upon interest
rate. The interest rate is effective for the period of time in which the Fund is
invested in the agreement and is not related to the coupon rate on the
underlying security. The period of these repurchase agreements will usually be
short, from overnight to one week, and at no time will a Fund invest in
repurchase agreements for more than one year. However, the securities that are
subject to repurchase agreements may have maturity dates in excess of one year
from the effective date of the repurchase agreements. The Fund will make payment
for these securities only upon physical delivery or evidence of book entry
transfer to the account of their custodian bank. The Fund may not enter into a
repurchase agreement with more than seven days duration if, as a result, the
market value of the Fund's net assets, together with investments in other
securities deemed to be not readily marketable, would be invested in these
repurchase agreements in excess of the Fund's policy on investments in illiquid
securities.
ILLIQUID INVESTMENTS. Securities that are acquired by the Fund outside the U.S.
and that are publicly traded in the U.S. or on a foreign securities exchange or
in a foreign securities market are not considered by the Fund to be illiquid
assets, so long as the Fund acquires and holds the securities with the intention
of reselling the securities in the foreign trading market, the Fund reasonably
believes it can readily dispose of the securities for cash in the U.S. or
foreign market, and current market quotations are readily available. Investments
may be in securities of foreign issuers, whether located in developed or
undeveloped countries. The Board has authorized the Fund to invest in restricted
securities where this investment is consistent with the Fund's investment
objective and has authorized these securities to be considered liquid to the
extent the Managers, as the case may be, determine that there is a liquid
institutional or other market for these securities, for example, restricted
securities that may be freely transferred among qualified institutional buyers
pursuant to Rule 144A under the 1933 Act and for which a liquid institutional
market has developed. The Board reviews any determination by the Managers to
treat a restricted security as liquid on a quarterly basis, including the
Managers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the Managers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and the
number of other potential 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 (the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). To the extent the Fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
WHAT ARE THE FUND'S POTENTIAL RISKS?
FOREIGN SECURITIES. Since foreign companies are not subject to uniform
accounting, auditing and financial reporting practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign bond markets are less than in the U.S., and
securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although each Fund endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
these transactions. These delays in settlement could result in temporary periods
when a portion of the assets of the Fund is uninvested and no return is earned
thereon. The inability of each Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Losses to the Fund due to subsequent declines in the value of
portfolio securities, or losses arising out of the Fund's inability to fulfill a
contract to sell these securities, could result in potential liability to the
Fund. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments that could affect the Fund's investments
in those countries. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions.
Investments in foreign securities where delivery takes place outside the U.S.
will have to be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes of governmental administrations or of economic or monetary
policies, in the U.S. or abroad, or changed circumstances in dealings between
nations, or currency convertibility or exchange rates could result in investment
losses for the Fund. Investments in foreign securities may also subject the Fund
to losses due to nationalization, expropriation or differing accounting
practices and treatments. Moreover, you should recognize that foreign securities
are often traded with less frequency and volume, and therefore may have greater
price volatility, than is the case with many U.S. securities. Brokerage
commissions, custodial services, and other costs relating to investment in
foreign countries are generally more expensive than in the U.S. Notwithstanding
the fact that the Fund generally intends to acquire the securities of foreign
issuers where there are public trading markets, investments by the Fund in the
securities of foreign issuers may tend to increase the risks with respect to the
liquidity of a Fund's portfolio and the Fund's ability to meet a large number of
shareholder redemption requests should there be economic or political turmoil in
a country in which a Fund has a substantial portion of its assets invested or
should relations between the U.S. and foreign countries deteriorate markedly.
Furthermore, the reporting and disclosure requirements applicable to foreign
issuers may differ from those applicable to domestic issuers, and there may be
difficulties in obtaining or enforcing judgments against foreign issuers.
Depositary Receipts (such as American Depositary Receipts and Global Depositary
Receipts) may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the securities underlying unsponsored depositary receipts are not obligated
to disclose material information in the U.S. and, therefore, there may be less
information available regarding these issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed above.
DEVELOPING MARKETS. Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in companies in
developed countries. These risks include (i) less social, political and economic
stability; (ii) the smaller size of the markets for these securities and the
currently low or nonexistent volume of trading, that result in a lack of
liquidity and in greater price volatility; (iii)the lack of publicly available
information, including reports of payments of dividends or interest on
outstanding securities; (iv) certain national policies that may restrict a
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (v) foreign taxation; (vi)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vii) the absence,
until recently in certain Eastern European countries and Russia, of a capital
market structure or market-oriented economy; (viii) the possibility that recent
favorable economic developments in Eastern Europe and Russia may be slowed or
reversed by unanticipated political or social events in these countries; (ix)
restrictions that may make it difficult or impossible for the Fund to vote
proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts; (x)the risk of uninsured loss due to lost, stolen,
or counterfeit stock certificates; and (xi) possible losses through the holding
of securities in domestic and foreign custodial banks and depositories.
In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods, extremely high rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for
repatriation.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade.
Investments in Eastern European countries may involve risks of nationalization,
expropriation and confiscatory taxation. The communist governments of a number
of Eastern European countries expropriated large amounts of private property in
the past, in many cases without adequate compensation, and there can be no
assurance that this expropriation will not occur in the future. In the event of
this expropriation, the Smaller Companies Fund could lose a substantial portion
of any investments it has made in the affected countries. Further, no accounting
standards exist in Eastern European countries. Finally, even though certain
Eastern European currencies may be convertible into U.S. dollars, the conversion
rates may be artificial relative to the actual market values and may be
unfavorable to Fund investors.
Certain Eastern European countries, which do not have market economies, are
characterized by an absence of developed legal structures governing private and
foreign investments and private property. Certain countries require governmental
approval prior to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit the investment
of foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals.
Authoritarian governments in certain Eastern European countries may require that
a governmental or quasi-governmental authority act as custodian of the Smaller
Companies Fund's assets invested in this country. To the extent these
governmental or quasi-governmental authorities do not satisfy the requirements
of the 1940 Act to act as foreign custodians of the Smaller Companies Fund's
cash and securities, the Fund's investment in these countries may be limited or
may be required to be effected through intermediaries. The risk of loss through
governmental confiscation may be increased in these countries.
Investing in Russian securities 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. These risks include: (a)
delays in settling portfolio transactions and risk of loss arising out of
Russia's unique system of share registration and custody; (b) the risk that it
may be impossible or more difficult than in other countries to obtain and/or
enforce a judgment; (c) pervasiveness of corruption and crime in the Russian
economic system; (d) currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation (including the risk
of social unrest associated with periods of hyperinflation or other factors);
(f) controls on foreign investment and local practices disfavoring foreign
investors and limitations on repatriation of invested capital, profits and
dividends, and on the Smaller Companies Fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the Russian government or other
executive or legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies to the
detriment of investors, including non-market oriented policies such as the
support of certain industries at the expense of other sectors or investors, or a
return to the centrally planned economy that existed prior to the dissolution of
the Soviet Union; (h) the financial condition of Russian companies, including
large amounts of inter-company debt that may create a payments crisis on a
national scale; (i) dependency on exports and the corresponding importance of
international trade; (j) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and
(k) possible difficulty in identifying a purchaser of securities held by the
Smaller Companies Fund due to the underdeveloped nature of the securities
markets.
There is little historical data on Russian securities markets because they are
relatively new and a substantial proportion of securities transactions in Russia
are privately negotiated outside of stock exchanges. Because of the recent
formation of the securities markets, as well as the underdeveloped state of the
banking and telecommunications systems, settlement, clearing and registration of
securities transactions are subject to significant risks. Ownership of shares
(except where shares are held through depositaries that meet the requirements of
the 1940 Act) is defined according to entries in the company's share register
and normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for shareholders
and these services are carried out by the companies themselves or by registrars
located throughout Russia. These registrars are not necessarily subject to
effective state supervision and it is possible for the Fund to lose its
registration through fraud, negligence or even mere oversight. While a Fund will
endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive a Fund of
its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 1,000 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can buy and sell the company's
shares by illegally instructing the registrar to refuse to record transactions
in the share register. This practice may prevent a Fund from investing in the
securities of certain Russian issuers deemed suitable by the Managers. Further,
this could cause a delay in the sale of Russian securities by a Fund if a
potential purchaser is deemed unsuitable, which may expose that Fund to
potential loss on the investment.
FORWARD TRANSACTIONS. While the Fund will enter into forward contracts to reduce
currency exchange rate risks, transactions in these contracts involve certain
other risks. Thus, while the Fund may benefit from these transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Fund than if it had not engaged in any these transactions.
Moreover, there may be imperfect correlation between the Fund's portfolio
holdings of securities denominated in a particular currency and forward
contracts entered into by the Fund. This imperfect correlation may cause a Fund
to sustain losses that will prevent the Fund from achieving a complete hedge or
expose the Fund to risk of foreign exchange loss.
OPTIONS AND FUTURES. The Fund bears the risk that the prices of the securities
being hedged will not move in the same amount as the hedging instrument. It is
also possible that there may be a negative correlation between the index,
securities or currencies underlying the hedging instrument and the hedged
securities that would result in a loss on both these securities and the hedging
instrument. In addition, it is not possible to hedge fully or perfectly against
currency fluctuations affecting the value of securities denominated in foreign
currencies because the value of these securities is also likely to fluctuate as
a result of independent factors not related to currency fluctuations. Therefore,
perfect correlation between the Fund's futures positions and portfolio positions
will be impossible to achieve. Accordingly, successful use by the Fund of
options on stock indices, financial and currency futures contracts and related
options, and currency options will be subject to the Fund's Managers ability to
predict correctly movements in the direction of the securities and currency
markets generally or of a particular segment. If the Fund's Managers are not
successful in employing these instruments in managing the Fund's investments,
the Fund's performance will be worse than if it did not employ these strategies.
In addition, the Fund will pay commissions and other costs in connection with
these investments, that may increase the Fund's expenses and reduce the return.
In writing options on futures, the Fund's loss is potentially unlimited and may
exceed the amount of the premium received.
Positions in stock index options, stock index futures contracts, financial
futures contracts, foreign currency futures contracts, related options on
futures and options on currencies 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 option, futures contract or option thereon
at any specific time. Thus, it may not be possible to close such an option or
futures position. The inability to close options or futures positions could have
an adverse impact on the Fund's ability to effectively hedge its securities or
foreign currency exposure. The Fund will enter into options or futures positions
only if its Sub-advisor believes that a liquid secondary market for these
options or futures contracts exist.
In the case of OTC options on securities there can be no assurance that a
continuous liquid secondary market will exist for any particular OTC option at
any specific time. Consequently, the Fund may be able to realize the value of an
OTC option it has purchased only by exercising it or entering into a closing
sale transaction with the dealer that issued it. Similarly, when the Fund writes
an OTC option, it generally can close out that option prior to its expiration
only by entering into a closing purchase transaction with the dealer to which
the Fund originally wrote it. If the Fund, on a covered call option, cannot
effect a closing transaction, it cannot sell the underlying security until the
option expires or the option is exercised. Therefore, when the Fund writes an
OTC call option, it may not be able to sell the underlying security even though
it might otherwise be advantageous to do so. Likewise, the Fund may be unable to
sell the securities it has pledged to secure OTC put options while it is
obligated as a put writer. Similarly, when a Fund is a buyer of a put or call
option, the Fund might find it difficult to terminate its position on a timely
basis in the absence of a secondary market. The ability to terminate OTC options
is more limited than with exchange traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Fund will treat purchased OTC options and all assets used to cover written OTC
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to a formula approved by the staff
of the SEC.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
HIGH YIELDING, FIXED-INCOME SECURITIES. The Smaller Companies Fund may invest up
to 5% of its assets in fixed income securities that are below investment grade
or are unrated but deemed to be of equivalent quality. Because of the Smaller
Companies Fund's policy of investing in higher yielding, higher risk securities,
an investment in the Smaller Companies Fund is accompanied by a higher degree of
risk than is present with an investment in higher rated, lower yielding
securities. Accordingly, an investment in the Smaller Companies 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. If
you are on a fixed income or retired, you should also consider the increased
risk of loss to principal that is present with an investment in higher risk
securities such as those in that the Smaller Companies Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, that react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be more sensitive
to economic conditions than higher rated securities. These lower rated
fixed-income securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even securities rated triple B by S&P or Moody's, ratings that are
considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of these issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, these issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because the securities are generally unsecured and are often
subordinated to other creditors of the issuer. Current prices for defaulted
bonds are generally significantly lower than their purchase price, and the
Smaller Companies Fund may have unrealized losses on defaulted securities that
are reflected in the price of the Smaller Companies Fund's shares. In general,
securities that default lose much of their value in the time period before the
actual default so that the Smaller Companies Fund's net assets are impacted
prior to the default. The Smaller Companies Fund may retain an issue that has
defaulted because the issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
that permit an issuer to call or repurchase the securities from the Smaller
Companies Fund. Although these securities are typically not callable for a
period from three to five years after their issuance, if a call were exercised
by the issuer during periods of declining interest rates, the Manager may find
it necessary to replace the securities with lower yielding securities, that
could result in less net investment income to the Smaller Companies Fund. The
premature disposition of a high yielding security due to a call or buy-back
feature, the deterioration of the issuer's creditworthiness, or a default may
also make it more difficult for the Smaller Companies Fund to manage the timing
of its receipt of income, that may have tax implications. The Smaller Companies
Fund may be required under the Code and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute the
income to the Smaller Companies Fund's shareholders even though the Smaller
Companies Fund is not currently receiving interest or principal payments on
these obligations. In order to generate cash to satisfy any or all of these
distribution requirements, the Smaller Companies Fund may be required to dispose
of portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares.
The Smaller Companies Fund may have difficulty disposing of certain high
yielding securities because there may be a thin trading market for a particular
security at any given time. The market for lower rated, fixed-income securities
generally tends to be concentrated among a smaller number of dealers than is the
case for securities that trade in a broader secondary retail market. Generally,
buyers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Smaller Companies Fund's ability to dispose of particular issues, when
necessary, to meet the Smaller Companies Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness of
the issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the Smaller Companies Fund to obtain market
quotations based on actual trades for purposes of valuing the Smaller Companies
Fund's portfolio. Current values for these high yield issues are obtained from
pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. See "How are Fund Shares Valued?" in this SAI
and in the Fund's Prospectus.
The Smaller Companies Fund is authorized to acquire high yielding, fixed-income
securities that are sold without registration under the federal securities laws
and therefore carry restrictions on resale. While many high yielding securities
have been sold with registration rights, covenants and penalty provisions for
delayed registration, if the Smaller Companies Fund is required to sell
restricted securities before the securities have been registered, it may be
deemed an underwriter of the securities under the 1933 Act, which entails
special responsibilities and liabilities. The Smaller Companies Fund may incur
special costs in disposing of restricted securities; however, the Fund will
generally incur no costs when the issuer is responsible for registering the
securities.
The Smaller Companies Fund may acquire high yielding, fixed-income securities
during an initial underwriting. These securities involve special risks because
they are new issues. The Managers will carefully review their credit and other
characteristics. The Smaller Companies Fund has no arrangement with its
underwriter or any other person concerning the acquisition of these securities.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yielding securities and adversely affected the
value of outstanding securities and the ability of issuers of these securities
to meet their obligations. Although the economy has improved considerably and
high yielding securities have performed more consistently since that time, there
is no assurance that the adverse effects previously experienced will not
reoccur. For example, the highly publicized defaults of some high yield issuers
during 1989 and 1990 and concerns regarding a sluggish economy that continued
into 1993, depressed the prices for many of these securities. While market
prices may be temporarily depressed due to these factors, the ultimate price of
any security will generally reflect the true operating results of the issuer.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Smaller Companies Fund's Net Asset Value. In addition, the
Smaller Companies Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. The Smaller Companies Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the Manager will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. 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, with respect to 75% of its total assets, the Fund would (a) have
invested more than 5% of the value of its total assets in the securities of the
issuer, or (b) hold more than 10% of any or all classes of the outstanding
voting securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of either Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan;
3. Borrow money, except for temporary or emergency (but not investment)
purposes from banks and only in an amount up to 10% of the value of the assets.
While borrowings exceed 5% of a Fund's total assets, it will not make any
additional investments;
4. Invest more than 25% of the Fund's assets (at the time of the
most recent investment) in any single industry;
5. Underwrite securities of other issuers, except insofar as a
Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio
securities;
6. Purchase illiquid securities, including illiquid securities which, at the
time of acquisition, could be disposed of publicly by each Fund only after
registration under the 1933 Act, if as a result more than 10% of their net
assets would be invested in such illiquid securities;
7. Invest in securities for the purpose of exercising management
or control of the issuer;
8. Maintain a margin account with a securities dealer, except that either Fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities, nor invest in commodities or commodities
contracts or interests (other than publicly-traded equity securities) or leases
with respect to any oil, gas or other mineral exploration or development
programs, except that either Fund may enter into contracts for hedging purposes
and make margin deposits in connection therewith;
9. Effect short sales, unless at the time the Fund owns
securities equivalent in kind and amount to those sold;
10. Invest more than 5% of total assets in companies which have a
record of less than three years continuous operation, including
the operations of any predecessor companies;
11. Invest directly in real estate or real estate limited partnerships (although
either Fund may invest in real estate investment trusts) or in the securities of
other investment companies, except to the extent permitted under the 1940 Act or
pursuant to any exemptions therefrom, including any exemption permitting either
Fund to invest in shares of one or more money market funds managed by Advisers
or its affiliates, or except that securities of another investment company may
be acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition; or
12. Purchase or retain in either Fund's portfolio any security if any officer,
trustee or security holder of the issuer is at the same time an officer, trustee
or employee of the Trust or of its investment advisor and such person owns
beneficially more than 1/2 of 1% of the securities, and if all such persons
owning more than 1/2 of 1% own more than 5% of the outstanding securities of the
issuer.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of the Fund's shareholders) not to
issue senior securities except to the extent that this restriction shall not be
deemed to prohibit the Fund from making any permitted borrowings, pledging,
mortgaging or hypothecating the Fund's assets as security for loans, entering
into repurchase transactions, engaging in joint and several trading accounts in
securities, except that an order to purchase or sell may be combined with orders
from other persons to obtain lower brokerage commissions and except as the Fund
may participate in a joint repurchase agreement account with other funds in the
Franklin Templeton Funds. The Fund will not buy puts, calls, straddles, spreads
or any combination thereof if by reason thereof the value of its aggregate
investment in such securities will exceed 5% of its total assets.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act, are indicated by an asterisk (*).
POSITIONS AND PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS OFFICES WITH THE DURING THE PAST FIVE
TRUST YEARS
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (64)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 55 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (51)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 60 of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 30 of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; and officer
and/or director, trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin Resources, Inc.
and of 56 of the investment companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 60 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee or managing
general partner, as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications, Inc., MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), Fusion Systems
Corporation (industrial technology), and Source One Mortgage Services
Corporation (information services); and director, trustee or managing general
partner, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds; and formerly held the following positions: Chairman,
Hambrecht and Quist Group; Director, H & Q Healthcare Investors; and President,
National Association of Securities Dealers, Inc.
Kenneth V. Domingues (64)
777 Mariners Island Blvd.R
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (36)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer, director and/or trustee of 60 of the investment companies in the
Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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 Distributors, Inc.; Vice President, Franklin
Advisers, Inc. and officer of 60 of the investment companies in the Franklin
Templeton Group of Funds.
Charles E. Johnson (40)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc. and officer and/or director or trustee, as the case may
be, of 39 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
R. Martin Wiskemann (69)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; Vice President, Treasurer and
Director, ILA Financial Services, Inc. and Arizona Life Insurance Company of
America; and officer and/or director, as the case may be, of 21 of the
investment companies in the Franklin Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are not currently
paid fees. As shown above, some of the nonaffiliated Board members also serve as
directors, trustees or managing general partners of other investment companies
in the Franklin Templeton Group of Funds. They may receive fees from these funds
for their services. The following table provides the total fees paid to
nonaffiliated Board members by other funds in the Franklin Templeton Group of
Funds.
NUMBER OF
TOTAL FEES BOARDS IN THE
RECEIVED FROM FRANKLIN
THE FRANKLIN TEMPLETON GROUP
TEMPLETON OF FUNDS ON
GROUP OF FUNDS* WHICH EACH
NAME SERVES**
Frank H. Abbott, III........$162,420 31
Harris J. Ashton.............327,925 55
S. Joseph Fortunato..........344,745 57
David W. Garbellano..........146,100 30
Frank W.T. LaHaye............143,200 26
Gordon S. Macklin............321,525 52
*For the calendar year ended December 31, 1995.
**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 61 registered investment companies, with approximately
171 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director, trustee or
managing general partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly or indirectly
from the Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.
As of December 2, 1996, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 2,416
shares of the Pacific Fund - Class I and 5,025 shares of the Smaller Companies
Fund- Class I, or less than 1% of each Fund's Class I shares. Many of the Board
members also own shares in other funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers and the Sub-advisor is TICI. Advisers and TICI provides investment
research and portfolio management services, including the selection of
securities for the Fund to buy, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Managers'
activities are subject to the review and supervision of the Board to whom the
Managers render periodic reports of the Fund's investment activities. Advisers
is covered by fidelity insurance on its officers, directors and employees for
the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information Summary of Code of Ethics."
Before January 1, 1993, BZWIM provided sub-advisory services for the Fund. BZWIM
is a subsidiary of Barclays de Zoete Wedd U.S. Holdings, Inc., which is an
indirect, wholly owned subsidiary of Barclays Bank PLC. On that date, TICI
became the Fund's Sub-advisor.
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 1% of the value of the Fund's average
daily net assets up through $100,000,000; 0.90% of the value of each Fund's
average daily net assets over $100,000,000 up through $250,000,000; 0.80% of the
value of each Fund's average daily net assets over $250,000,000 up through
$500,000,000; and 0.75% of the value of the Fund's average daily net assets over
$500,000,000. Each class pays its proportionate share of the management fee.
Under the sub-advisory agreement, TICI receives from Advisers a fee equal to an
annual rate of 0.50% of the value of each Fund's average daily net assets up
through $100,000,000; 0.40% of the value of each Fund's average daily net assets
over $100,000,000 up through $250,000,000; 0.30% of the value of each Fund's
average daily net assets over $250,000,000 up through $500,000,000; and 0.25% of
the value of each Fund's average daily net assets over $500,000,000.
TICI pays all expenses incurred by it through its activities under the
sub-advisory agreement with Advisers, other than the cost of securities
purchased for each Fund and brokerage commissions in connection with these
purchases.
The management fee will be reduced as necessary, to comply with the most
stringent limits on Fund expenses of any state where the Fund offers its shares.
Currently, the most restrictive limitation on a fund's allowable expenses for
each fiscal year, as a percentage of its average net assets, is 2.5% of the
first $30 million in assets, 2% of the next $70 million, and 1.5% of assets over
$100 million. Expense reductions have not been necessary based on state
requirements.
For the fiscal year ended October 31, 1994, management fees, before any advance
waiver, totaled $241,698 for the Pacific Fund. Under an agreement by Advisers to
limit its fees, the Pacific Fund paid management fees of $241,445 for the fiscal
year ended October 31, 1994. For the fiscal years ended October 31, 1995 and
1996, management fees totaling $526,350 and $623,230, respectively, were paid to
Advisers.
For the fiscal year ended October 31, 1994, management fees, before any advance
waiver, totaled $234,022 for the Smaller Companies Fund. Under an agreement by
Advisers to limit its fees, the Smaller Companies Fund paid management fees of
$206,039 for the fiscal year ended October 31, 1994. For the fiscal years ended
October 31, 1995 and 1996, management fees totaling $517,232 and $595,387,
respectively, were paid to Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1997. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 60 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee 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.
The fee is paid by Advisers. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly-owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
CUSTODIANS. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. Bank of America NT & SA, 555 California Street, 4th Floor, San
Francisco, California 94104, acts as custodian for cash received in connection
with the purchase of Fund shares. Citibank Delaware, One Penn's Way, New Castle,
Delaware 19720, acts as custodian in connection with transfer services through
bank automated clearing houses. The custodians do not participate in decisions
relating to the purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended October
31, 1996, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The selection of brokers and dealers to execute transactions in the Fund's
portfolio is made by the Managers, as the case may be, in accordance with
criteria set forth in the management and sub-advisory agreements and any
directions that the Board may give.
When placing a portfolio transaction, the Managers seek to obtain prompt
execution of orders at the most favorable net price. When portfolio transactions
are done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Managers and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of the transactions. These opinions are based on the experience of these
individuals in the securities industry and information available to them about
the level of commissions being paid by other institutional investors of
comparable size. The Managers will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of the Managers, a better price
and execution can otherwise be obtained. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask price.
The amount of commission is not the only factor the Managers consider in the
selection of a broker to execute a trade. If the Managers believe it is in the
Fund's best interest, the Managers may place portfolio transactions with brokers
who provide the types of services described below, even if it means the Fund
will pay a higher commission than if no weight were given to the broker's
furnishing of these services. This will be done only if, in the opinion of the
Managers, the amount of any additional commission is reasonable in relation to
the value of the services. Higher commissions will be paid only when the
brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist its Managers in carrying out their
responsibilities to the Fund, or when it is otherwise in the best interest of
the Fund to do so, whether or not such services may also be useful to the
Managers in advising other clients.
When the Managers believe several brokers are equally able to provide the best
net price and execution, they may decide to execute transactions through brokers
who provide quotations and other services to the Fund, in an amount of total
brokerage as may reasonably be required in light of these services.
Specifically, these services may include providing the quotations necessary to
determine the Fund's Net Asset Value, as well as research, statistical and other
data.
It is not possible to place a dollar value on the special executions or on the
research services received by the Managers from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Managers to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staff 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
Fund's officers are satisfied that the best execution is obtained, consistent
with internal policies the sale of the Fund's shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it may sometimes receive certain fees when the Fund tenders portfolio
securities pursuant to a tender-offer solicitation. As a means of recapturing
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 Advisers 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 the Fund and one or more other investment
companies or clients supervised by Advisers or advised by the Sub-advisor 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 Managers, 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 and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the fiscal years ended October 31, 1994, 1995 and 1996, the Pacific Fund
paid brokerage commissions totaling $176,925, $193,647 and $121,723,
respectively, and the Smaller Companies Fund paid brokerage commissions totaling
$147,306, $48,199 and $132,084, respectively.
As of October 31, 1996, the Funds did not own securities of their regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Funds offer their shares may differ from
federal law. Banks and financial institutions that sell shares of a Fund may be
required by state law to register as Securities Dealers. Financial institutions
or their affiliated brokers may receive an agency transaction fee in the
percentages indicated in the table under "How Do I Buy Shares? - Purchase Price
of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, each Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of each Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities In conformity with local
business practices in Taiwan, Class I shares may be offered with the following
schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds, including Class II shares, acquired more than 90 days before the Letter
is filed, will be counted towards completion of the Letter but will not be
entitled to a retroactive downward adjustment in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter have been completed. If
the Letter is not completed within the 13 month period, there will be an upward
adjustment of the sales charge, depending on the amount actually purchased (less
redemptions) during the period. The upward adjustment does not apply to certain
retirement plans. If you execute a Letter prior to a change in the sales charge
structure of the Fund, you may complete the Letter at the lower of the new sales
charge structure or the sales charge structure in effect at the time the Letter
was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by a Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the first business day of the month in
which a payment is scheduled for payments before February 1997 and on the 25th
day of the month beginning with your February 1997 payment. If the 25th falls on
a weekend or holiday, we will process the redemption on the next business day
for Class I shares and on the prior business day for Class II shares. If the
processing dates are different, the date of the Net Asset Value used to redeem
the shares will also be different for Class I and Class II shares.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. The Franklin Templeton Institutional Services
Department provides specialized services, including
recordkeeping, for institutional investors. The cost of these
services is not borne by the Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee that the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the Exchange, generally 1:00 p.m. Pacific time, each day that the
Exchange is open for trading. As of the date of this SAI, the Fund is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
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 Exchange on each day that the Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or countries, may
not take place on every Exchange business day. Furthermore, trading takes place
in various foreign markets on days that are not business days for the Exchange
and on which the Net Asset Value of each class is not calculated. Thus, the
calculation of the Net Asset Value of each class 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 scheduled close of the Exchange. The value of these securities used in
computing the Net Asset Value of each class 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 scheduled close of the Exchange
that will not be reflected in the computation of the Net Asset Value of each
class. 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 utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders that may be designated as
eligible for this deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the corporate dividends-received deduction will be provided by
the Fund annually in a notice to shareholders mailed shortly after the end of
the Fund's fiscal year.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by the you on December 31 of
the calendar year in which they are declared. The Fund intends as a matter of
policy to declare these dividends, if any, in December and to pay these
dividends in December or January to avoid the imposition of this tax, but does
not guarantee that its distributions will be sufficient to avoid any or all
federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount received, subject to the rules described below. If
the shares are a capital asset in the hands of the shareholder, gain or loss
will be capital gain or loss and will be long-term for federal income tax
purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of the shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Funds and a sales charge which
would otherwise apply to the reinvestment is reduced or eliminated. Any portion
of the sales charge excluded from the tax basis of the shares sold will be added
to the tax basis of the shares acquired in the reinvestment. You should consult
with your tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other Fund shares are purchased (through reinvestment
of dividends or otherwise) within 30 days before or after the redemption. Any
loss disallowed under these rules will be added to the tax basis of the shares
purchased.
The Fund's investment in options (including but not limited to written and
purchased put and call options, options on stock indices, forward conversions,
OTC options, the use of options in spread and straddle transactions, options on
foreign currencies or on futures contracts on foreign currencies, and options on
financial, interest rate and stock index futures contracts), futures and forward
contracts (including but not limited to financial, interest rate and stock index
futures contracts, and forward currency exchange contracts and other currency
hedging devices), and foreign securities and currencies (including the above
options, and forwards and futures contracts on such currencies), and certain
other securities transactions involving actual or deemed short sales, spreads,
straddles or foreign currency gains or losses are subject to many complex and
special tax rules. For example, OTC options on debt securities and equity
options, including options on stock and on narrow-based stock indices, will be
subject to tax under Section 1234 of the Code, generally producing a long-term
or short-term capital gain or loss upon exercise, lapse or closing out of the
option or sale of the underlying stock or security. By contrast, the Fund's
treatment of certain other options, futures and forward contracts entered into
by the Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indices, options on securities indices, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each Section 1256 position held by the
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of the Fund's fiscal year, and all gain or loss
associated with mark-to-market positions at fiscal year end (except certain
foreign currency gain or loss covered by Section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on Section 1256 positions may
require the Fund to recognize taxable income without the corresponding receipt
of cash. In order to generate cash to satisfy the distribution requirements of
the Code, the Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect both the amount, character and timing of income distributed to
shareholders by the Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles (i.e., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").
This requirement may limit the Fund's ability to engage in options, straddles,
hedging transactions and forward or futures contracts because these transactions
are often consummated in less than three months, may require the sale of
portfolio securities held less than three months and may, as in the case of
short sales of portfolio securities, reduce the holding periods of certain
securities within the Fund, resulting in additional short-short income for the
Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause these gains and losses to be
treated as ordinary income and losses rather than capital gains and losses and
may affect the amount and timing of the Fund's income or loss from such
transactions and in turn its distributions to you.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income. Foreign exchange gains, derived by a
Fund with respect to the Fund's business of investing in stock or securities, or
options or futures with respect to stock or securities, constitute qualifying
income for purposes of the 90% limitation.
Gain realized by the Fund from transactions that are deemed to constitute
"conversion transactions" under the Code and which would otherwise produce
capital gain may be recharacterized as ordinary income to the extent that the
gain does not exceed an amount defined by the Code as the "applicable imputed
income amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in this transaction and any one of the
following criteria are met: 1) there is an acquisition of property with a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it would
have the economic characteristics of a loan but would be taxed as capital gain;
or 4) the transaction is specified in Treasury regulations to be promulgated in
the future. The applicable imputed income amount, which represents the deemed
return on the conversion language based upon the time value of money, is
computed using the applicable federal rates, reduced by any prior
recharacterizations under this provision or Section 263(g) of the Code
concerning capitalized carrying costs.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not
directly related to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.
If a Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Fund does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Fund to its U.S.
shareholders. The Fund may also be subject to additional interest charges in
respect of deferred taxes arising from distributions or gains. Any federal
income tax paid by the Fund as a result of its ownership of shares in a PFIC
will not give rise to a deduction or credit to the Fund or to any shareholder. A
PFIC means any foreign corporation if, for the taxable year involved, either (i)
it derives at least 75 percent of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce "passive
income."
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares of stock held by
the Funds in a PFIC would be treated as an excess distribution received by a
Fund in the current year, eliminating the deferral and the related interest
charge. These excess distribution amounts are treated as ordinary income, which
the Fund will be required to distribute to shareholders even though the Fund has
not received any cash to satisfy this distribution requirement. These
regulations would be effective for taxable years ending after promulgation of
the proposed regulations as final regulations.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other income or similar taxes imposed by foreign countries.
If more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible and intends to elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. Pursuant to this election, you will be
required to include in gross income (in addition to taxable dividends actually
received) your pro rata share of the foreign taxes paid by the Fund, and will be
entitled either to deduct (as an itemized deduction) your pro rata share of
foreign income and similar taxes in computing your taxable income or to use it
as a foreign tax credit against your U. S. Federal income tax liability, subject
to limitations. No deduction for foreign taxes may be claimed by you if you do
not itemize deductions, but such a shareholder may be eligible to claim the
foreign tax credit (see below). You will be notified within 60 days after the
close of the Fund's taxable year whether the foreign taxes paid by the Fund will
"pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed your U.S. tax attributable to your foreign source taxable income. For
this purpose, if the pass-through election is made, the source of the Fund's
income flows through to its shareholders. With respect to the Fund, gains from
the sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign
currency-denominated debt securities, receivables and payables, will be treated
as ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income (as defined for
purposes of the foreign tax credit), including the foreign source passive income
passed through by the Fund. You may be unable to claim a credit for the full
amount of your proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in computing alternative minimum taxable
income and the foreign tax credit can be used to offset only 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by the Fund will be treated as U.S. source
income.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering for both classes of the Pacific Fund
and for Class I shares of the Smaller Companies Fund. The underwriting agreement
will continue in effect for successive annual periods if its continuance is
specifically approved at least annually by a vote of the Board or by a vote of
the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
underwriting agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
underwriting agreement terminates automatically in the event of its assignment
and may be terminated by either party on 90-days' written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund 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.
In connection with the offering of the Pacific Fund's shares, aggregate
underwriting commissions for the fiscal years ended October 31, 1994, 1995 and
1996 were $824,060, $255,959 and $412,861 respectively. After allowances to
dealers, Distributors retained $101,327, $28,742 and $46,160 for the respective
years. For the Smaller Companies Fund's shares, aggregate underwriting
commissions for the same fiscal periods were $597,708, $222,274 and $336,526,
respectively. After allowances to dealers, Distributors retained $77,152,
$25,127 and $38,426 for the respective years. Distributors may be entitled to
reimbursement under the Fund's Rule 12b-1 plan for each class, as discussed
below. Except as noted, Distributors received no other compensation from the
Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Each class has adopted a distribution plan or "Rule 12b-1 plan" pursuant to Rule
12b-1 of the 1940 Act, with respect tot he Class I and Class II shares.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the Pacific Fund pays Distributors
up to 0.75% per year of Class II's average daily net assets, payable quarterly,
for distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
Pacific Fund.
Under the Class II plan, the Pacific Fund also pays an additional 0.25% per year
of Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. For both the Class I and Class II plans,
payments to Distributors or others could be for various types of activities,
including (i) payments to broker-dealers who provide certain services of value
to the Fund's Class I and Class II shareholders (sometimes referred to as a
"trail fee"); (ii) reimbursement of expenses relating to selling and servicing
efforts or of organizing and conducting sales seminars; (iii) payments to
employees or agents of the Distributors who engage in or support distribution of
shares; (iv) payments of the costs of preparing, printing and distributing
prospectuses and reports to prospective investors and of printing and
advertising expenses; (v) payments of dealer commissions and wholesaler
compensation in connection with sales of the Fund's Class I and Class II shares
and interest or carrying charges in connection therewith; and (vi) such other
similar services as the Board determines to be reasonably calculated to result
in the sale of Class I and Class II shares.
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.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
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 Fund 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 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 the
management agreement with Advisers or by vote of a majority of the outstanding
shares of each class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The 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 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 October 31, 1996, the total amounts paid by the
Pacific Fund and the Smaller Companies Fund pursuant to the Class I plan were
$107,877 and $106,805, respectively, which were used for payments to
broker-dealers.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the 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 for each class follows. 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.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year
periods, or fractional portion thereof, that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes the maximum front-end sales charge is deducted from the initial $1,000
purchase, and 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 one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, that will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in the Fund. The average
annual total return for the indicated periods ended on October 31, 1996 were as
follows:
AVERAGE ANNUAL TOTAL RETURNS
ONE-YEAR PERIOD SINCE
PERIOD INCEPTION
ENDING (9/20/91 TO
FUND NAME 10/31/96 10/31/96)
- ---------------------------------------------------
PUBLIC OFFERING PRICE
Pacific Fund....... 4.81% 10.19%
Smaller Companies Fund 11.65% 10.84%
NET ASSET VALUE
Pacific Fund....... 11.19% 11.48%
Smaller Companies Fund 18.49% 12.13%
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 the one-, five-, or ten-year periods at the end of the one-, five-,
or ten-year periods (or fractional portion thereof)
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end 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, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods, or fractional portion
thereof. The cumulative total return for Class I for the indicated periods ended
October 31, 1996 was as follows:
CUMULATIVE TOTAL RETURNS
ONE-YEAR PERIOD SINCE
PERIOD INCEPTION
ENDING (9/20/91 TO
FUND NAME 10/31/96 10/31/96)
PUBLIC OFFERING PRICE
Pacific Fund....... 4.81% 64.29%
Smaller Companies Fund 11.65% 69.27%
NET ASSET VALUE
Pacific Fund....... 11.19% 74.31%
Smaller Companies Fund 18.49% 79.59%
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in either Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of each class' 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:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices an unmanaged index
composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and
20 transportation stocks. Comparisons of performance assume reinvestment of
dividends.
c) The New York Stock Exchange composite or component indices an unmanaged index
of all industrial, utilities, transportation, and finance stocks listed on the
Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure 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.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. -
analyzes price, yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) 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.
k) Historical data supplied by the research departments of First
Boston Corporation, the J. P. Morgan companies, Salomon Brothers,
Merrill Lynch, Lehman Brothers and Bloomberg L.P.
l) Standard & Poor's 100 Stock Index - an unmanaged index based on the prices of
100 blue-chip stocks, including 92 industrials, one utility, two transportation
companies, and 5 financial institutions. The S&P 100 Stock Index is a smaller
more flexible index for options trading.
m) 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.
n) Salomon Brothers Broad Bond Index or its component indices The Broad Index
measures yield, price, and total return for Treasury, agency, corporate, and
mortgage bonds.
o) Salomon Brothers World Government Bond Index - measures capitalization and
performance return of foreign bond markets.
p) Lehman Brothers Aggregate Bond Index or its component indices - the Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
q) Yields of other countries' government and corporate bonds as
compared to U.S. government and corporate bonds to illustrate the
potentially higher returns available outside the U.S.
r) Financial Times Actuaries Indices, including the FTA - World Index (and
components thereof), which is based on stocks in the major world equity markets.
s) Morgan Stanley Capital International Indices, including the EAFE Index (and
components thereof), which are based on stocks in major equity markets in
Europe, Australia, and the Far East.
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 a class' performance to the
return on 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 Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $153
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 125 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin
number one in service quality for five of the past eight years.
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a compliance officer and, within 10 days after the
end of each calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust for the fiscal year ended October 31, 1996, including the auditors'
report are incorporated herein by reference. In addition, the representative
computation of Net Asset Value and Offering Price per share are as follows for
the Smaller Companies Fund and the Pacific Fund:
SMALLER COMPANIES FUND
Net Asset Value and redemption price per share ($67,966,635 ~
4,792,931) = $14.18
Maximum Offering Price (100/94.25 of $14.18) = $15.04
PACIFIC FUND
Net Asset Value and redemption price per share ($59,739,843 /
4,120,190) = $14.50
Maximum Offering Price (100/94.25 of $14.50) = $15.38
USEFUL TERMS AND DEFINITIONS
1933 ACT - Securities Act of 1933, as amended
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
BZWIM - Barclays de Zoete Wedd Investment Management Inc.
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The Pacific Fund offers three classes of shares,
designated "Class I," "Class II" and "Class Z" and the Smaller Companies Fund
offers two classes of shares designated "Class I" and "Class Z." The classes
have proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge structures and Rule 12b-1 plans, if any.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter
EXCHANGE - New York Stock Exchange
FRANKLIN FUNDS - The mutual funds in the Franklin Group of FundsAE
except Franklin Valuemark Funds and the Franklin Government
Securities Trust
FRANKLIN TEMPLETON FUNDS - The Franklin Funds and the Templeton
Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered
investment companies in the Franklin Group of FundsAE and the
Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's
administrator.
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGERS - Franklin Advisers, Inc., the Fund's investment
manager, and Templeton Investment Counsel, Inc., the Fund's
Sub-advisor
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - 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.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 5.75% for the Funds for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund dated January 1, 1997 and as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SUB-ADVISOR - Templeton Investment Counsel, Inc., the Fund's
sub-advisor
TEMPLETON FUNDS - The U.S. registered mutual funds in the
Templeton Group of Funds except Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE AND FOREIGN GOVERNMENT BOND RATINGS
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears
Franklin Templeton International Trust
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1997
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?........................
What are the Fund's Potential Risks?.........................
Investment Restrictions......................................
Officers and Trustees........................................
Investment Management and Other Services.....................
How does the Fund Buy Securities for its Portfolio?........
How Do I Buy, Sell and Exchange Shares?......................
How are Fund Shares Valued?..................................
Additional Information on Distributions and Taxes............
The Fund's Underwriter.......................................
How does the Fund Measure Performance?.......................
Miscellaneous Information....................................
Financial Statements.........................................
Useful Terms and Definitions.................................
Appendix
Description of Ratings...................................
- -------------------------------------------------------------
When reading this SAI, you will see certain terms
beginning with capital letters. This means the term is
explained under "Useful Terms and Definitions."
- -------------------------------------------------------------
The Templeton Foreign Smaller Companies Fund (the "Smaller
Companies Fund") and the Templeton Pacific Growth Fund (the
"Pacific Fund") are diversified series' of the Franklin Templeton
International Trust (the "Trust"), an open-end management
investment company. This SAI relates to the Class Z shares of the
Fund. The investment objective of each Fund is to seek long-term
growth of capital. The Smaller Companies Fund seeks to achieve
its objective by investing primarily in equity securities of
smaller companies outside the U.S., including developing markets.
The Pacific Fund seeks to achieve its objective by investing
primarily in equity securities that trade on markets in the
Pacific Rim and are issued by companies (i) domiciled in the
Pacific Rim or (ii) that derive at least 50% of their revenues or
pre-tax income from activities in the Pacific Rim. References to
the "Fund" in this SAI refer to each fund individually, unless
the context indicates otherwise.
Class Z shares are only available for purchase by certain
persons, including, among others, certain financial institutions
(such as banks, trust companies, savings institutions and credit
unions); government and tax-exempt entities; pension, profit
sharing and employee benefit plans; certain qualified groups,
including family trusts, endowments, foundations and
corporations; Franklin Templeton Fund Allocator Series; and
directors, trustees, officers and full time employees (and their
family members) of Franklin Templeton Group and the Franklin
Templeton Group of Funds.
The Fund's Class Z Prospectus dated January 1, 1997, as may be
amended from time to time, contains the basic information you
should know before investing in the Fund. For a free copy, call
1-800/DIAL BEN or write the Fund at the address shown.
This SAI is not a prospectus. It contains information in addition
to and in more detail than set forth in the Prospectus. This SAI
is intended to provide you with additional information regarding
the activities and operations of the Fund, and should be read in
conjunction with the Prospectus.
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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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How does the Fund Invest its Assets?
The following provides more detailed information about some of
the securities the Fund may buy and its investment policies. You
should read it together with the section in the Prospectus
entitled "How does the Fund Invest its Assets?"
Foreign Investments. The Fund invests in securities of foreign
issuers. Investing in the securities of foreign issuers involves
certain special considerations, that are not typically associated
with investing in U.S. issuers. Since investments in the
securities of foreign issuers may involve currencies of foreign
countries, and since the Fund may temporarily hold funds in bank
deposits in foreign currencies during completion of investment
programs, the Fund may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations and
may incur costs in connection with conversions between various
currencies.
As noted in the Fund's prospectus, on occasion the Fund may
invest more than 25% of its assets in the securities of issuers
in one industrialized country that, in the view of the
Sub-advisor, poses no unique investment risk. Consistent with
this policy, the Fund may invest up to 30% of its assets in
securities issued by Hong Kong companies. However, the Fund will
not invest more than 25% of its assets in any one industry or
securities issued by any foreign government.
Currency Transactions. In order to hedge against currency
exchange rate risks, the Fund may enter into forward currency
exchange contracts ("forward contracts") and currency futures
contracts and options on these futures contracts, as well as buy
put or call options and write ("sell") covered put and call
options on currencies traded in U.S. or foreign markets.
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).
The Fund 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 Fund's
Managers determine that there is a pattern of correlation between
the two currencies. The Fund may also buy and sell forward
contracts (to the extent they are not deemed "commodities") for
non-hedging purposes when the Managers anticipate that the
foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio.
The Fund's custodian bank will place cash or liquid high grade
debt securities (securities rated in one of the top three ratings
categories by Moody's or S&P or, if unrated, but deemed by the
Managers to be of comparable quality) into a segregated account
of the Fund maintained by its custodian bank in an amount equal
to the value of the Fund's total assets committed to the forward
foreign currency exchange contracts requiring the Fund to
purchase foreign currencies. If the value of the securities
placed in the segregated account declines, additional cash or
securities is placed in the account on a daily basis so that the
value of the account equals the amount of the Fund's commitments
with respect to such contracts. The segregated account is
marked-to-market on a daily basis. Although the contracts are not
presently regulated by the Commodity Futures Trading Commission
(the "CFTC"), the CFTC may in the future assert authority to
regulate these contracts. In such event, the Fund's ability to
utilize forward foreign currency exchange contracts may be
restricted.
The Fund, generally will not enter into a forward contract with a
term of greater than one year.
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. The Fund may
enter into currency futures contracts traded on regulated
commodity exchanges, including non-U.S. exchanges.
The Fund may either accept or make delivery of the currency
specified at the maturity of a forward or futures contract or,
prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. Closing transactions
with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.
The Fund may enter into forward currency exchange contracts and
currency futures contracts in several circumstances. For example,
when the Fund enters into a contract for the purchase or sale of
a security denominated in a foreign currency (or options
contracts with respect to such futures contracts), or when the
Fund anticipates the receipt in a foreign currency of dividends
or interest payments on such a security that it holds, it may
desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as
the case may be. In addition, when the Sub-advisor believes that
the currency of a particular country may suffer a substantial
decline against the U.S. dollar, it may enter into a forward or
futures contract to sell, for a fixed amount of U.S. dollars, the
amount of that currency approximating the value of some or all of
the Fund's portfolio securities denominated in that currency. The
precise matching of the forward contract amounts and the value of
the securities involved is not generally possible because the
future value of these securities in foreign currencies changes as
a consequence of market movements in the value of those
securities between the date on which the contract is entered into
and the date it matures. Using forward contracts to protect the
value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate
of exchange that the Fund can achieve at some future point in
time. The precise projection of short-term currency market
movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Fund's
foreign assets.
The Fund may write covered put and call options and buy put and
call options on foreign currencies for the purpose of protecting
against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be
acquired. The Fund may use options on currency to cross-hedge,
which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency
with a pattern of correlation. In addition, the Fund may buy call
options on currency for non-hedging purposes when Advisers or the
Sub-advisor anticipates that the currency will appreciate in
value, but the securities denominated in that currency do not
present attractive investment opportunities and are not included
in the Fund's portfolio.
A call option written by a Fund obligates the Fund to sell
specified currency to the holder of the option at a specified
price at any time before the expiration date. A put option
written by the Fund would obligate the Fund to buy specified
currency from the option holder at a specified time before the
expiration date. The writing of currency options involves risk
that the Fund will, upon exercise of the option, be required to
sell currency subject to a call at a price that is less than the
currency's market value or be required to buy currency subject to
a put at a price that exceeds the currency's market value.
The Fund may terminate its obligations under a call or put option
by buying an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." A
Fund would also be able to enter into closing sale transactions
in order to realize gains or minimize losses on options bought by
the Fund.
The Fund would normally buy call options in anticipation of an
increase in the dollar value of the currency in which securities
to be acquired by the Fund are denominated. The purchase of a
call option would entitle the Fund, in return for the premium
paid, to purchase specified currency at a specified price during
the option period. The Fund would ordinarily realize a gain if,
during the option period, the value of such currency exceeded the
sum of the exercise price, the premium paid and transaction
costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option. A Fund may forfeit the entire
amount of the premium plus related transaction costs if exchange
rates move in a manner adverse to the Fund's position.
The Fund would normally buy put options in anticipation of a
decline in the dollar value of currency in which securities in
its portfolio are denominated ("protective puts"). Buying a put
option would entitle the Fund, in exchange for the premium paid,
to sell specific currency at a specified price during the option
period. Buying protective puts is designed merely to offset or
hedge against a decline in the dollar value of the Fund's
portfolio securities due to currency exchange rate fluctuations.
The Fund would ordinarily realize a gain if, during the option
period, the value of the underlying currency decreased below the
exercise price sufficiently to more than cover the premium and
transaction costs; otherwise, the Fund would realize either no
gain or a loss on the purchase of the put option. The Fund will
buy and sell foreign currency options traded on U.S. or foreign
exchanges or over-the-counter.
The Fund will not enter into forward currency exchange contracts
or currency futures contracts or buy or write such options or
maintain a net exposure to such contracts where the completion of
the contracts would obligate the Fund to deliver an amount of
currency other than U.S. dollars in excess of the value of the
Fund's portfolio securities or other assets denominated in that
currency or, in the case of cross-hedging, in a currency closely
correlated to that currency.
Options on Securities and Securities Indices
Writing Call and Put Options on Securities. The Fund may write
options to generate additional income and to hedge its investment
portfolio against anticipated adverse market and/or exchange rate
movements. The Fund may write covered call and put options on any
securities in which it may invest. The Fund may buy and write
these options on securities that are listed on domestic or
foreign securities exchanges or traded in the over-the-counter
market. Call options written by the Fund give the holder the
right to buy the underlying securities from the Fund at a stated
exercise price. Put options written by the Fund give the holder
the right to sell the underlying security to the Fund at a stated
exercise price. All options written by the Fund will be
"covered." The purpose of writing covered call options is to
realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call
options for additional income, the Fund may forego the
opportunity to profit from an increase in the market price of the
underlying security.
A call option written by the Fund is covered if the Fund owns the
underlying security covered by the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a
segregated account by its custodian bank) upon conversion or
exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and
in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the
exercise price of the call written or (ii) is greater than the
exercise price of the call written if the difference is
maintained by the Fund in cash and high-grade debt securities in a
segregated account with its custodian bank.
A put option written by the Fund is "covered" if the Fund
maintains cash and high-grade debt securities with a value equal
to the exercise price in a segregated account with its custodian
bank, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of
the put written. The premium paid by the buyer of an option will
reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand,
and interest rates.
The writer of an option that wishes to terminate its obligation
may effect a closing purchase transaction. A writer may not
effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, an investor who is the holder of
an option may liquidate its position by effecting a closing sale
transaction. This is accomplished by selling an option of the
same series as the option previously purchased.
The Fund will realize a profit from a closing transaction if the
price of the transaction is less than the premium received from
writing the option or is more than the premium paid to buy the
option; the Fund will realize a loss from a closing transaction
if the price of the transaction is more than the premium received
from writing the option or is less than the premium paid to buy
the option. Because increases in the market price of a call
option will generally reflect increases in the market price of
the underlying security, any loss resulting from the repurchase
of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund. There
is no guarantee that either a closing purchase or a closing sale
transaction can be effected when a Fund so desires. The purpose
of writing covered call options is to realize greater income than
would be realized on portfolio securities transactions alone.
However, in writing covered call options for additional income, a
Fund may forego the opportunity to profit from an increase in the
market price of the underlying security.
Buying Put Options. The Fund may buy put options on securities in
order to protect against a decline in the market value of the
underlying security below the exercise price less the premium
paid for the option. A put option gives the holder the right to
sell the underlying security at the option exercise price at any
time during the option period. The ability to buy put options
will allow the Fund to protect the unrealized gain in an
appreciated security in its portfolio without actually selling
the security. In addition, the Fund will continue to receive
interest or dividend income on the security. The Fund may sell a
put option that it has previously purchased prior to the sale of
the securities underlying that option. These sales will result in
a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction
costs paid for the put option that is sold. This gain or loss may
be wholly or partially offset by a change in the value of the
underlying security that the Fund owns or has the right to
acquire.
Buying Call Options. The Fund may buy call options on securities
that it intends to buy in order to limit the risk of a
substantial increase in the market price of this security. The
Fund may also buy call options on securities held in its
portfolio and on which it has written call options. A call option
gives the holder the right to buy the underlying securities from
the option writer at a stated exercise price. Prior to its
expiration, a call option may be sold in a closing sale
transaction. Profit or loss from such a sale will depend on
whether the amount received is more or less than the premium paid
for the call option plus the related transaction costs.
Options on Stock Indices. The Fund may buy and write 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 Fund. Call and put options on stock indices are
similar to options on securities except that, rather than the
right to buy or sell particular securities at a specified price,
options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing
level of the underlying stock index is greater than (or less
than, in the case of puts) the exercise price of the option. This
amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus,
unlike options on individual securities, all settlements are in
cash, and gain or loss depends on price movements in the stock
market generally (or in a particular industry or segment of the
market) rather than price movements in individual securities.
All options written on stock indices must be covered. When the
Fund writes an option on a stock index, it will establish a
segregated account containing cash or high quality, fixed-income
securities with its custodian bank in an amount at least equal to
the market value of the option and will maintain the account
while the option is open or will otherwise cover the transaction.
Over-the-counter Options on Securities ("OTC options"). The Fund
may write covered put and call options and buy put and call
options that trade in the over-the-counter market to the same
extent that it 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, as is the
case with exchange traded options, with a clearing corporation.
Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done by reference to
information from market makers. However, OTC options are
available for a greater variety of securities and in a wider
range of expiration dates and exercise prices than exchange
traded options; and the writer of an OTC option is paid the
premium in advance by the dealer.
There can be no assurance that a continuous, liquid secondary
market will exist for any particular option at any specific time.
Consequently, the Fund may be able to realize the value of an OTC
option it has purchased only by exercising it or entering into a
closing sale transaction with the dealer that issued the option.
Similarly, when the Fund writes an OTC option, it generally can
close out that option prior to its expiration only by entering
into a closing purchase transaction with the dealer to whom the
Fund originally wrote the option.
The Fund understands the current position of the staff of the SEC
to be that purchased OTC options and the assets used as "cover"
for written OTC options are illiquid securities. The Fund and
their Managers disagree with this position. Nevertheless, pending
a change in the staff's position, the Funds will treat OTC
options as subject to each Fund's limitation on illiquid
securities. Please see "Illiquid Investments" below.
The writer of an option may have no control over when the
underlying securities must be sold, in the case of a call option,
or purchased, in the case of a put option, since, with regard to
certain options, the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or
not an option expires unexercised, the writer retains the amount
of the premium. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale
of the underlying security. If a put option is exercised, the
writer must fulfill its obligation to buy the underlying security
at the exercise price, which will usually exceed the then market
value of the underlying security.
Forward Conversions. In a forward conversion, the Fund will buy
securities and write call options and buy put options on these
securities. All options written by the Fund will be covered. By
buying puts, the Fund protects the underlying security from
depreciation in value. By selling or writing calls on the same
security, the Fund receives premiums that 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. The Fund will not exercise a put it has purchased while
a call option on the same security is outstanding. The use of
options in connection with forward conversions is intended to
hedge against fluctuations in the market value of the underlying
security. Although it is generally intended in forward conversion
transactions that the exercise price of put and call options
would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore,
the Fund's return may depend in part on movements in the price of
the underlying security because of the different exercise prices
of the call and put options. These price movements may also
affect a Fund's total return if the conversion is terminated
prior to the expiration date of the options. In this event, the
Fund's return may be greater or less than it would otherwise have
been if it had hedged the security only by buying put options.
Spread and Straddle Transactions. The Fund may engage in "spread"
transactions in which it buys and writes a put or call option on
the same underlying security, with the options having different
exercise prices and/or expiration dates. All options written by
the Fund will be covered. The Fund may also engage in so-called
"straddles," in which it buys or writes combinations of put and
call options on the same security. Because buying options in
connection with these transactions may, under certain
circumstances, involve a limited degree of investment leverage,
the Fund will not enter into any spreads or straddles if, as a
result, more than 5% of its net assets will be invested at any
time in these options transactions. The Fund's ability to engage
in spread or straddle transactions may be further limited by
state securities laws.
Futures Transactions
The Fund may buy or sell (i) financial futures contracts such as
interest rate futures contracts; (ii) options on interest rate
futures contracts; (iii) stock index futures contracts; and (iv)
options on stock index futures contracts (collectively, "Futures
Transactions") for bona fide hedging purposes. The Fund may enter
into these Futures Transactions on domestic exchanges and, to the
extent these transactions have been approved by the CFTC for sale
to customers in the U.S., on foreign exchanges. The Fund will not
engage in Futures Transactions for speculation but only as a
hedge against changes resulting from market conditions such as
changes in interest rates, currency exchange rates, or securities
that it intends to buy. The Fund will not enter into any Futures
Transactions if, immediately thereafter, more than 20% of the
Fund's net assets would be represented by futures contracts or
options thereon. In addition, the Fund will not engage in any
Futures Transactions if, immediately thereafter, the sum of the
amount of initial margin deposits on the Fund's futures positions
and premiums paid for options on its futures contracts would
exceed 5% of the market value of the Fund's total assets.
To the extent the Fund enters into a futures contract, it will
deposit in a segregated account with its custodian bank, cash or
U.S. Treasury obligations equal to a specified percentage of the
value of the futures contract (the "initial margin"), as required
by the relevant contract market and futures commission merchant.
The futures contract will be marked-to-market daily. Should the
value of the futures contract decline relative to the Fund's
position, the Fund will be required to pay to the futures
commission merchant an amount equal to this change in value.
A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial
instruments for an agreed price during a designated month (or to
deliver the final cash settlement price, in the case of a
contract relating to an index or otherwise not calling for
physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling,
the Fund can seek, through the sale of futures contracts, to
offset a decline in the value of its current portfolio
securities. When rates are falling or prices are rising, the
Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in
the market when it affects anticipated purchases. Similarly, the
Fund can sell futures contracts on a specified currency to
protect against a decline in the value of this currency and its
portfolio securities that are denominated in this currency. The
Fund can buy futures contracts on foreign currency to fix the
price in U.S. dollars of a security denominated in this currency
that the Fund has acquired or expects to acquire.
Although futures contracts by their terms generally call for the
actual delivery or acquisition of underlying 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 this delivery. The contractual obligation is offset
by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in
the same month. Such a transaction, which is effected through a
member of an exchange, cancels the obligation to make or take
delivery of the securities or the cash value of the index
underlying the contractual obligations. The Fund may incur
brokerage fees when it buys or sells futures contracts.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting
transactions that may result in a profit or a loss. While the
Fund's futures contracts on securities or currency will usually
be liquidated in this manner, the Fund may instead make or take
delivery of the underlying securities or currency whenever it
appears economically advantageous for it to do so. A clearing
corporation associated with the exchange on which futures on
securities or currency are traded guarantees that, if still open,
the buying or selling will be performed on the settlement date.
Options on Futures Contracts. The acquisition of put and call
options on futures contracts will give the Fund the right, but
not the obligation, for a specified price, to sell or to buy,
respectively, the underlying futures contract at any time during
the option period. As the purchaser of an option on a futures
contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss
in the event of an unfavorable price movement to the loss of the
premium and transaction costs.
Financial Futures Contracts. Financial futures are contracts that
obligate the holder to take or make delivery of a specified
quantity of a financial instrument, such as a U.S. Treasury
security or foreign currencies, during a specified future period
at a specified price. A "sale" of a financial 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 financial 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. Examples of financial futures contracts include
interest rate futures contracts and stock index futures contracts.
Interest Rate Futures Contracts. Interest rate futures contracts
are futures contracts on debt securities. The value of these
instruments changes in response to changes in the value of the
underlying debt security, that depends primarily on prevailing
interest rates. The Fund may enter into interest rate futures
contracts in order to protect its portfolio securities from
fluctuations in interest rates without necessarily buying or
selling the underlying fixed-income securities. For example, if
the Fund owns bonds, and interest rates are expected to increase,
it might sell futures contracts on debt securities having
characteristics similar to those held in the portfolio. A sale
would have much the same effect as selling an equivalent value of
the bonds owned by the Fund. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but
the value of the futures contracts to the Fund would increase at
approximately the same rate, thereby keeping the net asset value
of the Fund from declining as much as it otherwise would have.
Stock Index Futures Contracts. A stock index futures contract
obligates the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at
which the agreement was made. Open futures contracts are valued
on a daily basis, and the Fund may be obligated to provide or
receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index
is made in the future.
The Fund may sell stock index futures contracts in anticipation
of or during a market decline in an attempt to offset the
decrease in market value of its equity securities that might
otherwise result. When the Fund is not fully invested in stocks
and anticipates a significant market advance, it may buy stock
index futures in order to gain rapid market exposure that may
offset increases in the cost of common stocks that it intends to
buy.
Options on Stock Index Futures Contracts. Call and put options on
stock index futures are similar to options on securities except
that, rather than the right to buy or sell stock at a specified
price, options on a stock index futures contract give the holder
the right to receive cash. Upon exercise of the option, the
delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account that
represents the amount by which the market price of the futures
contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference
between the exercise price of the option and the closing price of
the futures contract on the expiration date.
Hedging Strategies With Futures. Hedging by use of futures
contracts seeks to establish with more certainty, than would
otherwise be possible, the effective price, rate of return or
currency exchange rate on portfolio securities or securities that
a Fund owns or proposes to acquire. The Fund may, for example,
take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in
interest rates or a decline in market prices of foreign currency
rates that would adversely affect the dollar value of the Fund's
portfolio securities. These futures contracts may include
contracts for the future delivery of securities held by the Fund
or securities with characteristics similar to those of the Fund's
portfolio securities. Similarly, the Fund may sell futures
contracts on currency in which its portfolio securities are
denominated or in one currency to hedge against fluctuations in
the value of securities denominated in a different currency if
there is an established historical pattern of correlation between
the two currencies.
If, in the opinion of the Managers, there is a sufficient degree
of correlation between price trends for the Fund's portfolio
securities and futures contracts based on other financial
instruments, securities indices or other indices, the Fund may
also enter into these futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities
in the Fund's portfolio may be more or less volatile than prices
of these futures contracts, the Managers will attempt to estimate
the extent of this difference in volatility based on historical
patterns and to compensate for it by having the Fund enter into a
greater or fewer number of futures contracts or by attempting to
achieve only a partial hedge against price changes affecting the
Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of the portfolio
securities will substantially be offset by appreciation in the
value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio
securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the Fund may take a "long" position by buying
these futures contracts. This would be done, for example, when
the Fund anticipates the subsequent buy of particular securities
when it has the necessary cash, but expects the prices or
currency exchange rates then available in the applicable market
to be less favorable than prices or rates that are currently
available.
The CFTC and U.S. commodities exchanges have established limits
referred to as "speculative position limits" on the maximum net
long or net short position that any person may hold or control in
a particular futures contract. Trading limits are imposed on the
maximum number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Fund does not believe
that these trading and positions limits will have an adverse
impact on their strategies for hedging their securities. The need
to hedge against these risks will depend on the extent of
diversification of a Fund's common stock portfolio and the
sensitivity of these investments to factors influencing the stock
market as a whole.
Other Considerations. The Fund will engage in futures and related
options transactions only for bona fide hedging or other
appropriate risk management purposes in accordance with CFTC
regulations that permit principals of an investment company
registered under the 1940 Act to engage in these transactions
without registering as commodity pool operators. "Appropriate
risk management purposes" means activities in addition to bona
fide hedging that the CFTC deems appropriate for operators of
entities, including registered investment companies, that are
excluded from the definition of commodity pool operator. The Fund
is not permitted to engage in speculative futures trading. The
Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by
the Fund or which it expects to buy.
Except as stated below, the Fund's futures transactions will be
entered into for traditional hedging purposes - that is, futures
contracts will be sold to protect against a decline in the price
of securities it intends to buy (or the currency will be
purchased to protect the Fund against an increase in the price of
the securities (or the currency in which they are denominated)).
As evidence of this hedging intent, the Fund expects that on 75%
or more of the occasions on which it takes a long futures (or
option) position involving the purchase of futures contracts, the
Fund will have bought, or will be in the process of buying,
equivalent amounts of related securities (or assets denominated
in the related currency) in the cash market at the time when the
futures (or option) position is closed out. However, in
particular cases when it is economically advantageous for the
Fund to do so, a long futures position may be terminated (or an
option may expire) without the corresponding purchase of
securities or other assets. In the alternative, a CFTC regulation
permits the Fund to elect to comply with a different test, under
which (i) the Fund's long futures positions will be used as part
of its portfolio management strategy and will be incidental to
its activities in the underlying cash market and (ii) the
aggregate initial margin and premiums required to establish these
positions will not exceed 5% of the liquidation value of the
Fund's investment portfolio (a) after taking into account
unrealized profits and losses on any such contracts into which
the Fund has entered and (b) excluding the in-the-money amount
with respect to any option that is in-the-money at the time of
purchase.
The Fund will engage in transactions in futures contracts and
related options only to the extent these transactions are
consistent with the requirements of the Code for maintaining its
qualification as a regulated investment company for federal
income tax purposes. Please see "How Taxation Affects You and the
Fund" in the Prospectus.
The Fund will not buy or sell futures contracts or buy or sell
related options, except for closing purchase or sale
transactions, if immediately thereafter the sum of the amount of
margin deposits on the Fund's outstanding futures and related
options positions and the amount of premiums paid for outstanding
options on futures would exceed 5% of the market value of the
Fund's total assets. These transactions involve brokerage costs,
require margin deposits and, in the case of contracts and options
obligating the Fund to buy securities or currencies, require the
Fund to segregate assets to cover these contracts and options.
The ordinary spreads between prices in the cash and futures
markets, due to differences in the natures 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 Managers may
still not result in a successful transaction.
Perfect correlation between the Fund's futures positions and
portfolio positions may be difficult to achieve because no
futures contracts based on corporate fixed-income securities are
currently available. In addition, it is not possible to hedge
fully or perfectly against currency fluctuations affecting the
value of securities denominated in foreign currencies because the
value of these securities is likely to fluctuate as a result of
independent factors not related to currency fluctuations.
Other Investment Policies
Convertible Securities. As with a straight fixed-income security,
a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates
rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying
stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because its value can be influenced by
both interest rate and market movements, a convertible security
is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share price as its
underlying stock.
A convertible security is usually issued either by an operating
company or by an investment bank. When issued by an operating
company, a convertible security tends to be senior to common
stock, but subordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an
operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but,
if the parity price of the convertible security is less than the
call price, the operating company may pay out cash instead of
common stock. If the convertible security is issued by an
investment bank, the security is an obligation of and is
convertible through the issuing investment bank. The issuer of a
convertible security may be important in determining the
security's true value. This is because the holder of a convertible
security will have recourse only to the issuer.
While the Fund uses the same criteria to rate a convertible debt
security that it uses to rate a more conventional debt security,
a convertible preferred stock is treated like a preferred stock
for the Fund's financial reporting, credit rating, and investment
limitation purposes. A preferred stock is subordinated to all
debt obligations in the event of insolvency, and an issuer's
failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A
preferred stock generally has no maturity date, so that its
market value is dependent on the issuer's business prospects for
an indefinite period of time. In addition, distributions from
preferred stock are dividends, rather than interest payments, and
are usually treated as such for corporate tax purposes.
The Fund may invest in convertible preferred stocks that offer
enhanced yield features, such as Preferred Equity Redemption
Cumulative Stock ("PERCS"), that provide an investor, such as the
Fund, with the opportunity to earn higher dividend income than is
available on a company's common stock. A PERCS is a preferred
stock that generally features a mandatory conversion date, as
well as a capital appreciation limit that is usually expressed in
terms of a stated price. Most PERCS expire three years from the
date of issue, at that time they are convertible into common
stock of the issuer (PERCS are generally not convertible into
cash at maturity). Under a typical arrangement, if after three
years the issuer's common stock is trading at a price below that
set by the capital appreciation limit, each PERCS would convert
to one share of common stock. If, however, the issuer's common
stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive less
than one full share of common stock. The amount of that
fractional share of common stock received by the PERCS holder is
determined by dividing the price set by the capital appreciation
limit of the PERCS by the market price of the issuer's common
stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However if called early the
issuer must pay a call premium over the market price to the
investor. This call premium declines at a preset rate daily, up
to the maturity date of the PERCS.
The Fund may also invest in other 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 the company, the common stock of which will be
received in the event the convertible preferred stock is
converted; unlike PERCS they do not have a capital appreciation
limit; they seek to provide the investor with high current income
with some prospect of future capital appreciation; they are
typically issued with three 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 whose common stock is to be
acquired in the event the security is converted or by a different
issuer, such as an investment bank. These securities may be
identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but
will be ranked as senior or subordinated debt in the issuer's
corporate structure according to the terms of the debt indenture.
There may be additional types of convertible securities not
specifically referred to herein that may be similar to those
described above in which the Fund may invest, consistent with its
objectives and policies.
An investment in an enhanced convertible security or any other
security may involve additional risks to the Fund. The Fund may
have difficulty disposing of these securities because there may
be a thin trading market for a particular security at any given
time. Reduced liquidity may have an adverse impact on market
price and the Fund's ability to dispose of particular securities,
when necessary, to meet the Fund's liquidity needs or in response
to a specific economic event, such as the deterioration in the
credit worthiness of an issuer. Reduced liquidity in the
secondary market for certain securities may also make it more
difficult for the Fund to obtain market quotations based on
actual trades for purposes of valuing the Fund's portfolio. The
Fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
Repurchase Transactions. The Fund may enter into repurchase
agreements. A repurchase agreement is an agreement in which the
seller of a security agrees to repurchase the security sold at a
mutually agreed upon time and price. Under the 1940 Act, a
repurchase agreement is deemed to be the loan of money by a Fund
to the seller, collateralized by the underlying security. The
resale price is normally in excess of the purchase price,
reflecting an agreed upon interest rate. The interest rate is
effective for the period of time in which the Fund is invested in
the agreement and is not related to the coupon rate on the
underlying security. The period of these repurchase agreements
will usually be short, from overnight to one week, and at no time
will a Fund invest in repurchase agreements for more than one
year. However, the securities that are subject to repurchase
agreements may have maturity dates in excess of one year from the
effective date of the repurchase agreements. The Fund will make
payment for these securities only upon physical delivery or
evidence of book entry transfer to the account of their custodian
bank. The Fund may not enter into a repurchase agreement with
more than seven days duration if, as a result, the market value
of the Fund's net assets, together with investments in other
securities deemed to be not readily marketable, would be invested
in these repurchase agreements in excess of the Fund's policy on
investments in illiquid securities.
Illiquid Investments. Securities that are acquired by the Fund
outside the U.S. and that are publicly traded in the U.S. or on a
foreign securities exchange or in a foreign securities market are
not considered by the Fund to be illiquid assets, so long as the
Fund acquires and holds the securities with the intention of
reselling the securities in the foreign trading market, the Fund
reasonably believes it can readily dispose of the securities for
cash in the U.S. or foreign market, and current market quotations
are readily available. Investments may be in securities of
foreign issuers, whether located in developed or undeveloped
countries. The Board has authorized the Fund to invest in
restricted securities where this investment is consistent with
the Fund's investment objective and has authorized these
securities to be considered liquid to the extent the Managers, as
the case may be, determine that there is a liquid institutional
or other market for these securities, for example, restricted
securities that may be freely transferred among qualified
institutional buyers pursuant to Rule 144A under the 1933 Act and
for which a liquid institutional market has developed. The Board
reviews any determination by the Managers to treat a restricted
security as liquid on a quarterly basis, including the Managers'
assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted
security is properly considered a liquid security, the Managers
and the Board will take into account the following factors: (i)
the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the
number of other potential 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 (the time
needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the
general level of illiquidity in the Fund may be increased if
qualified institutional buyers become uninterested in purchasing
these securities or the market for these securities contracts.
What are the Fund's Potential Risks?
Foreign Securities. Since foreign companies are not subject to
uniform accounting, auditing and financial reporting practices
and requirements comparable to those applicable to U.S.
companies, there may be less publicly available information about
a foreign company than about a U.S. company. Volume and liquidity
in most foreign bond markets are less than in the U.S., and
securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed
commissions on foreign securities exchanges are generally higher
than negotiated commissions on U.S. exchanges, although each Fund
endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers,
dealers and listed companies than in the U.S., thus increasing
the risk of delayed settlements of portfolio transactions or loss
of certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct these
transactions. These delays in settlement could result in
temporary periods when a portion of the assets of the Fund is
uninvested and no return is earned thereon. The inability of each
Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment
opportunities. Losses to the Fund due to subsequent declines in
the value of portfolio securities, or losses arising out of the
Fund's inability to fulfill a contract to sell these securities,
could result in potential liability to the Fund. In addition,
with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political
or social instability, or diplomatic developments that could
affect the Fund's investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably
from the U.S. economy in these respects as growth of gross
national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Investments in foreign securities where delivery takes place
outside the U.S. will have to be made in compliance with any
applicable U.S. and foreign currency restrictions and tax laws
(including laws imposing withholding taxes on any dividend or
interest income) and laws limiting the amount and types of
foreign investments. Changes of governmental administrations or
of economic or monetary policies, in the U.S. or abroad, or
changed circumstances in dealings between nations, or currency
convertibility or exchange rates could result in investment
losses for the Fund. Investments in foreign securities may also
subject the Fund to losses due to nationalization, expropriation
or differing accounting practices and treatments. Moreover, you
should recognize that foreign securities are often traded with
less frequency and volume, and therefore may have greater price
volatility, than is the case with many U.S. securities.
Notwithstanding the fact that the Fund generally intends to
acquire the securities of foreign issuers where there are public
trading markets, investments by the Fund in the securities of
foreign issuers may tend to increase the risks with respect to
the liquidity of a Fund's portfolio and the Fund's ability to
meet a large number of shareholder redemption requests should
there be economic or political turmoil in a country in which a
Fund has a substantial portion of its assets invested or should
relations between the U.S. and foreign countries deteriorate
markedly. Furthermore, the reporting and disclosure requirements
applicable to foreign issuers may differ from those applicable to
domestic issuers, and there may be difficulties in obtaining or
enforcing judgments against foreign issuers.
Brokerage commissions, custodial services, and other costs
relating to investment in foreign countries are generally more
expensive than in the U.S. Foreign securities markets also have
different clearance and settlement procedures, and in certain
markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making
it difficult to conduct these transactions. Delays in settlement
could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due
to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or,
if the Fund has entered into a contract to sell the security, in
possible liability to the purchaser.
Depositary Receipts (such as American Depositary Receipts and
European Depositary Receipts) may not necessarily be denominated
in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the securities
underlying unsponsored depositary receipts are not obligated to
disclose material information in the U.S. and, therefore, there
may be less information available regarding these issuers and
there may not be a correlation between such information and the
market value of the Depositary Receipts. Depositary receipts also
involve the risks of other investments in foreign securities, as
discussed above.
Developing Markets. Investments in companies domiciled in
developing countries may be subject to potentially higher risks
than investments in companies in developed countries. These
risks include (i) less social, political and economic stability;
(ii) the smaller size of the markets for these securities and the
currently low or nonexistent volume of trading, that result in a
lack of liquidity and in greater price volatility; (iii)the lack
of publicly available information, including reports of payments
of dividends or interest on outstanding securities; (iv) certain
national policies that may restrict a Fund's investment
opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (v) foreign
taxation; (vi) the absence of developed structures governing
private or foreign investment or allowing for judicial redress
for injury to private property; (vii) the absence, until recently
in certain Eastern European countries and Russia, of a capital
market structure or market-oriented economy; (viii) the
possibility that recent favorable economic developments in
Eastern Europe and Russia may be slowed or reversed by
unanticipated political or social events in these countries; (ix)
restrictions that may make it difficult or impossible for the
Fund to vote proxies, exercise shareholder rights, pursue legal
remedies, and obtain judgments in foreign courts; (x)the risk of
uninsured loss due to lost, stolen, or counterfeit stock
certificates; and (xi) possible losses through the holding of
securities in domestic and foreign custodial banks and
depositories.
In addition, many countries in which the Fund may invest have
experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the U.S.
economy in these respects as growth of gross domestic product,
rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Repatriation of investment income, capital and proceeds of sales
by foreign investors may require governmental registration and/or
approval in some developing countries. The Fund could be
adversely affected by delays in or a refusal to grant any
required governmental registration or approval for repatriation.
Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers,
exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by
the countries with which they trade.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The
communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in
many cases without adequate compensation, and there can be no
assurance that this expropriation will not occur in the future.
In the event of this expropriation, the Smaller Companies Fund
could lose a substantial portion of any investments it has made
in the affected countries. Further, no accounting standards exist
in Eastern European countries. Finally, even though certain
Eastern European currencies may be convertible into U.S. dollars,
the conversion rates may be artificial relative to the actual
market values and may be unfavorable to Fund investors.
Certain Eastern European countries, which do not have market
economies, are characterized by an absence of developed legal
structures governing private and foreign investments and private
property. Certain countries require governmental approval prior
to investments by foreign persons, or limit the amount of
investment by foreign persons in a particular company, or limit
the investment of foreign persons to only a specific class of
securities of a company that may have less advantageous terms
than securities of the company available for purchase by
nationals.
Authoritarian governments in certain Eastern European countries
may require that a governmental or quasi-governmental authority
act as custodian of the Smaller Companies Fund's assets invested
in this country. To the extent these governmental or
quasi-governmental authorities do not satisfy the requirements of
the 1940 Act to act as foreign custodians of the Smaller
Companies Fund's cash and securities, the Fund's investment in
these countries may be limited or may be required to be effected
through intermediaries. The risk of loss through governmental
confiscation may be increased in these countries.
Investing in Russian securities 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. These risks include: (a) delays in
settling portfolio transactions and risk of loss arising out of
Russia's unique system of share registration and custody; (b) the
risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a judgment; (c) pervasiveness
of corruption and crime in the Russian economic system; (d)
currency exchange rate volatility and the lack of available
currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyperinflation or other factors); (f) controls on foreign
investment and local practices disfavoring foreign investors and
limitations on repatriation of invested capital, profits and
dividends, and on the Smaller Companies Fund's ability to
exchange local currencies for U.S. dollars; (g) the risk that the
Russian government or other executive or legislative bodies may
decide not to continue to support the economic reform programs
implemented since the dissolution of the Soviet Union and could
follow radically different political and/or economic policies to
the detriment of investors, including non-market oriented
policies such as the support of certain industries at the expense
of other sectors or investors, or a return to the centrally
planned economy that existed prior to the dissolution of the
Soviet Union; (h) the financial condition of Russian companies,
including large amounts of inter-company debt that may create a
payments crisis on a national scale; (i) dependency on exports
and the corresponding importance of international trade; (j) the
risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k)
possible difficulty in identifying a purchaser of securities held
by the Smaller Companies Fund due to the underdeveloped nature of
the securities markets.
There is little historical data on Russian securities markets
because they are relatively new and a substantial proportion of
securities transactions in Russia are privately negotiated
outside of stock exchanges. Because of the recent formation of
the securities markets, as well as the underdeveloped state of
the banking and telecommunications systems, settlement, clearing
and registration of securities transactions are subject to
significant risks. Ownership of shares (except where shares are
held through depositories that meet the requirements of the 1940
Act) is defined according to entries in the company's share
register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central
registration system for shareholders and these services are
carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject
to effective state supervision and it is possible for the Fund to
lose its registration through fraud, negligence or even mere
oversight. While a Fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a
custodian or other agent inspecting the share register and by
obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it
is possible that subsequent illegal amendment or other fraudulent
act may deprive a Fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian
regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for a Fund to enforce any
rights it may have against the registrar or issuer of the
securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than
1,000 shareholders is required by law to contract out the
maintenance of its shareholder register to an independent entity
that meets certain criteria, in practice this regulation has not
always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert
considerable influence over who can buy and sell the company's
shares by illegally instructing the registrar to refuse to record
transactions in the share register. This practice may prevent a
Fund from investing in the securities of certain Russian issuers
deemed suitable by the Managers. Further, this could cause a
delay in the sale of Russian securities by a Fund if a potential
purchaser is deemed unsuitable, which may expose that Fund to
potential loss on the investment.
Forward Transactions. While the Fund will enter into forward
contracts to reduce currency exchange rate risks, transactions in
these contracts involve certain other risks. Thus, while the Fund
may benefit from these transactions, unanticipated changes in
currency prices may result in a poorer overall performance for
the Fund than if it had not engaged in any these transactions.
Moreover, there may be imperfect correlation between the Fund's
portfolio holdings of securities denominated in a particular
currency and forward contracts entered into by the Fund. This
imperfect correlation may cause a Fund to sustain losses that
will prevent the Fund from achieving a complete hedge or expose
the Fund to risk of foreign exchange loss.
Options and Futures. The Fund bears the risk that the prices of
the securities being hedged will not move in the same amount as
the hedging instrument. It is also possible that there may be a
negative correlation between the index, securities or currencies
underlying the hedging instrument and the hedged securities that
would result in a loss on both these securities and the hedging
instrument. In addition, it is not possible to hedge fully or
perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of
these securities is also likely to fluctuate as a result of
independent factors not related to currency fluctuations.
Therefore, perfect correlation between the Fund's futures
positions and portfolio positions will be impossible to achieve.
Accordingly, successful use by the Fund of options on stock
indices, financial and currency futures contracts and related
options, and currency options will be subject to the Fund's
advisors' ability to predict correctly movements in the direction
of the securities and currency markets generally or of a
particular segment. If the Fund's advisors are not successful in
employing these instruments in managing the Fund's investments,
the Fund's performance will be worse than if it did not employ
these strategies. In addition, the Fund will pay commissions and
other costs in connection with these investments, that may
increase the Fund's expenses and reduce the return. In writing
options on futures, the Fund's loss is potentially unlimited and
may exceed the amount of the premium received.
In certain cases, the options and futures markets provide
investment or risk management opportunities that are not
available from direct investments in securities. In addition,
some strategies can be performed more effectively and at lower
cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. However, there are
risks involved in these transactions as discussed above.
Positions in stock index options, stock index futures contracts,
financial futures contracts, foreign currency futures contracts,
related options on futures and options on currencies 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 option, futures contract or option
thereon at any specific time. Thus, it may not be possible to
close such an option or futures position. The inability to close
options or futures positions could have an adverse impact on the
Fund's ability to effectively hedge its securities or foreign
currency exposure. The Fund will enter into options or futures
positions only if its Sub-advisor believes that a liquid
secondary market for these options or futures contracts exist.
In the case of OTC options on securities there can be no
assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently,
the Fund may be able to realize the value of an OTC option it has
purchased only by exercising it or entering into a closing sale
transaction with the dealer that issued it. Similarly, when the
Fund writes an OTC option, it generally can close out that option
prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote
it. If the Fund, on a covered call option, cannot effect a
closing transaction, it cannot sell the underlying security until
the option expires or the option is exercised. Therefore, when
the Fund writes an OTC call option, it may not be able to sell
the underlying security even though it might otherwise be
advantageous to do so. Likewise, the Fund may be unable to sell
the securities it has pledged to secure OTC put options while it
is obligated as a put writer. Similarly, when a Fund is a buyer
of a put or call option, the Fund might find it difficult to
terminate its position on a timely basis in the absence of a
secondary market. The ability to terminate OTC options is more
limited than with exchange traded options and may involve the
risk that broker-dealers participating in such transactions will
not fulfill their obligations. Until such time as the staff of
the SEC changes its position, the Fund will treat purchased OTC
options and all assets used to cover written OTC options as
illiquid securities, except that with respect to options written
with primary dealers in U.S. government securities pursuant to an
agreement requiring a closing purchase transaction at a formula
price, the amount of illiquid securities may be calculated with
reference to a formula approved by the staff of the SEC.
Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of
an exchange or the Options Clearing Corporation (the "OCC") may
not at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although
outstanding options on that exchange that had been issued by the
OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
High Yielding, Fixed-Income Securities. The Smaller Companies
Fund may invest up to 5% of its assets in fixed income securities
that are below investment grade or are unrated but deemed to be
of equivalent quality. Because of the Smaller Companies Fund's
policy of investing in higher yielding, higher risk securities,
an investment in the Smaller Companies Fund is accompanied by a
higher degree of risk than is present with an investment in
higher rated, lower yielding securities. Accordingly, an
investment in the Smaller Companies 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. If you are on a fixed income or retired, you should
also consider the increased risk of loss to principal that is
present with an investment in higher risk securities such as
those in that the Smaller Companies Fund invests.
The market value of lower rated, fixed-income securities and
unrated securities of comparable quality, commonly known as junk
bonds, tends to reflect individual developments affecting the
issuer to a greater extent than the market value of higher rated
securities, that react primarily to fluctuations in the general
level of interest rates. Lower rated securities also tend to be
more sensitive to economic conditions than higher rated
securities. These lower rated fixed-income securities are
considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms
of the obligation and will generally involve more credit risk
than securities in the higher rating categories. Even securities
rated triple B by S&P or Moody's, ratings that are considered
investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often
highly leveraged and may not have more traditional methods of
financing available to them. Therefore, the risk associated with
acquiring the securities of these issuers is generally greater
than is the case with higher rated securities. For example,
during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of high yielding
securities may experience financial stress. During these periods,
these issuers may not have sufficient cash flow to meet their
interest payment obligations. The issuer's ability to service its
debt obligations may also be adversely affected by specific
developments affecting the issuer, the issuer's inability to meet
specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the
issuer may be significantly greater for the holders of high
yielding securities because the securities are generally
unsecured and are often subordinated to other creditors of the
issuer. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Smaller
Companies Fund may have unrealized losses on defaulted securities
that are reflected in the price of the Smaller Companies Fund's
shares. In general, securities that default lose much of their
value in the time period before the actual default so that the
Smaller Companies Fund's net assets are impacted prior to the
default. The Smaller Companies Fund may retain an issue that has
defaulted because the issue may present an opportunity for
subsequent price recovery.
High yielding, fixed-income securities frequently have call or
buy-back features that permit an issuer to call or repurchase the
securities from the Smaller Companies Fund. Although these
securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the
issuer during periods of declining interest rates, the Manager
may find it necessary to replace the securities with lower
yielding securities, that could result in less net investment
income to the Smaller Companies Fund. The premature disposition
of a high yielding security due to a call or buy-back feature,
the deterioration of the issuer's creditworthiness, or a default
may also make it more difficult for the Smaller Companies Fund to
manage the timing of its receipt of income, that may have tax
implications. The Smaller Companies Fund may be required under
the Code and U.S. Treasury regulations to accrue income for
income tax purposes on defaulted obligations and to distribute
the income to the Smaller Companies Fund's shareholders even
though the Smaller Companies Fund is not currently receiving
interest or principal payments on these obligations. In order to
generate cash to satisfy any or all of these distribution
requirements, the Smaller Companies Fund may be required to
dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as
the sale of Fund shares.
The Smaller Companies Fund may have difficulty disposing of
certain high yielding securities because there may be a thin
trading market for a particular security at any given time. The
market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the
case for securities that trade in a broader secondary retail
market. Generally, buyers of these securities are predominantly
dealers and other institutional buyers, rather than individuals.
To the extent the secondary trading market for a particular high
yielding, fixed-income security does exist, it is generally not
as liquid as the secondary market for higher rated securities.
Reduced liquidity in the secondary market may have an adverse
impact on market price and the Smaller Companies Fund's ability
to dispose of particular issues, when necessary, to meet the
Smaller Companies Fund's liquidity needs or in response to a
specific economic event, such as a deterioration in the
creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more
difficult for the Smaller Companies Fund to obtain market
quotations based on actual trades for purposes of valuing the
Smaller Companies Fund's portfolio. Current values for these high
yield issues are obtained from pricing services and/or a limited
number of dealers and may be based upon factors other than actual
sales. See "How are Fund Shares Valued?" in this SAI and in the
Fund's Prospectus.
The Smaller Companies Fund is authorized to acquire high
yielding, fixed-income securities that are sold without
registration under the federal securities laws and therefore
carry restrictions on resale. While many high yielding securities
have been sold with registration rights, covenants and penalty
provisions for delayed registration, if the Smaller Companies
Fund is required to sell restricted securities before the
securities have been registered, it may be deemed an underwriter
of the securities under the 1933 Act, which entails special
responsibilities and liabilities. The Smaller Companies Fund may
incur special costs in disposing of restricted securities;
however, the Fund will generally incur no costs when the issuer
is responsible for registering the securities.
The Smaller Companies Fund may acquire high yielding,
fixed-income securities during an initial underwriting. These
securities involve special risks because they are new issues. The
Managers will carefully review their credit and other
characteristics. The Smaller Companies Fund has no arrangement
with its underwriter or any other person concerning the
acquisition of these securities.
The high yield securities market is relatively new and much of
its growth prior to 1990 paralleled a long economic expansion.
The recession that began in 1990 disrupted the market for high
yielding securities and adversely affected the value of
outstanding securities and the ability of issuers of these
securities to meet their obligations. Although the economy has
improved considerably and high yielding securities have performed
more consistently since that time, there is no assurance that the
adverse effects previously experienced will not reoccur. For
example, the highly publicized defaults of some high yield
issuers during 1989 and 1990 and concerns regarding a sluggish
economy that continued into 1993, depressed the prices for many
of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any
security will generally reflect the true operating results of the
issuer. Factors adversely impacting the market value of high
yielding securities will adversely impact the Smaller Companies
Fund's Net Asset Value. In addition, the Smaller Companies Fund
may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or
interest on its portfolio holdings. The Smaller Companies Fund
will rely on the Manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation,
the Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
Investment Restrictions
The Fund has adopted the following restrictions as fundamental
policies. These restrictions may not be changed without the
approval of a majority of the outstanding voting securities of
the Fund. Under the 1940 Act, this means the approval of (i) more
than 50% of the outstanding shares of the Fund or (ii) 67% or
more of the shares of the Fund present at a shareholder meeting
if more than 50% of the outstanding shares of the Fund are
represented at the meeting in person or by proxy, whichever is
less. The Fund may not:
1. 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, with respect to 75%
of its total assets, the Fund would (a) have invested more than
5% of the value of its total assets in the securities of the
issuer, or (b) hold more than 10% of any or all classes of the
outstanding voting securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds,
debentures or similar obligations which are publicly distributed
or of a character usually acquired by institutional investors or
through loans of either Fund's portfolio securities, or to the
extent the entry into a repurchase agreement may be deemed a loan;
3. Borrow money, except for temporary or emergency (but not
investment) purposes from banks and only in an amount up to 10%
of the value of the assets. While borrowings exceed 5% of a
Fund's total assets, it will not make any additional investments;
4. Invest more than 25% of the Fund's assets (at the time of the
most recent investment) in any single industry;
5. Underwrite securities of other issuers, except insofar as a
Fund may be technically deemed an underwriter under the federal
securities laws in connection with the disposition of portfolio
securities;
6. Purchase illiquid securities, including illiquid securities
which, at the time of acquisition, could be disposed of publicly
by each Fund only after registration under the 1933 Act, if as a
result more than 10% of their net assets would be invested in
such illiquid securities;
7. Invest in securities for the purpose of exercising management
or control of the issuer;
8. Maintain a margin account with a securities dealer, except
that either Fund may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of securities,
nor invest in commodities or commodities contracts or interests
(other than publicly-traded equity securities) or leases with
respect to any oil, gas or other mineral exploration or
development programs, except that either Fund may enter into
contracts for hedging purposes and make margin deposits in
connection therewith;
9. Effect short sales, unless at the time the Fund owns
securities equivalent in kind and amount to those sold;
10. Invest more than 5% of total assets in companies which have a
record of less than three years continuous operation, including
the operations of any predecessor companies;
11. Invest directly in real estate or real estate limited
partnerships (although either Fund may invest in real estate
investment trusts) or in the securities of other investment
companies, except to the extent permitted under the 1940 Act or
pursuant to any exemptions therefrom, including any exemption
permitting either Fund to invest in shares of one or more money
market funds managed by Advisers or its affiliates, or except
that securities of another investment company may be acquired
pursuant to a plan of reorganization, merger, consolidation or
acquisition; or
12. Purchase or retain in either Fund's portfolio any security if
any officer, trustee or security holder of the issuer is at the
same time an officer, trustee or employee of the Trust or of its
investment advisor and such person owns beneficially more than
1/2 of 1% of the securities, and if all such persons owning more
than 1/2 of 1% own more than 5% of the outstanding securities of
the issuer.
In addition to these fundamental policies, it is the present
policy of the Fund (which may be changed without the approval of
the Fund's shareholders) not to issue senior securities except to
the extent that this restriction shall not be deemed to prohibit
the Fund from making any permitted borrowings, pledging,
mortgaging or hypothecating the Fund's assets as security for
loans, entering into repurchase transactions, engaging in joint
and several trading accounts in securities, except that an order
to purchase or sell may be combined with orders from other
persons to obtain lower brokerage commissions and except as the
Fund may participate in a joint repurchase agreement account with
other funds in the Franklin Templeton Funds. The Fund will not
buy puts, calls, straddles, spreads or any combination thereof if
by reason thereof the value of its aggregate investment in such
securities will exceed 5% of its total assets.
If a percentage restriction is met at the time of investment, a
later increase or decrease in the percentage due to a change in
value of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
Officers and Trustees
The Board has the responsibility for the overall management of
the Fund, including general supervision and review of its
investment activities. The Board, in turn, elects the officers of
the Fund who are responsible for administering the Fund's
day-to-day operations. The affiliations of the officers and Board
members and their principal occupations for the past five years
are shown below. Members of the Board who are considered
"interested persons" of the Fund under the 1940 Act, are
indicated by an asterisk (*).
Positions and Principal Occupation
Name, Age and Address Offices with the During the Past Five
Trust Years
Frank H. Abbott, III (75)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment
company); and director, trustee or managing general partner, as
the case may be, of 31 of the investment companies in the
Franklin Group of Funds.
Harris J. Ashton (64)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers); Director,
RBC Holdings, Inc. (a bank holding company) and Bar-S Foods; and
director, trustee or managing general partner, as the case may
be, of 55 of the investment companies in the Franklin Templeton
Group of Funds.
*Harmon E. Burns (51)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President, Secretary and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services,
Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee of 60 of the investment companies in the
Franklin Templeton Group of Funds.
S. Joseph Fortunato (64)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director
of General Host Corporation; director, trustee or managing
general partner, as the case may be, of 57 of the investment
companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may
be, of 30 of the investment companies in the Franklin Group of
Funds.
*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman of the
Board and Director, Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and General Host Corporation; and officer
and/or director, trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin Resources, Inc.
and of 56 of the investment companies in the Franklin Templeton
Group of Funds.
*Rupert H. Johnson, Jr. (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Executive Vice President and Director, Franklin Resources, Inc.
and Franklin Templeton Distributors, Inc.; President and
Director, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director, trustee or
managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 60 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (67)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which
are General Partners of Peregrine Ventures and Peregrine Ventures
II (venture capital firms); Chairman of the Board and Director,
Quarterdeck Office Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee or managing general partner,
as the case may be, of 26 of the investment companies in the
Franklin Group of Funds.
Gordon S. Macklin (68)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services);
Director, Fund American Enterprises Holdings, Inc., MCI
Communications, Inc., MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), Fusion Systems Corporation
(industrial technology), and Source One Mortgage Services
Corporation (information services); and director, trustee or
managing general partner, as the case may be, of 52 of the
investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht
and Quist Group; Director, H & Q Healthcare Investors; and
President, National Association of Securities Dealers, Inc.
Kenneth V. Domingues (64)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin
Advisers, Inc., and Franklin Templeton Distributors, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the
investment companies in the Franklin Group of Funds.
Martin L. Flanagan (36)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton Investor Services, Inc.;
officer of most other subsidiaries of Franklin Resources, Inc.;
and officer, director and/or trustee of 60 of the investment
companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48)
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 Distributors,
Inc.; Vice President, Franklin Advisers, Inc. and officer of 60
of the investment companies in the Franklin Templeton Group of
Funds.
Charles E. Johnson (40)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.;
Senior Vice President, Franklin Templeton Distributors, Inc.;
President and Director, Templeton Worldwide, Inc. and Franklin
Institutional Services Corporation; officer and/or director, as
the case may be, of some of the subsidiaries of Franklin
Resources, Inc. and officer and/or director or trustee, as the
case may be, of 39 of the investment companies in the Franklin
Templeton Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 32 of the investment companies
in the Franklin Group of Funds.
R. Martin Wiskemann (69)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President, Portfolio Manager and Director, Franklin
Advisers, Inc.; Senior Vice President, Franklin Management, Inc.;
Vice President, Treasurer and Director, ILA Financial Services,
Inc. and Arizona Life Insurance Company of America; and officer
and/or director, as the case may be, of 21 of the investment
companies in the Franklin Group of Funds.
The table above shows the officers and Board members who are
affiliated with Distributors and Advisers. Nonaffiliated members
of the Board are not currently paid fees. As shown above, some of
the nonaffiliated Board members also serve as directors, trustees
or managing general partners of other investment companies in the
Franklin Templeton Group of Funds. They may receive fees from
these funds for their services. The following table provides the
total fees paid to nonaffiliated Board members by other funds in
the Franklin Templeton Group of Funds.
Number of Boards
in the Franklin
Total Fees Templeton Group
Received from of Funds on
the Franklin Which Each
Templeton Group Serves**
Name of Funds*
Frank H. Abbott, III........$162,420 31
Harris J. Ashton.............327,925 55
S. Joseph Fortunato..........344,745 57
David W. Garbellano..........146,100 30
Frank W.T. LaHaye............143,200 26
Gordon S. Macklin............321,525 52
*For the calendar year ended December 31, 1995.
**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 61 registered investment companies, with approximately
171 U.S. based funds or series.
Nonaffiliated members of the Board are reimbursed for expenses
incurred in connection with attending board meetings, paid pro
rata by each fund in the Franklin Templeton Group of Funds for
which they serve as director, trustee or managing general
partner. No officer or Board member received any other
compensation, including pension or retirement benefits, directly
or indirectly from the Fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or Board members who
are shareholders of Resources may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees
paid to its subsidiaries.
As of December 2, 1996, the officers and Board members, as a
group, owned of record and beneficially the following shares of
the Fund: approximately 2,416 shares of the Pacific Fund - Class
I and 5,025 shares of the Smaller Companies Fund- Class I, or
less than 1% of each Fund's Class I shares. Many of the Board
members also own shares in other funds in the Franklin Templeton
Group of Funds.
Investment Management and Other Services
Investment Manager and Services Provided. The Fund's investment
manager is Advisers and the Sub-advisor is TICI. Advisers and
TICI provides investment research and portfolio management
services, including the selection of securities for the Fund to
buy, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Managers'
activities are subject to the review and supervision of the Board
to whom the Managers render periodic reports of the Fund's
investment activities. Advisers is covered by fidelity insurance
on its officers, directors and employees for the protection of
the Fund.
Advisers and its affiliates act as investment manager to numerous
other investment companies and accounts. Advisers may give advice
and take action with respect to any of the other funds it
manages, or for its own account, that may differ from action
taken by Advisers on behalf of the Fund. Similarly, with respect
to the Fund, Advisers is not obligated to recommend, buy or sell,
or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may
buy or sell for its or their own account or for the accounts of
any other fund. Advisers is not obligated to refrain from
investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers
and other access persons will be made in compliance with the
Fund's Code of Ethics. Please see "Miscellaneous Information -
Summary of Code of Ethics."
Before January 1, 1993, BZWIM provided sub-advisory services for
the Fund. BZWIM is a subsidiary of Barclays de Zoete Wedd U.S.
Holdings, Inc., which is an indirect, wholly owned subsidiary of
Barclays Bank PLC. On that date, TICI became the Fund's
Sub-advisor.
Management Fees. Under its management agreement, the Fund pays
Advisers a management fee equal to an annual rate of 1% of the
value of the Fund's average daily net assets up through
$100,000,000; 0.90% of the value of each Fund's average daily net
assets over $100,000,000 up through $250,000,000; 0.80% of the
value of each Fund's average daily net assets over $250,000,000
up through $500,000,000; and 0.75% of the value of the Fund's
average daily net assets over $500,000,000. Each class pays its
proportionate share of the management fee.
Under the sub-advisory agreement, TICI receives from Advisers a
fee equal to an annual rate of 0.50% of the value of each Fund's
average daily net assets up through $100,000,000; 0.40% of the
value of each Fund's average daily net assets over $100,000,000
up through $250,000,000; 0.30% of the value of each Fund's
average daily net assets over $250,000,000 up through
$500,000,000; and 0.25% of the value of each Fund's average daily
net assets over $500,000,000.
TICI pays all expenses incurred by it through its activities
under the sub-advisory agreement with Advisers, other than the
cost of securities purchased for each Fund and brokerage
commissions in connection with these purchases.
The management fee will be reduced as necessary, to comply with
the most stringent limits on Fund expenses of any state where the
Fund offers its shares. Currently, the most restrictive
limitation on a fund's allowable expenses for each fiscal year,
as a percentage of its average net assets, is 2.5% of the first
$30 million in assets, 2% of the next $70 million, and 1.5% of
assets over $100 million. Expense reductions have not been
necessary based on state requirements.
For the fiscal year ended October 31, 1994, management fees,
before any advance waiver, totaled $241,698 for the Pacific Fund.
Under an agreement by Advisers to limit its fees, the Pacific
Fund paid management fees of $241,445 for the fiscal year ended
October 31, 1994. For the fiscal years ended October 31, 1995 and
1996, management fees totaling $526,350 and $623,230,
respectively, were paid to Advisers.
For the fiscal year ended October 31, 1994, management fees,
before any advance waiver, totaled $234,022 for the Smaller
Companies Fund. Under an agreement by Advisers to limit its fees,
the Smaller Companies Fund paid management fees of $206,039 for
the fiscal year ended October 31, 1994. For the fiscal years
ended October 31, 1995 and 1996, management fees totaling
$517,232 and $595,387, respectively, were paid to Advisers.
Management Agreement. The management agreement is in effect until
April 30, 1997. It may continue in effect for successive annual
periods if its continuance is specifically approved at least
annually by a vote of the Board or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not
parties to the management agreement or interested persons of any
such party (other than as members of the Board), cast in person
at a meeting called for that purpose. The management agreement
may be terminated without penalty at any time by the Board or by
a vote of the holders of a majority of the Fund's outstanding
voting securities, or by Advisers on 60 days' written notice, and
will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
Administrative Services. Under an agreement with Advisers, FT
Services provides certain administrative services and facilities
for the Fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance
with regulatory requirements. FT Services is a wholly owned
subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a
monthly administration fee 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. The fee is paid by Advisers. It is not a separate
expense of the Fund.
Shareholder Servicing Agent. Investor Services, a wholly-owned
subsidiary of Resources, is the Fund's shareholder servicing
agent and acts as the Fund's transfer agent and dividend-paying
agent. Investor Services is compensated on the basis of a fixed
fee per account.
Custodians. Bank of New York, Mutual Funds Division, 90
Washington Street, New York, New York, 10286, acts as custodian of
the securities and other assets of the Fund. Bank of America NT &
SA, 555 California Street, 4th Floor, San Francisco, California
94104, acts as custodian for cash received in connection with the
purchase of Fund shares. Citibank Delaware, One Penn's Way, New
Castle, Delaware 19720, acts as custodian in connection with
transfer services through bank automated clearing houses. The
custodians do not participate in decisions relating to the
purchase and sale of portfolio securities.
Auditors. Coopers & Lybrand L.L.P., 333 Market Street, San
Francisco, California 94105, are the Fund's independent auditors.
During the fiscal year ended October 31, 1996, their auditing
services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended October 31, 1996. Class Z
shares of the Fund were not offered to the public before January
1, 1997.
How does the Fund Buy Securities for its Portfolio?
The selection of brokers and dealers to execute transactions in
the Fund's portfolio is made by the Managers, as the case may be,
in accordance with criteria set forth in the management and
sub-advisory agreements and any directions that the Board may
give.
When placing a portfolio transaction, the Managers seek to obtain
prompt execution of orders at the most favorable net price. When
portfolio transactions are done on a securities exchange, the
amount of commission paid by the Fund is negotiated between the
Managers and the broker executing the transaction. The
determination and evaluation of the reasonableness of the
brokerage commissions paid in connection with portfolio
transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and review
of the transactions. These opinions are based on the experience
of these individuals in the securities industry and information
available to them about the level of commissions being paid by
other institutional investors of comparable size. The Managers
will ordinarily place orders to buy and sell over-the-counter
securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of the Managers, a
better price and execution can otherwise be obtained. Purchases
of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter,
and purchases from dealers will include a spread between the bid
and ask price.
The amount of commission is not the only factor the Managers
consider in the selection of a broker to execute a trade. If the
Managers believe it is in the Fund's best interest, the Managers
may place portfolio transactions with brokers who provide the
types of services described below, even if it means the Fund will
pay a higher commission than if no weight were given to the
broker's furnishing of these services. This will be done only if,
in the opinion of the Managers, the amount of any additional
commission is reasonable in relation to the value of the
services. Higher commissions will be paid only when the brokerage
and research services received are bona fide and produce a direct
benefit to the Fund or assist its Managers in carrying out their
responsibilities to the Fund, or when it is otherwise in the best
interest of the Fund to do so, whether or not such services may
also be useful to the Managers in advising other clients.
When the Managers believe several brokers are equally able to
provide the best net price and execution, they may decide to
execute transactions through brokers who provide quotations and
other services to the Fund, in an amount of total brokerage as
may reasonably be required in light of these services.
Specifically, these services may include providing the quotations
necessary to determine the Fund's Net Asset Value, as well as
research, statistical and other data.
It is not possible to place a dollar value on the special
executions or on the research services received by the Managers
from dealers effecting transactions in portfolio securities. The
allocation of transactions in order to obtain additional research
services permits the Managers to supplement its own research and
analysis activities and to receive the views and information of
individuals and research staff 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 Fund's officers
are satisfied that the best execution is obtained, consistent
with internal policies the sale of the Fund's shares, as well as
shares of other funds in the Franklin Templeton Group of Funds,
may also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of
Securities Dealers, it may sometimes receive certain fees when
the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing 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 Advisers 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 the Fund and one or more
other investment companies or clients supervised by Advisers or
advised by the Sub-advisor 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 Managers, 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 and to negotiate
lower brokerage commissions will be beneficial to the Fund.
During the fiscal years ended October 31, 1994, 1995 and 1996,
the Pacific Fund paid brokerage commissions totaling $176,925,
$193,647 and $121,723, respectively, and the Smaller Companies
Fund paid brokerage commissions totaling $147,306, $48,199 and
$132,084, respectively.
As of October 31, 1996, the Funds did not own securities of their
regular broker-dealers.
How Do I Buy, Sell and Exchange Shares?
Additional Information on Buying Shares
When you buy shares, if you submit a check or a draft that is
returned unpaid to the Fund we may impose a $10 charge against
your account for each returned item.
Reinvestment Date. Shares acquired through the reinvestment of
dividends will be purchased at the Net Asset Value determined on
the business day following the dividend record date (sometimes
known as the "ex-dividend date"). The processing date for the
reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
Additional Information on Exchanging Shares
If you request the exchange of the total value of your account,
declared but unpaid income dividends and capital gain
distributions will be exchanged into the new fund and will be
invested at Net Asset Value. Backup withholding and information
reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in
this SAI and in the Prospectus.
If a substantial number of shareholders should, within a short
period, sell their shares of the Fund under the exchange
privilege, the Fund might have to sell portfolio securities it
might otherwise hold and incur the additional costs related to
such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money.
If this occurs, it is the Fund's general policy to initially
invest this money in short-term, interest-bearing money market
instruments, unless it is believed that attractive investment
opportunities consistent with the Fund's investment objectives
exist immediately. This money will then be withdrawn from the
short-term money market instruments and invested in portfolio
securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company are
generally not available until the fifth business day following
the sale. The funds you are seeking to exchange into may delay
issuing shares pursuant to an exchange until that fifth business
day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day
the request for exchange is received in proper form. Please see
"May I Exchange Shares for Shares of Another Fund?" in the
Prospectus.
Additional Information on Selling Shares
Systematic Withdrawal Plan. There are no service charges for
establishing or maintaining a systematic withdrawal plan. Once
your plan is established, any distributions paid by the Fund will
be automatically reinvested in your account. Payments under the
plan will be made from the redemption of an equivalent amount of
shares in your account, generally on the first business day of
the month in which a payment is scheduled for payments before
February 1997 and on the 25th day of the month beginning with
your February 1997 payment. If the 25th falls on a weekend or
holiday, we will process the redemption on the next business day
for Class I shares and on the prior business day for Class II
shares. If the processing dates are different, the date of the
Net Asset Value used to redeem the shares will also be different
for Class I and Class II shares.
Redeeming shares through a systematic withdrawal plan may reduce
or exhaust the shares in your account if payments exceed
distributions received from the Fund. This is especially likely
to occur if there is a market decline. If a withdrawal amount
exceeds the value of your account, your account will be closed
and the remaining balance in your account will be sent to you.
Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of
your investment.
The Fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a
systematic withdrawal plan if all shares in your account are
withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
Through Your Securities Dealer. If you sell shares through your
Securities Dealer, it is your dealer's responsibility to transmit
the order to the Fund in a timely fashion. Any loss to you
resulting from your dealer's failure to do so must be settled
between you and your Securities Dealer.
Redemptions in Kind. The Fund has committed itself to pay in cash
(by check) all requests for redemption by any shareholder of
record, limited in amount, however, during any 90-day period to
the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of the 90-day period. This commitment is
irrevocable without the prior approval of the SEC. In the case of
redemption requests in excess of these amounts, the Board
reserves the right to make payments in whole or in part in
securities or other assets of the Fund, in case of an emergency,
or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the
price used to compute the Fund's net assets and you may incur
brokerage fees in converting the securities to cash. The Fund
does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment
in a timely manner.
General Information
If dividend checks are returned to the Fund marked "unable to
forward" by the postal service, we will consider this a request
by you to change your dividend option to reinvest all
distributions. The proceeds will be reinvested in additional
shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate
you or verify your current mailing address, we may deduct the
costs of our efforts to find you from your account. These costs
may include a percentage of the account when a search company
charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy
or sell shares of the Fund must be denominated in U.S. dollars.
We may, in our sole discretion, either (a) reject any order to
buy or sell shares denominated in any other currency or (b) honor
the transaction or make adjustments to your account for the
transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
Special Services. The Franklin Templeton Institutional Services
Department provides specialized services, including
recordkeeping, for institutional investors. The cost of these
services is not borne by the Fund.
Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous
beneficial owners for recordkeeping operations performed with
respect to such owners. For each beneficial owner in the omnibus
account, the Fund may reimburse Investor Services an amount not
to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a
fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept
your transaction request.
How are Fund Shares Valued?
We calculate the Net Asset Value per share of each class as of
the scheduled close of the Exchange, generally 1:00 p.m. Pacific
time, each day that the Exchange is open for trading. As of the
date of this SAI, the Fund is informed that the Exchange observes
the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
For the purpose of determining the aggregate net assets of the
Fund, cash and receivables are valued at their realizable
amounts. Interest is recorded as accrued and dividends are
recorded on the ex-dividend date. Portfolio securities listed on
a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the
last quoted sale price of the day or, if there is no such
reported sale, within the range of the most recent quoted bid and
ask prices. Over-the-counter portfolio securities are valued
within the range of the most recent quoted bid and ask prices.
Portfolio securities that are traded both in the over-the-counter
market and on a stock exchange are valued according to the
broadest and most representative market as determined by Advisers.
Portfolio securities underlying actively traded call options are
valued at their market price as determined above. The current
market value of any option held by the Fund is its last sale
price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the
range of the current closing bid and ask prices if the valuation
is believed to fairly reflect the contract's market value.
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 Exchange on each day that the
Exchange is open. Trading in European or Far Eastern securities
generally, or in a particular country or countries, may not take
place on every Exchange business day. Furthermore, trading takes
place in various foreign markets on days that are not business
days for the Exchange and on which the Net Asset Value of each
class is not calculated. Thus, the calculation of the Net Asset
Value of each class 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 scheduled close of the Exchange. The
value of these securities used in computing the Net Asset Value
of each class 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 scheduled close of
the Exchange that will not be reflected in the computation of the
Net Asset Value of each class. 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
utilize a pricing service, bank or Securities Dealer to perform
any of the above described functions.
Additional Information on Distributions and Taxes
Distributions
You may receive two types of distributions from the Fund:
1. Income dividends. The Fund receives income generally in the
form of dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which income
dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains
or losses in connection with sales or other dispositions of its
portfolio securities. Distributions by the Fund derived from net
short-term and net long-term capital gains (after taking into
account any capital loss carryforward or post October loss
deferral) may generally be made once a year in December to
reflect any net short-term and net long-term capital gains
realized by the Fund as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year.
The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust
the timing of these distributions for operational or other
reasons.
Taxes
As stated in the Prospectus, the Fund has elected and qualified
to be treated as a regulated investment company under Subchapter
M of the Code. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it
determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal
and possibly state corporate taxes on its taxable income and
gains, and distributions to shareholders will be taxable to the
extent of the Fund's available earnings and profits.
Subject to the limitations discussed below, all or a portion of
the income distributions paid by the Fund may be treated by
corporate shareholders as qualifying dividends for purposes of
the dividends-received deduction under federal income tax law. If
the aggregate qualifying dividends received by the Fund
(generally, dividends from U.S. domestic corporations, the stock
in which is not debt-financed by the Fund and is held for at
least a minimum holding period) is less than 100% of its
distributable income, then the amount of the Fund's dividends
paid to corporate shareholders that may be designated as eligible
for this deduction will not exceed the aggregate qualifying
dividends received by the Fund for the taxable year. The amount
or percentage of income qualifying for the corporate
dividends-received deduction will be provided by the Fund
annually in a notice to shareholders mailed shortly after the end
of the Fund's fiscal year.
The Code requires all funds to distribute at least 98% of their
taxable ordinary income earned during the calendar year and at
least 98% of their capital gain net income earned during the
twelve-month period ending October 31 of each year (in addition
to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in
order to avoid the imposition of a federal excise tax. Under
these rules, certain distributions which are declared in October,
November or December but which, for operational reasons, may not
be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by the you on
December 31 of the calendar year in which they are declared. The
Fund intends as a matter of policy to declare these dividends, if
any, in December and to pay these dividends in December or
January to avoid the imposition of this tax, but does not
guarantee that its distributions will be sufficient to avoid any
or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions
for federal and state income tax purposes. For most shareholders,
gain or loss will be recognized in an amount equal to the
difference between the shareholder's basis in the shares and the
amount received, subject to the rules described below. If the
shares are a capital asset in the hands of the shareholder, gain
or loss will be capital gain or loss and will be long-term for
federal income tax purposes if the shares have been held for more
than one year.
All or a portion of the sales charge incurred in purchasing
shares of the Fund will not be included in the federal tax basis
of the shares sold or exchanged within ninety (90) days of their
purchase (for purposes of determining gain or loss with respect
to such shares) if the sales proceeds are reinvested in the Fund
or in another fund in the Franklin Templeton Funds and a sales
charge which would otherwise apply to the reinvestment is reduced
or eliminated. Any portion of the sales charge excluded from the
tax basis of the shares sold will be added to the tax basis of
the shares acquired in the reinvestment. You should consult with
your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares
will be disallowed to the extent other Fund shares are purchased
(through reinvestment of dividends or otherwise) within 30 days
before or after the redemption. Any loss disallowed under these
rules will be added to the tax basis of the shares purchased.
The Fund's investment in options (including but not limited to
written and purchased put and call options, options on stock
indices, forward conversions, OTC options, the use of options in
spread and straddle transactions, options on foreign currencies
or on futures contracts on foreign currencies, and options on
financial, interest rate and stock index futures contracts),
futures and forward contracts (including but not limited to
financial, interest rate and stock index futures contracts, and
forward currency exchange contracts and other currency hedging
devices), and foreign securities and currencies (including the
above options, and forwards and futures contracts on such
currencies), and certain other securities transactions involving
actual or deemed short sales, spreads, straddles or foreign
currency gains or losses are subject to many complex and special
tax rules. For example, OTC options on debt securities and equity
options, including options on stock and on narrow-based stock
indices, will be subject to tax under Section 1234 of the Code,
generally producing a long-term or short-term capital gain or
loss upon exercise, lapse or closing out of the option or sale of
the underlying stock or security. By contrast, the Fund's
treatment of certain other options, futures and forward contracts
entered into by the Fund is generally governed by Section 1256 of
the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indices,
options on securities indices, options on futures contracts,
regulated futures contracts and certain foreign currency
contracts and options thereon.
Absent a tax election to the contrary, each Section 1256 position
held by the Fund will be marked-to-market (i.e., treated as if it
were sold for fair market value) on the last business day of the
Fund's fiscal year, and all gain or loss associated with
mark-to-market positions at fiscal year end (except certain
foreign currency gain or loss covered by Section 988 of the Code)
will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section
1256 mark-to-market rules may be to accelerate income or to
convert what otherwise would have been long-term capital gains
into short-term capital gains or short-term capital losses into
long-term capital losses within the Fund. The acceleration of
income on Section 1256 positions may require the Fund to
recognize taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution
requirements of the Code, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect
both the amount, character and timing of income distributed to
shareholders by the Fund.
When the Fund holds an option or contract which substantially
diminishes the Fund's risk of loss with respect to another
position of the Fund (as might occur in some hedging
transactions), this combination of positions could be treated as
a "straddle" for tax purposes, resulting in possible deferral of
losses, adjustments in the holding periods of Fund securities and
conversion of short-term capital losses into long-term capital
losses. Certain tax elections exist for mixed straddles (i.e.,
straddles comprised of at least one Section 1256 position and at
least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is also subject to
the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and
certain other investments held for less than three months
("short-short income").
This requirement may limit the Fund's ability to engage in
options, straddles, hedging transactions and forward or futures
contracts because these transactions are often consummated in
less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of
short sales of portfolio securities, reduce the holding periods
of certain securities within the Fund, resulting in additional
short-short income for the Fund.
The Fund will monitor its transactions in such options and
contracts and may make certain other tax elections in order to
mitigate the effect of the above rules and to prevent
disqualification of the Fund as a regulated investment company
under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in
connection with certain transactions involving foreign
currencies, foreign currency payables or receivables, foreign
currency-denominated debt securities, foreign currency forward
contracts, and options or futures contracts on foreign currencies
are subject to special tax rules which may cause these gains and
losses to be treated as ordinary income and losses rather than
capital gains and losses and may affect the amount and timing of
the Fund's income or loss from such transactions and in turn its
distributions to you.
In order for the Fund to qualify as a regulated investment
company, at least 90% of the Fund's annual gross income must
consist of dividends, interest and certain other types of
qualifying income. Foreign exchange gains, derived by a Fund with
respect to the Fund's business of investing in stock or
securities, or options or futures with respect to stock or
securities, constitute qualifying income for purposes of the 90%
limitation.
Gain realized by the Fund from transactions that are deemed to
constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as
ordinary income to the extent that the gain does not exceed an
amount defined by the Code as the "applicable imputed income
amount." A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable
to the time value of the Fund's net investment in this
transaction and any one of the following criteria are met: 1)
there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially
identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to
the Fund on the basis that it would have the economic
characteristics of a loan but would be taxed as capital gain; or
4) the transaction is specified in Treasury regulations to be
promulgated in the future. The applicable imputed income amount,
which represents the deemed return on the conversion language
based upon the time value of money, is computed using the
applicable federal rates, reduced by any prior
recharacterizations under this provision or Section 263(g) of the
Code concerning capitalized carrying costs.
Currency speculation or the use of currency forward contracts or
other currency instruments for non-hedging purposes may generate
gains deemed to be not directly related to the Fund's principal
business of investing in stock or securities and related options
or futures. Under current law, non-directly-related gains arising
from foreign currency positions or instruments held for less than
three months are treated as derived from the disposition of
securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its
activities involving foreign exchange gains to the extent
necessary to comply with these requirements.
The federal income tax treatment of interest rate and currency
swaps is unclear in certain respects and may in some
circumstances result in the realization of income not qualifying
under the 90% test described above or be deemed to be derived
from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The
Fund will limit its interest rate and currency swaps to the
extent necessary to comply with these requirements.
If a Fund owns shares in a foreign corporation that constitutes a
"passive foreign investment company" (a "PFIC") for federal
income tax purposes and the Fund does not elect to treat the
foreign corporation as a "qualified electing fund" within the
meaning of the Code, the Fund may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it
receives from the PFIC or any gain it derives from the
disposition of such shares, even if such income is distributed as
a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of
deferred taxes arising from distributions or gains. Any federal
income tax paid by the Fund as a result of its ownership of
shares in a PFIC will not give rise to a deduction or credit to
the Fund or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it
derives at least 75 percent of its gross income from "passive
income" (including, but not limited to, interest, dividends,
royalties, rents and annuities), or (ii) on average, at least 50
percent of the value (or adjusted basis, if elected) of the
assets held by the corporation produce "passive income."
On April 1, 1992, proposed U.S. Treasury regulations were issued
regarding a special mark-to-market election for regulated
investment companies. Under these regulations, the annual
mark-to-market gain, if any, on shares of stock held by the Funds
in a PFIC would be treated as an excess distribution received by
a Fund in the current year, eliminating the deferral and the
related interest charge. These excess distribution amounts are
treated as ordinary income, which the Fund will be required to
distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These
regulations would be effective for taxable years ending after
promulgation of the proposed regulations as final regulations.
Income received by the Fund from sources within foreign countries
may be subject to withholding and other income or similar taxes
imposed by foreign countries. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists
of securities of foreign corporations, the Fund will be eligible
and intends to elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. Pursuant to this
election, you will be required to include in gross income (in
addition to taxable dividends actually received) your pro rata
share of the foreign taxes paid by the Fund, and will be entitled
either to deduct (as an itemized deduction) your pro rata share
of foreign income and similar taxes in computing your taxable
income or to use it as a foreign tax credit against your U. S.
Federal income tax liability, subject to limitations. No
deduction for foreign taxes may be claimed by you if you do not
itemize deductions, but such a shareholder may be eligible to
claim the foreign tax credit (see below). You will be notified
within 60 days after the close of the Fund's taxable year whether
the foreign taxes paid by the Fund will "pass through" for that
year.
Generally, a credit for foreign taxes is subject to the
limitation that it may not exceed your U.S. tax attributable to
your foreign source taxable income. For this purpose, if the
pass-through election is made, the source of the Fund's income
flows through to its shareholders. With respect to the Fund,
gains from the sale of securities will be treated as derived from
U.S. sources and certain currency fluctuation gains, including
fluctuation gains from foreign currency-denominated debt
securities, receivables and payables, will be treated as ordinary
income derived from U.S. sources. The limitation on the foreign
tax credit is applied separately to foreign source passive income
(as defined for purposes of the foreign tax credit), including
the foreign source passive income passed through by the Fund. You
may be unable to claim a credit for the full amount of your
proportionate share of the foreign taxes paid by the Fund.
Foreign taxes may not be deducted in computing alternative
minimum taxable income and the foreign tax credit can be used to
offset only 90% of the alternative minimum tax (as computed under
the Code for purposes of this limitation) imposed on corporations
and individuals. If the Fund is not eligible to make the election
to "pass through" to its shareholders its foreign taxes, the
foreign income taxes it pays generally will reduce investment
company taxable income and the distributions by the Fund will be
treated as U.S. source income.
The Fund's Underwriter
Pursuant to an underwriting agreement, Distributors acts as
principal underwriter in a continuous public offering for each
class of the Fund's shares. The underwriting agreement will
continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the
Fund's outstanding voting securities, and in either event by a
majority vote of the Board members who are not parties to the
underwriting agreement or interested persons of any such party
(other than as members of the Board), cast in person at a meeting
called for that purpose. The underwriting agreement terminates
automatically in the event of its assignment and may be
terminated by either party on 90-days' written notice.
Distributors pays the expenses of the distribution of Fund
shares, including advertising expenses and the costs of printing
sales material and prospectuses used to offer shares to the
public. The Fund 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 will not receive compensation from the Fund for
acting as underwriter with respect to the Class Z shares.
How does the Fund Measure Performance?
Performance quotations are subject to SEC rules. These rules
require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the SEC. Average
annual total return quotations used by the 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 for the Class Z shares follows. For any period prior
to January 1, 1997, the standardized performance quotations for
Class Z will be calculated by substituting the performance of
Class I for the relevant time period, and excluding the effect of
the maximum sales charge and including the effect of Rule 12b-1
fees applicable to Class I. Regardless of the method used, past
performance is not necessarily indicative of future results, but
is an indication of the return to shareholders only for the
limited historical period used.
Total Return
Average Annual Total Return. Average annual total return is
determined by finding the average annual rates of return over
one-, five- and ten-year periods, or fractional portion thereof,
that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the 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 one-, five- and ten-year period and
the deduction of all applicable charges and fees.
The average annual total return for Class Z for the indicated
periods ended on October 31, 1996 would have been as follows:
Average Annual Total Returns
One-Year Period Since
Period Inception
Ending (9/20/91 to
Fund Name 10/31/96 10/31/96)
Pacific Fund....... 11.19% 11.48%
Smaller Companies Fund 18.49% 12.13%
These rates of return 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 the one-, five-, or ten-year periods at
the end of the one-, five-, or ten-year periods (or fractional
portion thereof)
Cumulative Total Return. The Fund may also quote the cumulative
total return for each class, in addition to the average annual
total return. These quotations are computed the same way, except
the cumulative total return will be based on the actual return
for each class for a specified period rather than on the average
return over one-, five- and ten-year periods, or fractional
portion thereof. The cumulative total return for Class Z for the
indicated periods ended October 31, 1996 would have been as
follows:
Cumulative Total Returns
One-Year Period Since
Period Inception
Ending (9/20/91 to
Fund Name 10/31/96 10/31/96)
Pacific Fund....... 11.19% 74.31%
Smaller Companies Fund 18.49% 79.59%
Volatility
Occasionally statistics may be used to show the Fund's volatility
or risk. Measures of volatility or risk are generally used to
compare the Fund's Net Asset Value or performance to a market
index. One measure of volatility is beta. Beta is the volatility
of a fund relative to the total market, as represented by an
index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00
indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is
used to measure variability of Net Asset Value or total return
around an average over a specified period of time. The idea is
that greater volatility means greater risk undertaken in
achieving performance.
Other Performance Quotations
For any period prior to January 1, 1997, sales literature about
Class Z may quote a current distribution rate, yield, cumulative
total return, average annual total return and other measures of
performance as described elsewhere in this SAI by substituting
the performance of Class I for the relevant time period and
excluding the effect of the maximum sales charge and Rule 12b-1
fees applicable to Class I.
Sales literature referring to the use of the Fund as a potential
investment for Individual Retirement Accounts (IRAs), Business
Retirement Plans and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material
information relating to investment objectives and performance
results of funds belonging to the Franklin Templeton Group of
Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton
Group of Funds.
Comparisons
To help you better evaluate how an investment in the Fund may
satisfy your investment objective, advertisements and other
materials about the Fund may discuss certain measures of each
class' 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:
a) Dow Jones Composite Average or its component averages - an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks (Dow Jones Utilities Average), and 20 transportation
company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices -
an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks, and 20 transportation
stocks. Comparisons of performance assume reinvestment of
dividends.
c) The New York Stock Exchange composite or component indices -
an unmanaged index of all industrial, utilities, transportation,
and finance stocks listed on the Exchange.
d) Wilshire 5000 Equity Index - represents the return on the
market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume
reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed
Income Fund Performance Analysis - measure 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.
f) CDA Mutual Fund Report, published by CDA Investment
Technologies, Inc. - analyzes price, current yield, risk, total
return, and average rate of return (average annual compounded
growth rate) over specified time periods for the mutual fund
industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. -
analyzes price, yield, risk, and total return for mutual funds.
h) Financial publications: The Wall Street Journal, Business
Week, Changing Times, Financial World, Forbes, Fortune and Money
magazines - provide performance statistics over specified time
periods.
i) Consumer Price Index (or Cost of Living Index), published by
the U.S. Bureau of Labor Statistics - a statistical measure of
change, over time, in the price of goods and services in major
expenditure groups.
j) 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.
k) Historical data supplied by the research departments of First
Boston Corporation, the J. P. Morgan companies, Salomon Brothers,
Merrill Lynch, Lehman Brothers and Bloomberg L.P.
l) Standard & Poor's 100 Stock Index - an unmanaged index based
on the prices of 100 blue-chip stocks, including 92 industrials,
one utility, two transportation companies, and 5 financial
institutions. The S&P 100 Stock Index is a smaller more flexible
index for options trading.
m) 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.
n) Salomon Brothers Broad Bond Index or its component indices -
The Broad Index measures yield, price, and total return for
Treasury, agency, corporate, and mortgage bonds.
o) Salomon Brothers World Government Bond Index - measures
capitalization and performance return of foreign bond markets.
p) Lehman Brothers Aggregate Bond Index or its component indices
- - the Aggregate Bond Index measures yield, price and total return
for Treasury, Agency, Corporate, Mortgage, and Yankee bonds.
q) Yields of other countries' government and corporate bonds as
compared to U.S. government and corporate bonds to illustrate the
potentially higher returns available outside the U.S.
r) Financial Times Actuaries Indices, including the FTA - World
Index (and components thereof), which is based on stocks in the
major world equity markets.
s) Morgan Stanley Capital International Indices, including the
EAFE Index (and components thereof), which are based on stocks in
major equity markets in Europe, Australia, and the Far East.
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 performance of
Class Z to the return on 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 Fund may help you achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a
home, college costs and other long-term goals. The Franklin
College Costs Planner may help you in determining how much money
must be invested on a monthly basis in order to have a projected
amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon
current costs published by the College Board.) The Franklin
Retirement Planning Guide leads you through the steps to start a
retirement savings program. Of course, an investment in the Fund
cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds,
one of the largest mutual fund organizations in the U.S., and may
be considered in a program for diversification of assets. Founded
in 1947, Franklin, one of the oldest mutual fund organizations,
has managed mutual funds for over 48 years and now services more
than 2.6 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton
Worldwide, Inc., a pioneer in international investing. Together,
the Franklin Templeton Group has over $153 billion in assets
under management for more than 4.2 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of
Funds offers 125 U.S. based open-end investment companies to the
public. The Fund may identify itself by its NASDAQ symbol or
CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin
number one in service quality for five of the past eight years.
From time to time, the number of Fund shares held in the "street
name" accounts of various Securities Dealers for the benefit of
their clients or in centralized securities depositories may
exceed 5% of the total shares outstanding. To the best knowledge
of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding Class Z shares.
In the event of disputes involving multiple claims of ownership
or authority to control your account, the Fund has the right (but
has no obligation) to: (a) freeze the account and require the
written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing
instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c)
surrender ownership of all or a portion of the account to the IRS
in response to a Notice of Levy.
Summary of Code of Ethics. Employees of Resources or its
subsidiaries who are access persons under the 1940 Act are
permitted to engage in personal securities transactions subject
to the following general restrictions and procedures: (i) the
trade must receive advance clearance from a compliance officer
and must be completed within 24 hours after clearance; (ii)
copies of all brokerage confirmations must be sent to a
compliance officer and, within 10 days after the end of each
calendar quarter, a report of all securities transactions must be
provided to the compliance officer; and (iii) access persons
involved in preparing and making investment decisions must, in
addition to (i) and (ii) above, file annual reports of their
securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
Financial Statements
The audited financial statements contained in the Annual Report
to Shareholders of the Trust for the fiscal year ended October
31, 1996, including the auditors' report are incorporated herein
by reference. These audited financial statements do not include
information for Class Z as these shares were not publicly offered
prior to the date of this SAI.
Useful Terms and Definitions
1933 Act - Securities Act of 1933, as amended
1940 Act - Investment Company Act of 1940, as amended
Advisers - Franklin Advisers, Inc., the Fund's investment manager
Board - The Board of Trustees of the Trust
BZWIM - Barclays de Zoete Wedd Investment Management Inc.
CD - Certificate of deposit
Class I, Class II and Class Z - The Pacific Fund offers three
classes of shares, designated "Class I," "Class II" and "Class Z"
and the Smaller Companies Fund offers two classes of shares
designated "Class I" and "Class Z." The classes have
proportionate interests in the Fund's portfolio. Class I and
Class II differ, however, primarily in their sales charge
structures and Rule 12b-1 plans. Class Z shares are purchased
without a sales charge and do not have a Rule 12b-1 plan.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's
principal underwriter
Exchange - New York Stock Exchange
Franklin Funds - The mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and the Franklin Government
Securities Trust
Franklin Templeton Funds - The Franklin Funds and the Templeton
Funds
Franklin Templeton Group - Franklin Resources, Inc., a publicly
owned holding company, and its various subsidiaries
Franklin Templeton Group of Funds - All U.S. registered
investment companies in the Franklin Group of Funds and the
Templeton Group of Funds
FT Services - Franklin Templeton Services, Inc., the Fund's
administrator.
Investor Services - Franklin/Templeton Investor Services, Inc.,
the Fund's shareholder servicing and transfer agent
IRS - Internal Revenue Service
Managers - Franklin Advisers, Inc., the Fund's investment
manager, and Templeton Investment Counsel, Inc., the Fund's
Sub-advisor
Moody's - Moody's Investors Service, Inc.
Mutual Series - Franklin Mutual Series Fund Inc., a member of the
Franklin Group of Funds, formerly the Mutual Series Fund Inc.
Net Asset Value (NAV) - 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.
Offering Price - The public offering price is based on the Net
Asset Value per share of the class and includes the front-end
sales charge, if applicable. The maximum front-end sales charge
is 5.75% for Class I and 1% for Class II. Class Z shares have no
front-end sales charge.
Prospectus - The prospectus for the Class Z shares of the Fund
dated January 1, 1997 and as may be amended from time to time
Resources - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
Securities Dealer - A financial institution which, either
directly or through affiliates, has an agreement with
Distributors to handle customer orders and accounts with the
Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Sub-advisor - Templeton Investment Counsel, Inc., the Fund's
sub-advisor
Templeton Funds - The U.S. registered mutual funds in the
Templeton Group of Funds except Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund
TICI - Templeton Investment Counsel, Inc., the Fund's sub-advisor
U.S. - United States
We/Our/Us - Unless a different meaning is indicated by the
context, these terms refer to the Fund and/or Investor Services,
Distributors, or other wholly owned subsidiaries of Resources.
APPENDIX
Description of Ratings
Corporate and Foreign Government Bond Ratings
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large,
fluctuation of protective elements may be of greater amplitude,
or there may be other elements present which make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes
and are considered upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations.
They are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured.
Often the protection of interest and principal payments is very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period
of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect
to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B in its corporate
bond ratings. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; modifier 2
indicates a mid-range ranking; and modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong and, in the majority of instances, differ from AAA issues
only in small degree.
A - Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity
to pay principal and interest. Whereas they normally exhibit
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to
pay principal and interest for bonds in this category than for
bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt
that is assigned an actual or implied CCC- rating. The C rating
may also reflect the filing of a bankruptcy petition under
circumstances where debt service payments are continuing. The C1
rating is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
FORM N-1A
PART C
Other Information
Item 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
Financial Statements incorporated herein by reference to the Registrant's Annual
Report to Shareholders dated October 31, 1996 as filed with the SEC
electronically on form type N-30D on December 20, 1996
(i) Report of Independent Auditors.
(ii) Statement of Investments in Securities and Net Assets, October
31, 1996.
(iii)Statement of Assets and Liabilities - October 31, 1996.
(iv) Statement of Operations - for the year ended October 31, 1996.
(v) Statements of Changes in Net Assets - for the years ended
October 31, 1997 and 1996.
(vi) Notes to Financial Statements.
b) Exhibits:
The following exhibits are incorporated by reference, with the exception of
11(i), 18(ii), 27(i) and 27(ii) and which are attached.
(1) copies of the charter as now in effect;
(i) Certificate of Trust of Franklin International Trust dated
March 19, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Certificate of Amendment to the Certificate of Trust of
Franklin International Trust dated March 22, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(iii) Agreement and Declaration of Trust of Franklin International
Trust dated March 19, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(iv) Certificate of Amendment to the Certificate of Trust of
Franklin International Trust dated August 20, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(v) Certificate of Amendment to the Certificate of Trust of
Franklin International Trust dated May 14, 1992
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(vi) Certificate of Amendment of Agreement and Declaration of Trust
of Franklin International Trust dated December 14, 1995
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: July 23, 1996
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws of Franklin International Trust
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Amendment to By-Laws of Franklin International Trust dated
October 27, 1994
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights of
the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the management
of the assets of the Registrant;
(i) Management Agreement between Registrant and Franklin Advisers,
Inc. dated September 20, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Franklin Pacific Growth Fund Subadvisory Agreement between
Franklin Advisers, Inc., and Templeton Investment Counsel,
Inc. dated January 1, 1993
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(iii) Franklin International Equity Fund Subadvisory Agreement
between Franklin Advisers, Inc., and Templeton Investment
Counsel, Inc. dated January 1, 1993
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of all
agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between Registrant
and Franklin Templeton Distributors, Inc. dated April 23, 1995
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: July 23, 1996
(ii) Distribution Agreement between Registrant and Franklin
Templeton Distributors, Inc. dated September 20, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(iii) Forms of Dealer Agreements between Registrant and Franklin
Templeton Distributors, Inc.
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar contracts
or arrangements wholly or partly for the benefit of trustees or
officers of the Registrant in their capacity as such; any such plan
that is not set forth in a formal document, furnish a reasonably
detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and similar
investments of the Registrant, including the schedule of remuneration;
(i) Custodian Agreement between Registrant and Bank of America
dated August 20, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Custodian Agreement between Registrant and Citibank Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master Agreement
3. Short Form Bank Agreement - Deposits and Disbursements of
Funds
Registrant: Franklin Premier Return Fund
Filing: Post Effective Amendment No. 54 to Registration
Statement on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(iii) Custody Agreement between Franklin International Trust and
Chase Manhattan Bank, NT & SA dated July 28, 1995
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(iv) Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: July 23, 1996
(v) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: July 23, 1996
(9) copies of all other material contracts not made in the ordinary course
of business which are to be performed in whole or in part at or after
the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
(i) Opinion and Consent of Counsel
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this registration statement
and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
Not applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, advisor, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their purchases
were made for investment purposes without any present intention of
redeeming or reselling;
(i) Letter of Understanding dated September 10, 1991
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model plan.
Such form(s) should disclose the costs and fees charged in connection
therewith;
(i) Copy of model retirement plan
Registrant: AGE High Income Fund, Inc.
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Amended and Restated Distribution Plan Pursuant to Rule 12b-1
dated July 1, 1993
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(16) schedule for computation of each performance quotation provided in the
registration statement in response to Item 22 (which need not be
audited).
(i) Schedule for computation of performance quotations
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(17) Power of Attorney
(i) Power of Attorney dated July 18, 1995
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Certificate of Secretary dated July 18, 1995
Filing: Post-Effective Amendment No. 6 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Mutiple Class Plan
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for Templeton Pacific Growth Fund
(ii)Financial Data Schedule for Templeton Smaller Companies Fund
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of October 31, 1996 the number of record holders of the Registrant's Funds
were as follows:
Number of
TITLE OF CLASS RECORD HOLDERS
Beneficial Interest
Franklin Smaller Companies Fund Class I: 8,346
Franklin Smaller Companies Fund Class II: 0
Franklin Smaller Companies Fund Class Z: 0
Templeton Pacific Growth Fund Class I: 8,946
Templeton Pacific Growth Fund Class II: 0
Templeton Pacific Growth Fund Class Z: 0
ITEM 27 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
The officers and directors of the Registrant's manager also serve as
officers and/or directors for (1) the manager's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin
Group of Funds(R). In addition, Mr. Charles B. Johnson is a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of the Funds' Investment Manager (SEC File
801-26292), incorporated herein by reference, which sets forth the officers
and directors of the Investment Manager and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Franklin Resources, Inc., serves as each Fund's Sub-adviser,
furnishing to Franklin Advisers, Inc. 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 the Fund's Sub-adviser (SEC File
801-15125), incorporated herein by reference, which sets forth the officers
and directors of the Sub-adviser and information as to any business,
profession, vocation or employment of a substantial nature engages in by those
officers and directors during the past two years.
ITEM 29 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 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, Inc.
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Advantaged High Yield Securities Fund
Franklin Tax-Advantaged International Bond Fund
Franklin Tax-Advantaged U.S.Government Securities Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Global Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
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 Securities 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 29 with respect to each director and
officer of Distributors is incorporated by reference to 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).
c) Not applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin Templeton Investor Services, Inc., both
of whose address is 777 Mariners Island Blvd., San Mateo, CA 94404
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
any trustee or trustees when requested in writing to do so by the record
holders of not less than 10 per cent of the Registrant's outstanding
shares and to assist its shareholders in the communicating with other
shareholders in accordance with the requirements of Section 16(c) of the
Investment Company Act of 1940.
b) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Trust's annual report and to furnish each person to
whom a prospectus is delivered a copy of the annual report upon request
and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 30th day of December, 1996.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(Registrant)
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.,
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:
RUPERT H. JOHNSON, JR.* Principal Executive Officer and
Rupert H. Johnson, Jr. Trustee
Dated: December 30, 1996
MARTIN L FLANAGAN Principal Accounting Officer
Martin L. Flanagan Dated: December 30, 1996
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: December 30, 1996
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: December 30, 1996
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: December 30, 1996
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: December 30, 1996
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: December 30, 1996
DAVID W. GARBELLANO* Trustee
David W. Garbellano Dated: December 30, 1996
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: December 30, 1996
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: December 30, 1996
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: December 30, 1996
*By /s/ Larry L. Greene, Attorney-in-fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN TEMPLETON INTERNATIONAL TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Certificate of Trust for Franklin International *
Trust dated March 19, 1991
EX-99.B1(ii) Certificate of Amendment to the Certificate of *
Trust of Franklin International Trust dated March
22, 1991
EX-99.B1(iii) Agreement and Declaration of Trust for Franklin *
International Trust dated March 19, 1991
EX-99.B1(iv) Certificate of Amendment to Certificate of Trust *
for Franklin International Trust dated August 20,
1991
EX-99.B1(v) Certificate of Amendment to Certificate of Trust *
for Franklin International Trust dated May 14, 1992
EX-99.B1(vi) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin International
Trust dated December 14, 1995
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-Laws for Franklin International *
Trust dated October 27, 1994
EX-99.B5(i) Management Agreement between Registrant and *
Franklin Advisers, Inc. dated September 20, 1991
EX-99.B5(ii) Franklin Pacific Growth Fund Subadvisory Agreement *
between Franklin Advisers, Inc. and Templeton
Investment Counsel, Inc. dated January 1, 1993
EX-99.B5(iii) Franklin International Equity Fund Subadvisory *
Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. dated January 1,
1993
EX-99.B6(i) Distribution Agreement dated April 12, 1990 *
EX-99.B6(ii) Forms of Dealer Agreements between Registrant and *
Franklin/Templeton Distributors, Inc.
EX-99.B6(iii) Amended and Restated Distribution Agreement between *
Registrant and Franklin/Templeton Distributors,
Inc. dated April 23, 1995
EX-99.B8(i) Custodian Agreement between Registrant and Bank of *
America dated August 20, 1991
EX-99.B8(ii) Custodian Agreement between Registrant and Citibank *
Delaware
EX-99.B8(iii) Custody Agreement Between Franklin International *
Trust and Chase Manhattan Bank, NT & SA dated July
28, 1995
EX-99.B8(iv) Master Custody Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.B8(v) Terminal Link Agreement between Registrant and Bank *
of New York dated February 16, 1996
EX-99.B10(i) Opinion and Consent of Counsel *
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Letter of Understanding relating to Initial Capital *
dated September 10, 1991
EX-99.B14(i) Model Retirement Plan *
EX-99.B15(i) Amended and Restated Distribution Plan Pursuant to *
Rule 12b-1 dated July 1, 1993
EX-99.B16(i) Schedule for computation of performance quotations *
EX-99.17(i) Power of Attorney dated July 18, 1995 *
EX-99.17(ii) Certificate of Secretary dated July 18, 1995 *
EX-99.B18(i) Multiple Class Plan Attached
EX-27.B(i) Financial Data Schedule for Templeton
Pacific Growth Fund Attached
EX-27.B(ii) Financial Data Schedule for Templeton
Smaller Companies Fund Attached
*Incorporated by Reference
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 8
to the Registration Statement of Franklin Templeton International Trust on Form
N-1A (File Nos. 33-41340 and 811-6336) of our report dated November 27, 1996 on
our audit of the Financial Statements and Financial Highlights of Franklin
Templeton International Trust, which report is included in the Annual Report to
Shareholders for the year ended October 31, 1996, which is incorporated by
reference in the Registration Statement.
/s/ COOPERS & LYBRAND L.L.P.
Fort Lauderdale, FL
December 20, 1996
FRANKLIN TEMPLETON INTERNATIONAL TRUST
on behalf of
TEMPLETON PACIFIC GROWTH FUND
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of Trustees of Franklin Templeton
International Trust (the "Investment Company") for its series,
Templeton Pacific Growth Fund (the "Fund"). The Board has
determined that the Plan is in the best interests of each class
of the Fund and the Investment Company as a whole. The Plan sets
forth the provisions relating to the establishment of multiple
classes of shares of the Fund.
1. The Fund shall offer three classes of shares, to be
known as Class I, Class II shares and Class Z shares.
2. Class I Shares shall carry a front-end sales charge
ranging from 0% - 4.50 %, and Class II Shares shall carry a
front-end sales charge of 1.00%. Class Z Shares shall not be
subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent
deferred sales charge ("CDSC") except in the following limited
circumstances. On investments of $1 million or more, a
contingent deferred sales charge of 1.00% of the lesser of the
then-current net asset value or the original net asset value at
the time of purchase applies to redemptions of those investments
within the contingency period of 12 months from the calendar
month following their purchase. The CDSC is waived in certain
circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase
shall be assessed a CDSC of 1.00% on the lesser of the
then-current net asset value or the original net asset value at
the time of purchase. The CDSC is waived in certain
circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company
pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended, (the "Rule 12b-1 Plan") associated with the Class I
Shares may be used to reimburse Franklin/Templeton Distributors,
Inc. (the "Distributo") or others for expenses incurred in the
promotion and distribution of the Class I Shares. Such expenses
include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and
distributing sales literature and related expenses,
advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead
expenses attributable to the distribution of the Class I Shares,
as well as any distribution or service fees paid to securities
dealers of their firms or others who have executed a servicing
agreement with the Investment Company for the Class I Shares, the
Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has
two components. The first component is a shareholder servicing
fee, to be paid to broker-dealers, banks, trust companies and
others who provide personal assistance to shareholders in
servicing their accounts. The second component is an asset-based
sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be
paid to dealers or retained by the Distributor to be used in the
promotion and distribution of Class II Shares, in a manner
similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z
Shares, and therefore, the Class Z Shares shall not be subject to
deductions relating to rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares
shall operate in accordance with the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article
III, section 26(d).
5. The only difference in expenses as between Class I,
Class II, and Class Z Shares shall relate to differences in Rule
12b-1 plan expenses, as described in the applicable Rule 12b-1
Plans.
6. There shall be no conversion features associated with
the Class I, Class II, and Class Z Shares.
7. Shares of Class I and Class II may be exchanged for
shares of another investment company within the Franklin
Templeton Group of Funds according to the terms and conditions
stated in each fund's prospectus, as it may be amended from time
to time, to the extent permitted by the Investment Company Act of
1940 and the rules and regulations adopted thereunder. There is
no conversion feature applicable to Class Z Shares.
8. Each class will vote separately with respect to any
Rule 12b-1 Plan related to that class.
9. On an ongoing basis, the Board members, pursuant to
their fiduciary responsibilities under the 1940 Act and
otherwise, will monitor the Fund for the existence of any
material conflicts between the Board members interests of the
various classes of shares. The Board members, including a
majority of the independent Board members, shall take such action
as is reasonably necessary to eliminate any such conflict that
may develop. Franklin Advisers, Inc. and Franklin/Templeton
Distributors, Inc. shall be responsible for alerting the Board to
any material conflicts that arise.
10. All material amendments to this Plan must be approved
by a majority of the Board members, including a majority of the
Board members who are not interested persons of the Investment
Company.
11. I, Deborah R. Gatzek, Secretary of the Franklin
Templeton Group of Funds, do hereby certify that this Multiple
Class Plan was adopted by Franklin Templeton International Trust,
on behalf of its series Templeton Pacific Growth Fund, by a
majority of the Trustees of the Trust on June 18, 1996.
/s/Deborah R. Gatzek
Secretary
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