As filed with the Securities and Exchange Commission on December 31, 1997
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
Pre-Effective Amendment No.
Post-Effective Amendment No. 10
And/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12
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 (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1) [x] on March 1, 1998
pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for
a previously filed post-effective amendment
Title of Securities Being Registered:
Shares of Beneficial Interest:
Franklin Templeton International Trust
Templeton Pacific Growth Fund - Class I
Templeton Pacific Growth Fund - Class II Templeton Pacific Growth Fund - Advisor
Class
Templeton Foreign Smaller Companies Fund - Class I
Templeton Foreign Smaller Companies Fund - Advisor Class
FRANKLIN TEMPLETON INTERNATIONAL TRUST
CROSS REFERENCE SHEET
FORM N- 1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(Templeton Pacific Growth Fund - Class I
and II 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 "Financial Highlights"; "How
Information does the Fund Measure
Performance?"
4. General Description of "How is the Fund Organized?";
Registrant "How does the Fund
Invest its Assets?"; "What
are the Risks of Investing
in the Fund?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion Contained in Registrant's
of Fund Performance Annual Report to Shareholders
6. Capital Stock and Other "How is the Fund Organized?";
Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
from the Fund?"; "How
Taxation Affects the Fund and
its Shareholders"; "What If I
Have Questions About My
Account?"
7. Purchase of Securities Being Offered "How Do I Buy Shares?"; "May
I Exchange Shares for Shares
of Another Fund?";
"Transaction Procedures and
Special Requirements";
"Services to Help You Manage
Your Account"; "Who Manages
the Fund?"; "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"; "Useful Terms
and Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TEMPLETON INTERNATIONAL TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN THE PROSPECTUS
(Templeton Pacific Growth Fund - Advisor Class
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 "Financial Highlights"; "How
Information does the Fund Measure
Performance?"
4. General Description of "How is the Fund
Registrant Organized?"; "How does the
Fund Invest its Assets?";
"What are the Risks of
Investing in the Fund?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's
Fund Performance Annual Report to
Shareholders
6. Capital Stock and Other "How is the Fund Organized?";
Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
from the Fund?"; "How Taxation
Affects the Fund and its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to
Help You Manage Your Account";
"Who Manages the Fund?";"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"; "Useful Terms
and Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN TEMPLETON INTERNATIONAL TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
(Templeton Pacific Growth Fund - Class I and II
Templeton Foreign Smaller Companies Fund - Class I)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and See Prospectus "How is the
History Trust Organized?"
13. Investment Objectives and Policies "How does the Fund Invest its
Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and
Other Services"
15. Control Persons and Principal "Officers and Trustees";
Holders ofSecurities "Investment Management and
Other Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Purchase
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing ofSecurities Being Offered Exchange 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"
FRANKLIN TEMPLETON INTERNATIONAL TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
STATEMENT OF ADDITIONAL INFORMATION
(Templeton Pacific Growth Fund - Advisor Class
Templeton Foreign Smaller Companies Fund - Advisor Class)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and See Prospectus "How is the
History Trust Organized?"
13. Investment Objectives "How does the Fund Invest its
and Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Officers and Trustees";
"Investment Management and
Other Services"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and
Other Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and
Other Services Other Services"; "The Fund's
Underwriter"
17. Brokerage Allocation and "How does the Fund Purchase
Other Practices Securities for its Portfolio?"
18. Capital Stock and Other Securities Not Applicable
19. Purchase, Redemption and "How Do I Buy, Sell and
Pricing of Securities Exchange Shares?"; "How are
Being Offered 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
FRANKLIN TEMPLETON INTERNATIONAL TRUST
TEMPLETON FOREIGN SMALLER COMPANIES FUND
TEMPLETON PACIFIC GROWTH FUND
MARCH 1, 1998
INVESTMENT STRATEGY: GLOBAL GROWTH
This prospectus describes Class I of the Templeton Foreign Smaller Companies
Fund (the "Smaller Companies Fund") and Class I and Class II shares of the
Templeton Pacific Growth Fund (the "Pacific Fund"). Each Fund is a series of
Franklin Templeton International Trust (the "Trust"). Each series may
individually or together be referred to as the "Fund(s)." This prospectus
contains information you should know before investing in the Fund. Please
keep it for future reference.
Each Fund currently offers another class of shares with a different sales
charge and expense structure, which affects performance. This class is
described in a separate prospectus. For more information, contact your
investment representative or call 1-800/DIAL BEN.
The Trust has a Statement of Additional Information ("SAI") for its Class I
and Class II shares, dated March 1, 1998, which may be amended from time to
time. It 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.
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.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
March 1, 1998
When reading this prospectus, you will see certain terms beginning with
capital 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 Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How does the Fund Measure Performance?...................
How Taxation Affects the Fund and its Shareholders.......
How is the Trust Organized?.......................
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.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
100 Fountain Parkway
P.O. Box 33030
St. Petersburg
FL 33733-8030
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 each class for the fiscal
year ended October 31, 1997. Pacific Fund Class II expenses are annualized.
The Fund's actual expenses may vary.
SMALLER PACIFIC FUND PACIFIC FUND
A. SHAREHOLDER TRANSACTION COMPANIES CLASS I CLASS II
EXPENSES+ FUND
Maximum Sales Charge (as a
percentage of Offering Price)
5.75% 5.75% 5.75%
Paid at time of purchase
5.75%++ 5.75%++ 1.00%+++
Paid at redemption++++ None None 0.99%
Exchange Fee (per transaction)
$5.00* None None
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 1.00%** 1.00% 1.00%
Rule 12b-1 Fees 0.25%*** 0.17%*** 1.00%***
Other Expenses 0.33% 0.46% 0.48%
----- ----- -----
Total Fund Operating Expenses
1.58%** 1.63% 2.48%
======= ===== =====
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
SMALLER COMPANIES FUND
$73**** $105 $139 $235
PACIFIC FUND - $73****
CLASS I $106 $141 $240
PACIFIC FUND -
CLASS II $45 $86 $141 $289
For the same Pacific Fund Class II investment, you would pay projected
expenses of $35 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? - Choosing a Share Class."
++++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. A Contingent Deferred Sales
Charge may also apply to purchases by certain retirement plans that qualify
to buy Class I shares without a front-end sales charge. 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.
*$5.00 fee is only for Market Timers. We process all other exchanges without
a fee.
**For the period shown, Advisers had agreed in advance to limit its
management fees. With this reduction, management fees were 0.90% and total
operating expenses were 1.48%.
***These fees may not exceed 0.25% for Class I and 1.00% for Class II. 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, 1997. The Annual Report to Shareholders also
includes more information about the Fund's performance. For a free copy,
please call Fund Information.
<TABLE>
<CAPTION>
Class I
-----------------------------------------------------------------------
For the Year Ended October 31,
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Smaller Companies Fund 1997 1996 1995 1994 1993 1992 1991++
- - - -------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $14.18 $13.23 $13.83 $12.28 $10.02 $10.07
$10.01
Income from investment operations:
Net investment income .27 .35 .25 .23 .42 .19
..06
Net realized and unrealized gain (loss) 1.64 1.88 (.08) 1.54 2.25 (.04) -
-----------------------------------------------------------------------
Total from investment operations 1.91 2.23 .17 1.77 2.67 .15 .06
-----------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.32) (.25) (.19) (.22) (.41) (.20) -
Distributions from net realized gains (.71) (1.03) (.59) - - - -
-----------------------------------------------------------------------
Total distributions (1.03) (1.28) (.78) (.22) (.41) (.20) -
-----------------------------------------------------------------------
Net Asset Value, end of year $15.06 $14.18 $13.23 $13.83 $12.28 $10.02 $10.07
=======================================================================
Total return+ 14.25% 18.49% 1.75% 14.56% 27.40% 1.46% .60%
Ratios/Supplemental Data
Net assets, end of year (000's) $121,619 $67,967 $50,947 $57,854 $19,217 $6,944
1,286
Ratios to average net assets:
Expenses 1.48% 1.53% 1.63% 1.22% .50% .29%
- - - -
Expenses excluding waiver and payment by affiliates 1.58% 1.53% 1.63% 1.76% 2.27% 2.50%
2.50%**
Net investment income 2.01% 2.50% 1.86% 1.99% 4.22% 2.36%
4.92%**
Portfolio turnover rate 33.62% 40.46% 9.12% 21.80% 52.99% 48.78%
- - - -
Average commission rate paid* $.0029 $.0026 - - - -
- - - -
</TABLE>
<TABLE>
<CAPTION>
Class I
--------------------------------------------------------------------------
Year Ended October 31,
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pacific Fund 1997 1996 1995 1994 1993 1992 1991++
- - - ------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $14.50 $14.11 $15.40 $14.44 $10.90 $10.07 $10.01
--------------------------------------------------------------------------
Income from investment operations:
Net investment income .14 .12 .15 .21 .19 .14 .06
Net realized and unrealized gain (loss) (3.65) 1.41 (1.01) 1.01 3.83 .84 -
--------------------------------------------------------------------------
Total from investment operations (3.51) 1.53 (.86) 1.22 4.02 .98 .06
--------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.11) (.21) (.16) (.20) (.19) (.15) -
Distributions from net realized gains - (.93) (.27) (.06) (.28) - -
--------------------------------------------------------------------------
Total distributions (.11) (1.14) (.43) (.26) (.48) (.15) -
--------------------------------------------------------------------------
Net Asset Value, end of year $10.88 $14.50 $14.11 $15.40 $14.44 $10.90 $10.07
==========================================================================
Total return+ (24.42%) 11.27% (5.54)% 8.46% 38.46% 9.77% .60%
Ratios/Supplemental Data
Net assets, end of year (000's) $40,958 $59,740 $50,247 $58,241 $22,619 $ 5,724 $1,165
Ratios to average net assets:
Expenses 1.63% 1.52% 1.72% 1.22% .50% .29% -
Expenses excluding waiver
and payment by affiliates 1.63% 1.52% 1.72% 1.72% 2.31% 2.50% 2.50%**
Net investment income .97% 1.06% 1.04% 1.54% 2.03% 1.80% 5.01%**
Portfolio turnover rate 24.79% 13.48% 36.21% 9.16% 47.52% 62.96% -
Average commission rate paid* $.0061 $.0092 - - - - -
</TABLE>
Class II
-------------
Pacific Fund 1997+++
- - - -----------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout the year)
Net Asset Value, beginning of year $15.10
-------------
Income from investment operations:
Net investment income .05
Net realized and unrealized loss (4.31)
-------------
Total from investment operations (4.26)
-------------
Less distributions:
Dividends from net investment income (.03)
-------------
Total distributions (.03)
-------------
Net Asset Value, end of year $10.81
=============
Total Return+ (28.28%)
Ratios/Supplemental Data
Net assets, end of year ( 000's) $2,307
Ratios to average net assets:
Expenses 2.48%**
Net investment income .93%**
Portfolio turnover rate 24.79%
Average commission rate paid* $.0061
+Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge and is not annualized.
++For the period from September 20, 1991 (effective date) through October 31,
1991.
+++For the period from January 2, 1997 (commencement of sales) through
October 31, 1997.
*Relates to purchases and sales of equity securities. Prior to fiscal year
end 1996, disclosure of average commission rate was not required.
**Annualized.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of each Fund is long-term capital growth. This goal is
fundamental which means that it may not be changed without shareholder
approval.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
SMALLER COMPANIES FUND
The Smaller Companies Fund tries to achieve its investment goal by investing
primarily in equity securities of smaller companies outside the U.S. SMALLER
COMPANIES generally are those with market capitalizations of less than $1
billion.
Under normal market conditions, the Fund expects to invest at least 65% of
its total assets in smaller companies (i)located in, or (ii) deriving a
significant portion of their revenues from, or (iii) for which the principal
securities trading market is in any foreign country, including emerging
market countries.
The Fund may invest up to 35% of its total assets in any combination of (i)
equity securities of larger capitalized issuers outside the U.S.; or (ii)
equity securities of issuers within the U.S. - the Fund presently does not
expect to invest more than 5% of its assets in these securities; or (iii)
both rated and unrated debt securities - independent rating organizations
rate debt securities based upon their assessment of the financial soundness
of the issuer. Generally, a lower rating indicates higher risk. The Fund may
buy debt securities which are rated C or better by Moody's or S&P; or unrated
debt which it determines to be of comparable quality. At present, the Fund
does not intend to invest more than 5% of its total assets in non-investment
grade securities (rated lower than BBB by S&P or Baa by Moody's), including
defaulted securities. Please see the SAI for more details on the risks
associated with lower-rated securities.
PACIFIC FUND
The Pacific Fund tries to achieve its investment goal by investing at least
65% of its total assets in equity securities that trade on Pacific Rim
markets 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 Pacific Rim
activities.
For purposes of the Fund's investments, Pacific Rim countries include
Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand,
Pakistan, Philippines, Singapore, South Korea and Thailand.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in issuers in at least three of these countries.
The Fund may invest up to 35% of its total assets in any combination of (i)
securities of issuers domiciled outside the Pacific Rim - these investments
may include securities of issuers that are linked by tradition, economic
markets, cultural similarities or geography to countries in the Pacific Rim
or that have operations in the Pacific Rim or that stand to benefit from
political and economic events in the Pacific Rim; or (ii) both rated and
unrated debt and synthetic convertible securities - independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates
higher risk. The Fund may buy debt securities when they are rated Baa by
Moody's or BBB by S&P or better; or unrated debt which it determines to be of
comparable quality. The Fund's investments in debt instruments may include
U.S. and foreign government and corporate securities, including Samurai
bonds,Yankee bonds and Eurobonds. The Fund currently has no intention of
investing more than 5% of its net assets in synthetic convertible securities.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The Fund's primary investments
are in common stock.
In selecting these equity securities, the Managers do a company-by-company
analysis, rather than focusing on a specific industry or economic sector.
The Managers concentrate primarily on the market price of a company's
securities relative to their view regarding the company's long-term earnings
potential. A company's historical value measures, including price/earnings
ratios, profit margins and liquidation value, will also be considered.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of
money to it, and generally, provide for the payment of interest. These
include bonds, notes and debentures; commercial paper; time deposits; and
bankers' acceptances.
DEPOSITARY RECEIPTS. The Funds may also invest in American, and Global
Depositary Receipts. The Smaller Companies Fund may also invest in European
Depositary Receipts. Depositary Receipts are certificates typically issued
by a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic corporation.
GENERAL. The Fund may invest more than 25% of its assets in the securities of
issuers of any one country. The Fund may invest in any industry although it
will not concentrate (invest more than 25% of its total assets) in any one
industry. The Fund will not invest more than 25% of its total assets in
securities of any one foreign government.
Please see the SAI for more details on the types of securities in which the
Fund invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS.
When the Managers believe that the securities trading markets or the economy
are experiencing excessive volatility or a prolonged general decline, or
other adverse conditions exist, they may invest the Funds' portfolios in a
temporary defensive manner. Under such circumstances, the Funds may invest
up to 100% of their assets in high quality money market instruments. These
include government securities, bank obligations, the highest quality
commercial paper and repurchase agreements. For the Pacific Fund, these
securities must be rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's
or if unrated, determined to be of comparable quality. The Smaller Companies
Fund may also invest in non-U.S. currency, short-term instruments denominated
in non-U.S. currencies and medium-term (up to five years to maturity)
obligations issued or guaranteed by the U.S. government or the governments of
foreign countries, their agencies or instrumentalities.
REPURCHASE AGREEMENTS.
The Fund will generally have a portion of its assets in cash or cash
equivalents for a variety of reasons including waiting for a special
investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the Fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the
Fund agrees to buy a U.S. government security from one of these issuers and
then to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the Fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the Fund in
each repurchase agreement.
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 may also enter into options on securities
and securities indices, other types of futures contracts and related
options. Each of these techniques and transactions is described more fully
in the SAI.
SECURITIES LENDING.
To generate additional income, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors. Such loans
may not exceed 33 1/3% of the value of the Fund's total assets measured at
the time of the most recent loan. For each loan the Fund must receive in
return collateral with a value at least equal to 100% of the current market
value of the loaned securities.
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 for approximately the amount at which the Fund has valued them.
SHORT-TERM TRADING AND PORTFOLIO TURNOVER.
The Fund invests for long-term capital growth and does not intend to
emphasize short-term trading profits. It is anticipated, therefore, that the
Fund's annual portfolio turnover rate generally will be below 100%; although
this rate may be higher or lower, in relation to market conditions.
OTHER POLICIES AND RESTRICTIONS.
The Fund has a number of additional investment restrictions that govern its
activities. Some of these restrictions may only be changed with shareholder
approval and some may be changed by the Board alone. For a list of these
restrictions and more information about the Fund's investment policies,
including those described above, and their associated risks, please see "How
does the Fund Invest its Assets?" and "Investment Restrictions" in the SAI.
The policies and restrictions discussed in this prospectus and in the SAI are
applied at the time the Fund makes an investment. The Fund is generally not
required to sell a security because of a change in circumstances.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK.
There is no assurance that the Fund's investment goal will be met. The Fund
will seek to spread investment risk by diversifying its investments but the
possibility of losses remains. Generally, if the securities owned by the Fund
increase in value, the value of the shares of the Fund which you own will
increase. Similarly, if the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in
any change in the value of the securities owned by the Fund.
FOREIGN SECURITIES RISK.
The value of foreign (and U.S.) securities is affected by general economic
conditions and individual company and industry earnings prospects. While
foreign securities may offer significant opportunities for gain, they also
involve additional risks that can increase the potential for losses in the
Fund. These risks can be significantly greater for investments in emerging
markets. Investments in Depositary Receipts also involve some or all of the
risks described below.
The political, economic and social structures of some countries in which the
Fund invests may be less stable and more volatile than those in the U.S. 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.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they 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. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The Fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
Some of the countries in which the Fund may invest such as
[ ] and [ ] are considered developing or emerging markets.
Investments in these markets are subject to all of the risks of foreign
investing generally, and have additional and heightened risks due to a lack
of legal, business and social frameworks to support securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions and risk of loss arising out of the
system of share registration and custody. The Funds may invest up to 100% of
their total assets in emerging markets. The Smaller Companies Fund may
include up to 5% of its total assets in Russian securities. For more
information on the risks associated with emerging markets securities, please
see the SAI.
SMALLER COMPANIES RISK.
The Smaller Companies Fund's investments in smaller company securities
involve special risks. Historically, smaller company securities have been
more volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity
in the markets for such securities and the greater sensitivity of smaller
companies to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
MARKET, CURRENCY, AND INTEREST RATE RISK.
General market movements in any country where the Fund has investments are
likely to affect the value of the securities which the Fund owns in that
country and the Fund's share price may also be affected. The Fund's
investments may be denominated in foreign currencies so that changes in
foreign currency exchange rates will also affect the value of what the Fund
owns, and thus the price of its 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, consequently, its
share price. Rising interest rates, which often occur during times of
inflation or a growing economy, are likely to cause the face value of a debt
security to decrease, having a negative effect on the value of the Fund's
shares. Of course, individual and worldwide stock markets, interest rates
and currency valuations have both increased and decreased, sometimes very
dramatically, in the past. These changes are likely to occur again in the
future at unpredictable times.
CREDIT AND ISSUER RISK.
The Fund's investments in debt securities involve credit risk. This is the
risk that the issuer of a debt security will be unable to make principal and
interest payments in a timely manner and the debt security will go into
default. The purchase of defaulted debt securities involves significant
additional risks, such as the possibility of complete loss of the investment
in the event the issuer does not restructure or reorganize to enable it to
resume paying interest and principal to holders.
DERIVATIVE SECURITIES RISK.
Derivative investments are those whose values are dependent upon the
performance of one or more other securities or investments or indexes. (In
contrast to common stock, for example, whose value is dependent upon the
operations of the issuer). Option transactions, futures and forward
contracts are considered derivative investments. Although the Fund will
enter these transactions in order to enhance its performance, their success
will depend upon the Managers' ability to predict pertinent market movements.
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 Fund's 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 $215 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.
Under an agreement with Advisers, Investment Counsel is the sub-advisor of
each Fund. Investment Counsel provides Advisers with investment management
advice and assistance. Investment Counsel recommends the optimal equity
allocation and provides advice regarding the Fund's investments. Investment
Counsel also determines which securities will be purchased, retained or sold
and executes these transactions. Investment Counsel'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:
SMALLER COMPANIES FUND - Simon Rudolph and Peter A. Nori since June 1997.
Simon Rudolph
Vice President of Investment Counsel
Mr. Rudolph is a Chartered Accountant and holds a Bachelor of Arts degree in
Economic History from Durham University in England. Mr. Rudolph has been a
securities analyst since 1986. Before joining the Franklin Templeton
organization in 1997, he was an executive director with Morgan Stanley.
Peter A. Nori
Vice President of Investment Counsel
Mr. Nori is a Chartered Financial Analyst and holds both a Master of Business
Administration degree and a Bachelor of Science degree in Finance from the
University of San Francisco. After completing the Franklin management
training program, Mr. Nori joined portfolio research in 1990 as an equity
analyst and co-portfolio manager of the Franklin Convertible Securities Fund.
In 1994, Mr. Nori joined the Templeton organization as a research analyst
specializing in small-cap companies and currently is also the portfolio
manager of Templeton American Trust, Inc.
PACIFIC FUND - William T. Howard, Jr. since 1993, Mark R. Beveridge since
1994, and Gary Clemons since 1993.
William T. Howard, Jr.
Senior Vice President of Investment Counsel
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
Senior Vice President of Investment Counsel
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
Senior Vice President of Investment Counsel
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, 1997, management
fees, before any advance waiver, totaled 1.00% of the average daily net
assets of the Smaller Companies Fund. Total operating expenses were 1.58%.
Under an agreement by Advisers to limit its fees, the Smaller Companies Fund
paid management fees totaling 0.90% and operating expenses totaling 1.48%.
Advisers may end this arrangement at any time upon notice to the Board.
During the same period, Advisers paid Investment Counsel a sub-advisory fee
totaling 0.43% of the average daily net assets of the Smaller Companies Fund.
This fee is not a separate expense of the Fund but is paid by Advisers from
the management fees it receives from the Fund.
During the fiscal year ended October 31, 1997, management fees totaling 1.00%
of the average daily net assets of the Pacific Fund were paid to Advisers.
Total annualized expenses, including fees paid to Advisers, were 1.63% for
Class I and 2.48% for Class II. During the same period, Advisers paid
Investment Counsel a sub-advisory fee totaling 0.51% of the average daily net
assets of the Pacific Fund. This fee is not a separate expense of the Fund
but is paid by Advisers from the management fees it receives from the Fund.
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, they 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
Smaller Companies Fund and Pacific Fund Class I and Class II have separate
distribution plans or "Rule 12b-1 Plans" under which they may pay or
reimburse Distributors or others for the expenses of activities that are
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; a prorated portion of Distributors' overhead expenses; and
the expenses of printing prospectuses and reports used for sales purposes,
and preparing and distributing sales literature and advertisements.
Payments by each 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 Pacific 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 Pacific 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 Pacific Fund on behalf of customers, and similar
servicing and account maintenance activities.
The Rule 12b-1 fees charged to each class of the Pacific Fund 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. A
commonly used measure of performance is total return. Performance figures are
usually calculated using the maximum sales charges, but certain figures may
not include 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 TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE INTERNAL
REVENUE CODE. BECAUSE MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN
THE SAI.
TAXATION OF THE FUND'S INVESTMENTS.
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The Fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are
described in the section "How does the The Fund earns dividends and interest (the
Fund Invest its Assets?" Special tax Fund's "income") on its investments. When
rules may apply in determining the income the Fund sells a security for a price that is
and gains that the Fund earns on its higher than it paid, it has a gain. When the
investments. These rules may, in turn, Fund sells a security for a price that is
affect the amount of distributions that lower than it paid, it has a loss. If the
the Fund pays to you. These special tax Fund has held the security for more than one
rules are discussed in the SAI. year, the gain or loss will be a long-term
capital gain or loss. If the Fund has held
TAXATION OF THE FUND. As a regulated the security for one year or less, the gain
investment company, the Fund generally or loss will be a short-term capital gain or
pays no federal income tax on the income loss. The Fund's gains and losses are netted
and gains that it distributes to you. together, and, if the Fund has a net gain
(the Fund's "gains"), that gain will
generally be distributed to you.
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FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the Fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the Fund's distributions to you, but, depending upon the amount of the
Fund's assets that are invested in foreign securities, may be passed through to
you as a foreign tax credit on your income tax return. The Fund may also invest
in the securities of foreign companies that are "passive foreign investment
companies" ("PFICs"). These investments in PFICs may cause the Fund to pay
income taxes and interest charges. If possible, the Fund will adopt strategies
to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS.
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DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
Fund, whether you receive them in cash or
in additional shares, are generally As a shareholder, you will receive your share
subject to income tax. The Fund will send of the Fund's income and gains on its
you a statement in January of the current investments in stocks, bonds and other
year that reflects the amount of ordinary securities. The Fund's income and short term
dividends, capital gain distributions and capital gains are paid to you as ordinary
non-taxable distributions you received dividends. The Fund's long-term capital
from the Fund in the prior year. This gains are paid to you as capital gain
statement will include distributions distributions. If the Fund pays you an
declared in December and paid to you in amount in excess of its income and gains,
January of the current year, but which are this excess will generally be treated as a
taxable as if paid on December 31 of the non-taxable distribution. These amounts,
prior year. The IRS requires you to taken together, are what we call the Fund's
report these amounts on your income tax distributions to you.
return for the prior year. The Fund's
statement for the prior year will tell you
how much of your capital gain distribution
represents 28% rate gain property. The
remainder of the capital gain distribution
represents 20% rate gain, subject to
certain holding period and debt financing
restrictions.
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DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the Fund.
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REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares
in the Fund for shares in another Franklin A redemption is a sale by you to the Fund of
Templeton Fund, you will generally have a some or all of your shares in the Fund. The
gain or loss that the IRS requires you to price per share you receive when you redeem
report on your income tax return. If you Fund shares may be more or less than the
exchange Fund shares held for 90 days or price at which you purchased those shares.
less and pay no sales charge, or a reduced An exchange of shares in the Fund for shares
sales charge, for the new shares, all or a of another Franklin Templeton Fund is treated
portion of the sales charge you paid on as a redemption of Fund shares and then a
the purchase of the shares you exchanged purchase of shares of the other fund. When
is not included in their cost for purposes you redeem or exchange your shares, you will
of computing gain or loss on the generally have a gain or loss, depending upon
exchange. If you hold your shares for six whether the basis in your shares is more or
months or less, any loss you have will be less than your cost or other basis in the
treated as a long-term capital loss to the shares. Call Franklin Templeton Fund
extent of any capital gain distributions Information at 1-800-342-5236 for a free
received by you from the Fund. All or a shareholder Tax Information Handbook if you
portion of any loss on the redemption or need more information in calculating the gain
exchange of your shares will be disallowed or loss on the redemption or exchange of your
by the IRS if you purchase other shares in shares.
the Fund within 30 days before or after
your redemption or exchange.
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FOREIGN TAXES. If more than 50% of the WHAT IS FOREIGN TAX CREDIT?
value of the Fund's assets consist of
foreign securities, the Fund may elect to A foreign tax credit is a tax credit for the
pass-through to you the amount of foreign amount of taxes imposed by a foreign country
taxes it paid. If the Fund makes this on earnings of the Fund. When a foreign
election, your year-end statement will company in which the Fund invests pays a
show more taxable income than was actually dividend to the Fund, the dividend will
distributed to you. However, you will be generally be subject to a withholding tax.
entitled to either deduct your share of The taxes withheld in foreign countries
such taxes in computing your taxable create credits that you may use to offset
income or claim a foreign tax credit for your U.S. federal income tax.
such taxes against your U.S. federal
income tax. Your year-end statement,
showing the amount of deduction or credit
available to you, will be distributed to
you in January along with other
shareholder information records including
your Fund Form 1099-DIV.
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The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS SIMPLIFIED
PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND IS NOT AVAILABLE
IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
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BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup Withholding occurs when the Fund is
number ("TIN"), certify that it is required to withhold and pay over to the IRS
correct, and certify that you are not 31% of your distributions and redemption
subject to backup withholding under IRS proceeds. You can avoid backup withholding
rules. If you fail to provide a correct by providing the Fund with your TIN, and by
TIN or the proper tax certifications, the completing the tax certifications on your
Fund is required to withhold 31% of all account application that you were asked to
the distributions (including ordinary sign when you opened your account. However,
dividends and capital gain distributions), if the IRS instructs the Fund to begin backup
and redemption proceeds paid to you. The withholding, it is required to do so even if
Fund is also required to begin backup you provided the Fund with your TIN and these
withholding on your account if the IRS tax certifications, and backup withholding
instructs the Fund to do so. The Fund will remain in place until the Fund is
reserves the right not to open your instructed by the IRS that it is no longer
account, or, alternatively, to redeem your required.
shares at the current net asset value,
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the Fund to begin backup
withholding on your account.
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THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" IN THE
STATEMENT OF ADDITIONAL INFORMATION. THE TAX TREATMENT TO YOU OF DIVIDENDS,
CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID AND INCOME TAXES WITHHELD ARE
ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK BY
CONTACTING OUR FUND INFORMATION DEPARTMENT TOLL-FREE AT 1-800-342-5236.
HOW IS THE TRUST ORGANIZED?
Each Fund is a diversified series of 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.
Prior to February 1, 1996, the Trust was known as Franklin International
Trust. As of January 2, 1997, the Funds began offering new classes of shares
designated Templeton Foreign Smaller Companies Fund - Advisor Class,
Templeton Pacific Growth Fund - Class II and Templeton Pacific Growth Fund -
Advisor Class. All shares outstanding before the offering of Class II and
Advisor Class shares have been designated Class I shares. Additional series
and 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 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 affecting only that class,
or expressly required to be voted on separately by state or federal law.
Shares of each class of a series have the same voting and other rights and
preferences as the other classes and series of the Trust for matters that
affect the Trust as a whole.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares.
In certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of December 24, 1997, Franklin Templeton Trust Company TTEE for ValuSelect
Franklin Resources PSP, P.O. Box 2438, Rancho Cordova, CA 95741-2438 owned of
record and beneficially more than 25% of the outstanding shares of Pacific
Fund's Advisor Class.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE PACIFIC FUND
CURRENTLY DOES NOT ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $100*
o To add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve the right to
refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application, including
the optional shareholder privileges section. By applying for privileges now, you
can avoid the delay and inconvenience of having to send an additional
application to add privileges later. PLEASE ALSO INDICATE WHICH CLASS OF SHARES
YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL AUTOMATICALLY INVEST
YOUR PURCHASE IN CLASS I SHARES. It is important that we receive a signed
application since we will not be able to process any redemptions from your
account until we receive your signed application.
4. Make your investment using the table below.
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METHOD STEPS TO FOLLOW
- - - --------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund with your
check made payable to the Fund.
For additional investments:
Send a check made payable to the Fund. Please
include your account number on the check.
- - - --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For initial investments you must also return
your signed shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the Fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day. If we
receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- - - --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- - - --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
o Lower annual expenses than Class o Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
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
AS A PERCENTAGE OF AMOUNT PAID TO
-------------------- DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- - - ------------------------------------------------------------------------------
CLASS I
Under $50,000 5.75% 6.10% 5.00%
$50,000 but less than 4.50% 4.71% 3.75%
$100,000
$100,000 but less than 3.50% 3.63% 2.80%
$250,000
$250,000 but less than 2.50% 2.56% 2.00%
$500,000
$500,000 but less than 2.00% 2.04% 1.60%
$1,000,000
$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 "Choosing a Share Class."
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 existing shares in
the 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 Franklin Templeton Fund sales and other 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. If one of the following sales charge waivers applies to
you or your purchase of Fund shares, you may buy shares of the Fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class I shares only,
except for items 1 and 2 which also apply to Class II purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the Fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class II shareholders who
chose to reinvest their distributions in Class I shares of the Fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class I shares of the Fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you originally paid a sales charge on the shares and you
reinvest the money in the same class of shares. This waiver does not
apply to exchanges.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of Fund shares and a new Contingency
Period will begin. We will, however, credit your Fund account with
additional shares based on the Contingent Deferred Sales Charge you paid
and the amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. 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, or the Templeton Variable Products Series Fund. You should contact
your tax advisor for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners, who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with
at least 100 employees, or (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 may buy Class I shares without a front-end sales charge.
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 to be able to buy Class I shares without a
front-end sales charge. For retirement plan accounts opened on or after May
1, 1997, a Contingent Deferred Sales Charge may apply if the account is
closed within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds. Please see "How Do I Sell Shares? - Contingent
Deferred Sales Charge" for details.
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, call Retirement Plan Services.
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 described below may be made to Securities Dealers who initiate
and are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not
by the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount
invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested.
4. Class I purchases by trust companies and bank trust departments,
Eligible Governmental Authorities, and broker-dealers or others on
behalf of clients participating in comprehensive fee programs - up to
0.25% of the amount invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the
amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1, 2 or 5 above or a payment of up
to 1% for investments described in paragraph 3 will be eligible to receive
the Rule 12b-1 fee associated with the purchase starting in the thirteenth
calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
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, its investment
objective and policies, 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 signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- - - --------------------------------------------------------------------------------
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. For accounts with shares subject to a
Contingent Deferred Sales Charge, we will first exchange any shares in your
account that are not subject to the charge. If there are not enough of these
to meet your exchange request, we will exchange shares subject to the charge
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. If you exchange your Class II shares for shares of Money
Fund II, however, 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, except as noted below.
o The accounts must be identically registered. You may, however, 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. 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 Retirement Plan Services 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.
Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Smaller Companies Fund within two weeks of an earlier
exchange request, (ii) exchanged shares out of the Fund more than twice in
a calendar quarter, or (iii) exchanged shares equal to at least $5
million, or more than 1% of the Smaller Companies Fund's net assets.
Shares under common ownership or control are combined for these limits. If
you have exchanged 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.
o Currently, the Pacific Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Certain shareholders of Class
Z shares of Franklin Mutual Series Fund Inc. may exchange their Class Z
shares for Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- - - --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- - - --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
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 other requirements.
- - - --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
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 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- - - --------------------------------------------------------------------------------
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 would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 4:00 p.m. Eastern time, your wire payment
will be sent the next business day. For requests received in proper form
after 4:00 p.m. Eastern time, the payment will be sent the second business
day. By offering this service to you, the Fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the Fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently 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 Retirement Plan Services.
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.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account
is closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will 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 Account fees
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
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, at a rate of up to 1% a month of an account's Net Asset
Value. For example, if you maintain an annual balance of $1 million in
Class I shares, you can redeem 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 redeemed
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 Redemptions by Trust Company employee benefit plans or employee benefit
plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
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 Class I
and Class II.
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 and you will then receive a portion of the price you paid
back in the form of a taxable 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 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 - Class I Only" under "Services to Help You Manage
Your Account."
Distributions may be reinvested only in the SAME CLASS of shares, except as
follows: (i) Class II shareholders who chose to reinvest their distributions
in Class I shares of the Fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class II shareholders may
reinvest their distributions in shares of any Franklin Templeton money fund.
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. You may change your distribution option at any time
by notifying us by mail or phone. Please allow at least seven days before the
record date for us to process the new option. For Trust Company retirement
plans, special forms are required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one 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.
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 close of the NYSE, generally
4:00 p.m. Eastern 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.
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 are 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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
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. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account 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 may also record calls. 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 us written
instructions, as described elsewhere in this prospectus.
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. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to 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 Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to
exchange or redeem your shares. Electronic instructions may be processed
through established electronic trading systems and programs used by the Fund.
Telephone instructions directly from your representative will be accepted
unless you have told us that you do not want telephone privileges to apply to
your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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 -
Class I Only" below. Once your plan is established, any distributions paid by
the Fund will be automatically reinvested in your account.
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.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, 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 for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The Smaller
Companies Fund's code number is 191. The code number for the Pacific Fund is
190 for Class I and 290 for Class II.
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more
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, Distributors
and Investment Counsel are located at 100 Fountain Parkway, P.O. Box 33030,
St. Petersburg, Florida 33733-8030. You may also contact us by phone at one
of the numbers listed below.
HOURS OF OPERATION
(EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 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
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Pacific Fund offers three classes
of shares, designated "Class I," "Class II" and "Advisor Class" and the
Smaller Companies Fund offers two classes of shares designated "Class I" and
"Advisor Class." The classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge and expense
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.
Depositary Receipts - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
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
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the Fund's
sub-advisor
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGERS - Advisers and Investment Counsel
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
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 PLANS - 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.
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
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
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
FRANKLIN TEMPLETON INTERNATIONAL TRUST
TEMPLETON FOREIGN SMALLER COMPANIES FUND - ADVISOR CLASS
TEMPLETON PACIFIC GROWTH FUND - ADVISOR CLASS
MARCH 1, 1998
INVESTMENT STRATEGY: GLOBAL GROWTH
This prospectus describes the Advisor Class shares of the Templeton Foreign
Smaller Companies Fund (the "Smaller Companies Fund") and the Templeton Pacific
Growth Fund (the "Pacific Fund"). Each Fund is a series of Franklin Templeton
International Trust (the "Trust"). Each series may individually or together be
referred to as the "Fund(s)." This prospectus contains information you should
know before investing in the Fund. Please keep it for future reference.
The Trust currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Trust has a Statement of Additional Information ("SAI") for its Advisor
Class, dated March 1, 1998, which may be amended from time to time. It 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.
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.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY 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.
FRANKLIN TEMPLETON INTERNATIONAL TRUST - ADVISOR CLASS
March 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
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 Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How does the Fund Measure Performance?...................
How Taxation Affects the Fund and its Shareholders.......
How is the Trust Organized?..............................
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.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
100 Fountain Parkway
P.O. Box 33030
St. Petersburg
FL 33733-8030
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 the Advisor Class for the fiscal
year ended October 31, 1997. The expenses are annualized. The Fund's actual
expenses may vary.
SMALLER
COMPANIES PACIFIC
A. SHAREHOLDER TRANSACTION EXPENSES+ FUND FUND
Maximum Sales Charge Imposed on Purchases None None
Exchange Fee (per transaction) $5.00* None
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 1.00%** 1.00%
Rule 12b-1 Fees None None
Other Expenses 0.36% 0.48%
Total Fund Operating Expenses 1.36%** 1.48%
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Smaller Companies Fund $14 $43 $74 $164
Pacific Fund $15 $47 $81 $177
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.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.90% and total operating
expenses were 1.24%.
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 the period shown below appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended October
31, 1997. The Annual Report to Shareholders also includes more information about
the Fund's performance. For a free copy, please call Fund Information.
ADVISOR CLASS
SMALLER COMPANIES FUND 1997++ PER SHARE OPERATING PERFORMANCE (for a share
outstanding throughout the year) Net Asset Value, beginning of year $14.00
Income from investment operations:
Net investment income .20
Net realized and unrealized gain .98
Total from investment operations 1.18
Less distributions:
Dividends from net investment income (.09)
-----
Total distributions (.09)
-----
Net Asset Value, end of year $15.09
=====
Total return+ 8.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ( 000's) $3,726
Ratio to average net assets:
Expenses 1.24%**
Expenses excluding waiver and payment by
affiliates 1.36%**
Net investment income 2.66%**
Portfolio turnover rate 33.62%
Average commission rate paid* $.0029
ADVISOR CLASS
PACIFIC FUND 1997++
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year) Net Asset Value, beginning
of year $15.10
Income from investment operations:
Net investment income .12
Net realized and unrealized gain (loss) (4.30)
Total from investment operations (4.18)
Less distributions:
Dividends from net investment income (.04)
-----
Total distributions (.04)
-----
Net Asset Value, end of year $10.88
=====
Total Return+ (27.74%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ( 000's) $1,357
Ratio to average net assets:
Expenses 1.48%**
Net investment income 1.55%**
Portfolio turnover rate 24.79%
Average commission rate paid* $.0061
+Total return is not annualized.
++For the period from January 2, 1997 (commencement of sales) through October
31, 1997.
*Relates to purchases and sales of equity securities.
**Annualized.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of each Fund is long-term capital growth. This goal is
fundamental which means that it may not be changed without shareholder approval.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
SMALLER COMPANIES FUND
The Smaller Companies Fund tries to achieve its investment goal by investing
primarily in equity securities of smaller companies outside the U.S. SMALLER
COMPANIES generally are those with market capitalizations of less than $1
billion.
Under normal market conditions, the Fund expects to invest at least 65% of its
total assets in smaller companies (i)located in, or (ii) deriving a significant
portion of their revenues from, or (iii) for which the principal securities
trading market is in any foreign country, including emerging market countries.
The Fund may invest up to 35% of its total assets in any combination of (i)
equity securities of larger capitalized issuers outside the U.S.; or (ii) equity
securities of issuers within the U.S. - the Fund presently does not expect to
invest more than 5% of its assets in these securities; or (iii) both rated and
unrated debt securities - independent rating organizations rate debt securities
based upon their assessment of the financial soundness of the issuer. Generally,
a lower rating indicates higher risk. The Fund may buy debt securities which are
rated C or better by Moody's or S&P; or unrated debt which it determines to be
of comparable quality. At present, the Fund does not intend to invest more than
5% of its total assets in non-investment grade securities (rated lower than BBB
by S&P or Baa by Moody's), including defaulted securities. Please see the SAI
for more details on the risks associated with lower-rated securities.
PACIFIC FUND
The Pacific Fund tries to achieve its investment goal by investing at least 65%
of its total assets in equity securities that trade on Pacific Rim markets 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 Pacific Rim activities.
For purposes of the Fund's investments, Pacific Rim countries include Australia,
China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan,
Philippines, Singapore, South Korea and Thailand. Under normal market
conditions, the Fund will invest at least 65% of its total assets in issuers in
at least three of these countries.
The Fund may invest up to 35% of its total assets in any combination of (i)
securities of issuers domiciled outside the Pacific Rim - these investments may
include securities of issuers that are linked by tradition, economic markets,
cultural similarities or geography to countries in the Pacific Rim or that have
operations in the Pacific Rim or that stand to benefit from political and
economic events in the Pacific Rim; or (ii) both rated and unrated debt and
synthetic convertible securities - independent rating organizations rate debt
securities based upon their assessment of the financial soundness of the issuer.
Generally, a lower rating indicates higher risk. The Fund may buy debt
securities when they are rated Baa by Moody's or BBB by S&P or better; or
unrated debt which it determines to be of comparable quality. The Fund's
investments in debt instruments may include U.S. and foreign government and
corporate securities, including Samurai bonds,Yankee bonds and Eurobonds. The
Fund currently has no intention of investing more than 5% of its net assets in
synthetic convertible securities.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The Fund's primary investments are
in common stock.
In selecting these equity securities, the Managers do a company-by-company
analysis, rather than focusing on a specific industry or economic sector. The
Managers concentrate primarily on the market price of a company's securities
relative to their view regarding the company's long-term earnings potential. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; and bankers' acceptances.
DEPOSITARY RECEIPTS. The Funds may also invest in American, and Global
Depositary Receipts. The Smaller Companies Fund may also invest in European
Depositary Receipts. Depositary Receipts are certificates typically issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic corporation.
GENERAL. The Fund may invest more than 25% of its assets in the securities of
issuers of any one country. The Fund may invest in any industry although it will
not concentrate (invest more than 25% of its total assets) in any one industry.
The Fund will not invest more than 25% of its total assets in securities of any
one foreign government.
Please see the SAI for more details on the types of securities in which the Fund
invests.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS.
When the Managers believe that the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist, they may invest the Funds' portfolios in a temporary
defensive manner. Under such circumstances, the Funds may invest up to 100% of
their assets in high quality money market instruments. These include government
securities, bank obligations, the highest quality commercial paper and
repurchase agreements. For the Pacific Fund, these securities must be rated A-1
or A-2 by S&P or Prime-1 or Prime-2 by Moody's or if unrated, determined to be
of comparable quality. The Smaller Companies Fund may also invest in non-U.S.
currency, short-term instruments denominated in non-U.S. currencies and
medium-term (up to five years to maturity) obligations issued or guaranteed by
the U.S. government or the governments of foreign countries, their agencies or
instrumentalities.
REPURCHASE AGREEMENTS.
The Fund will generally have a portion of its assets in cash or cash equivalents
for a variety of reasons including waiting for a special investment opportunity
or taking a defensive position. To earn income on this portion of its assets,
the Fund may enter into repurchase agreements with certain banks and
broker-dealers. Under a repurchase agreement, the Fund agrees to buy a U.S.
government security from one of these issuers and then to sell the security back
to the issuer after a short period of time (generally, less than seven days) at
a higher price. The bank or broker-dealer must transfer to the Fund's custodian
securities with an initial value of at least 102% of the dollar amount invested
by the Fund in each repurchase agreement.
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 may also enter into options on securities and securities indices, other
types of futures contracts and related options. Each of these techniques and
transactions is described more fully in the SAI.
SECURITIES LENDING.
To generate additional income, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors. Such loans may
not exceed 33 1/3% of the value of the Fund's total assets measured at the time
of the most recent loan. For each loan the Fund must receive in return
collateral with a value at least equal to 100% of the current market value of
the loaned securities.
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 for approximately the amount at which the Fund has valued them.
SHORT-TERM TRADING AND PORTFOLIO TURNOVER.
The Fund invests for long-term capital growth and does not intend to emphasize
short-term trading profits. It is anticipated, therefore, that the Fund's annual
portfolio turnover rate generally will be below 100%; although this rate may be
higher or lower, in relation to market conditions.
OTHER POLICIES AND RESTRICTIONS.
The Fund has a number of additional investment restrictions that govern its
activities. Some of these restrictions may only be changed with shareholder
approval and some may be changed by the Board alone. For a list of these
restrictions and more information about the Fund's investment policies,
including those described above, and their associated risks, please see "How
does the Fund Invest its Assets?" and "Investment Restrictions" in the SAI.
The policies and restrictions discussed in this prospectus and in the SAI are
applied at the time the Fund makes an investment. The Fund is generally not
required to sell a security because of a change in circumstances.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL RISK.
There is no assurance that the Fund's investment goal will be met. The Fund will
seek to spread investment risk by diversifying its investments but the
possibility of losses remains. Generally, if the securities owned by the Fund
increase in value, the value of the shares of the Fund which you own will
increase. Similarly, if the securities owned by the Fund decrease in value, the
value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
FOREIGN SECURITIES RISK.
The value of foreign (and U.S.) securities is affected by general economic
conditions and individual company and industry earnings prospects. While foreign
securities may offer significant opportunities for gain, they also involve
additional risks that can increase the potential for losses in the Fund. These
risks can be significantly greater for investments in emerging markets.
Investments in Depositary Receipts also involve some or all of the risks
described below.
The political, economic and social structures of some countries in which the
Fund invests may be less stable and more volatile than those in the U.S. 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.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they 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. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The Fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with respect
to foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts.
Some of the countries in which the Fund may invest such as [ ] and [ ] are
considered developing or emerging markets. Investments in thes markets are
subject to all of the risks of foreign investing generally, and have additional
and heightened risks due to a lack of legal, business and social frameworks to
support securities markets.
Emerging markets involve additional significant risks, including political and
social uncertainty (for example, regional conflicts and risk of war), currency
exchange rate volatility, pervasiveness of corruption and crime, delays in
settling portfolio transactions and risk of loss arising out of the system of
share registration and custody. The Funds may invest up to 100% of their total
assets in emerging markets. The Smaller Companies Fund may include up to 5% of
its total assets in Russian securities. For more information on the risks
associated with emerging markets securities, please see the SAI.
SMALLER COMPANIES RISK.
The Smaller Companies Fund's investments in smaller company securities involve
special risks. Historically, smaller company securities have been more volatile
in price than larger company securities, especially over the short-term. Among
the reasons for the greater price volatility are the less certain growth
prospects of smaller companies, the lower degree of liquidity in the markets for
such securities and the greater sensitivity of smaller companies to changing
economic conditions.
In addition, smaller companies may lack depth of management, they may be unable
to generate funds necessary for growth or development or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established.
Therefore, while smaller companies may offer greater opportunities for capital
growth than larger, more established companies, they also involve greater risks
and Should be considered speculative.
MARKET, CURRENCY, AND INTEREST RATE RISK.
General market movements in any country where the Fund has investments are
likely to affect the value of the securities which the Fund owns in that country
and the Fund's share price may also be affected. The Fund's investments may be
denominated in foreign currencies so that changes in foreign currency exchange
rates will also affect the value of what the Fund owns, and thus the price of
its 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, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the Fund's shares. Of course, individual and worldwide
stock markets, interest rates and currency valuations have both increased and
decreased, sometimes very dramatically, in the past. These changes are likely to
occur again in the future at unpredictable times.
CREDIT AND ISSUER RISK.
The Fund's investments in debt securities involve credit risk. This is the risk
that the issuer of a debt security will be unable to make principal and interest
payments in a timely manner and the debt security will go into default. The
purchase of defaulted debt securities involves significant additional risks,
such as the possibility of complete loss of the investment in the event the
issuer does not restructure or reorganize to enable it to resume paying interest
and principal to holders.
DERIVATIVE SECURITIES RISK.
Derivative investments are those whose values are dependent upon the performance
of one or more other securities or investments or indexes. (In contrast to
common stock, for example, whose value is dependent upon the operations of the
issuer). Option transactions, futures and forward contracts are considered
derivative investments. Although the Fund will enter these transactions in order
to enhance its performance, their success will depend upon the Managers' ability
to predict pertinent market movements.
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
Fund's 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 $215 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.
Under an agreement with Advisers, Investment Counsel is the sub-advisor of each
Fund. Investment Counsel provides Advisers with investment management advice and
assistance. Investment Counsel recommends the optimal equity allocation and
provides advice regarding the Fund's investments. Investment Counsel also
determines which securities will be purchased, retained or sold and executes
these transactions. Investment Counsel'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:
SMALLER COMPANIES FUND - Simon Rudolph and Peter A. Nori since June 1997.
Simon Rudolph
Vice President of Investment Counsel
Mr. Rudolph is a Chartered Accountant and holds a Bachelor of Arts degree in
Economic History from Durham University in England. Mr. Rudolph has been a
securities analyst since 1986. Before joining the Franklin Templeton
organization in 1997, he was an executive director with Morgan Stanley.
Peter A. Nori
Vice President of Investment Counsel
Mr. Nori is a Chartered Financial Analyst and holds both a Master of Business
Administration degree and a Bachelor of Science degree in Finance from the
University of San Francisco. After completing the Franklin management training
program, Mr. Nori joined portfolio research in 1990 as an equity analyst and
co-portfolio manager of the Franklin Convertible Securities Fund. In 1994, Mr.
Nori joined the Templeton organization as a research analyst specializing in
small-cap companies and currently is also the portfolio manager of Templeton
American Trust, Inc.
PACIFIC FUND - William T. Howard, Jr. since 1993, Mark R. Beveridge since 1994,
and Gary Clemons since 1993.
William T. Howard, Jr.
Senior Vice President of Investment Counsel
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
Senior Vice President of Investment Counsel
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
Senior Vice President of Investment Counsel
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, 1997, management fees,
before any advance waiver, totaled 1.00% of the average daily net assets of the
Smaller Companies Fund. Total operating expenses were 1.36% of the average daily
net assets of the Smaller Companies Fund. Under an agreement by Advisers to
limit its fees, the Smaller Companies Fund paid management fees totaling 0.90%
and annualized operating expenses totaling 1.24%. Advisers may end this
arrangement at any time upon notice to the Board. During the same period,
Advisers paid Investment Counsel a sub-advisory fee totaling 0.43% of the
average daily net assets of the Smaller Companies Fund. This fee is not a
separate expense of the Fund but is paid by Advisers from the management fees it
receives from the Fund.
During the fiscal year ended October 31, 1997, management fees totaling 1.00% of
the average daily net assets of the Pacific Fund were paid to Advisers. Total
annualized expenses, including fees paid to Advisers, were 1.48%. During the
same period, Advisers paid Investment Counsel a sub-advisory fee totaling 0.51%
of the average daily net assets of the Pacific Fund. This fee is not a separate
expense of the Fund but is paid by Advisers from the management fees it receives
from the Fund.
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, they 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 Advisor Class of the Fund advertises its performance. A
commonly used measure of performance is total return.
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 the Advisor 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 TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT OF
1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE INTERNAL
REVENUE CODE. BECAUSE MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN
THE SAI.
TAXATION OF THE FUND'S INVESTMENTS.
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The Fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are
described in the section "How does the The Fund earns dividends and interest (the
Fund Invest its Assets?" Special tax Fund's "income") on its investments. When
rules may apply in determining the income the Fund sells a security for a price that is
and gains that the Fund earns on its higher than it paid, it has a gain. When the
investments. These rules may, in turn, Fund sells a security for a price that is
affect the amount of distributions that lower than it paid, it has a loss. If the
the Fund pays to you. These special tax Fund has held the security for more than one
rules are discussed in the SAI. year, the gain or loss will be a long-term
capital gain or loss. If the Fund has held
TAXATION OF THE FUND. As a regulated the security for one year or less, the gain
investment company, the Fund generally or loss will be a short-term capital gain or
pays no federal income tax on the income loss. The Fund's gains and losses are netted
and gains that it distributes to you. together, and, if the Fund has a net gain
(the Fund's "gains"), that gain will
generally be distributed to you.
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FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the Fund's investments in foreign stocks and bonds. These taxes will reduce the
amount of the Fund's distributions to you, but, depending upon the amount of the
Fund's assets that are invested in foreign securities, may be passed through to
you as a foreign tax credit on your income tax return. The Fund may also invest
in the securities of foreign companies that are "passive foreign investment
companies" ("PFICs"). These investments in PFICs may cause the Fund to pay
income taxes and interest charges. If possible, the Fund will adopt strategies
to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS.
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DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
Fund, whether you receive them in cash or
in additional shares, are generally As a shareholder, you will receive your share
subject to income tax. The Fund will send of the Fund's income and gains on its
you a statement in January of the current investments in stocks, bonds and other
year that reflects the amount of ordinary securities. The Fund's income and short term
dividends, capital gain distributions and capital gains are paid to you as ordinary
non-taxable distributions you received dividends. The Fund's long-term capital
from the Fund in the prior year. This gains are paid to you as capital gain
statement will include distributions distributions. If the Fund pays you an
declared in December and paid to you in amount in excess of its income and gains,
January of the current year, but which are this excess will generally be treated as a
taxable as if paid on December 31 of the non-taxable distribution. These amounts,
prior year. The IRS requires you to taken together, are what we call the Fund's
report these amounts on your income tax distributions to you.
return for the prior year. The Fund's
statement for the prior year will tell you
how much of your capital gain distribution
represents 28% rate gain property. The
remainder of the capital gain distribution
represents 20% rate gain, subject to
certain holding period and debt financing
restrictions.
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DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report Fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the Fund.
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REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares
in the Fund for shares in another Franklin A redemption is a sale by you to the Fund of
Templeton Fund, you will generally have a some or all of your shares in the Fund. The
gain or loss that the IRS requires you to price per share you receive when you redeem
report on your income tax return. If you Fund shares may be more or less than the
exchange Fund shares held for 90 days or price at which you purchased those shares.
less and pay no sales charge, or a reduced An exchange of shares in the Fund for shares
sales charge, for the new shares, all or a of another Franklin Templeton Fund is treated
portion of the sales charge you paid on as a redemption of Fund shares and then a
the purchase of the shares you exchanged purchase of shares of the other fund. When
is not included in their cost for purposes you redeem or exchange your shares, you will
of computing gain or loss on the generally have a gain or loss, depending upon
exchange. If you hold your shares for six whether the basis in your shares is more or
months or less, any loss you have will be less than your cost or other basis in the
treated as a long-term capital loss to the shares. Call Franklin Templeton Fund
extent of any capital gain distributions Information at 1-800-342-5236 for a free
received by you from the Fund. All or a shareholder Tax Information Handbook if you
portion of any loss on the redemption or need more information in calculating the gain
exchange of your shares will be disallowed or loss on the redemption or exchange of your
by the IRS if you purchase other shares in shares.
the Fund within 30 days before or after
your redemption or exchange.
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FOREIGN TAXES. If more than 50% of the WHAT IS FOREIGN TAX CREDIT?
value of the Fund's assets consist of
foreign securities, the Fund may elect to A foreign tax credit is a tax credit for the
pass-through to you the amount of foreign amount of taxes imposed by a foreign country
taxes it paid. If the Fund makes this on earnings of the Fund. When a foreign
election, your year-end statement will company in which the Fund invests pays a
show more taxable income than was actually dividend to the Fund, the dividend will
distributed to you. However, you will be generally be subject to a withholding tax.
entitled to either deduct your share of The taxes withheld in foreign countries
such taxes in computing your taxable create credits that you may use to offset
income or claim a foreign tax credit for your U.S. federal income tax.
such taxes against your U.S. federal
income tax. Your year-end statement,
showing the amount of deduction or credit
available to you, will be distributed to
you in January along with other
shareholder information records including
your Fund Form 1099-DIV.
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The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS SIMPLIFIED
PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND IS NOT AVAILABLE
IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your Fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the Fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the Fund, and gains arising from redemptions or exchanges of your Fund
shares will generally be subject to state and local income tax. The holding of
Fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the Fund.
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BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you
provide your taxpayer identification Backup Withholding occurs when the Fund is
number ("TIN"), certify that it is required to withhold and pay over to the IRS
correct, and certify that you are not 31% of your distributions and redemption
subject to backup withholding under IRS proceeds. You can avoid backup withholding
rules. If you fail to provide a correct by providing the Fund with your TIN, and by
TIN or the proper tax certifications, the completing the tax certifications on your
Fund is required to withhold 31% of all account application that you were asked to
the distributions (including ordinary sign when you opened your account. However,
dividends and capital gain distributions), if the IRS instructs the Fund to begin backup
and redemption proceeds paid to you. The withholding, it is required to do so even if
Fund is also required to begin backup you provided the Fund with your TIN and these
withholding on your account if the IRS tax certifications, and backup withholding
instructs the Fund to do so. The Fund will remain in place until the Fund is
reserves the right not to open your instructed by the IRS that it is no longer
account, or, alternatively, to redeem your required.
shares at the current net asset value,
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the Fund to begin backup
withholding on your account.
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THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" IN THE
STATEMENT OF ADDITIONAL INFORMATION. THE TAX TREATMENT TO YOU OF DIVIDENDS,
CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID AND INCOME TAXES WITHHELD ARE
ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX INFORMATION HANDBOOK BY
CONTACTING OUR FUND INFORMATION DEPARTMENT TOLL-FREE AT 1-800-342-5236.
HOW IS THE TRUST ORGANIZED?
Each Fund is a diversified series of 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. As of
January 2, 1997, the Funds began offering new classes of shares designated
Templeton Foreign Smaller Companies Fund - Advisor Class, Templeton Pacific
Growth Fund - Class II and Templeton Pacific Growth Fund - Advisor Class. All
shares outstanding before the offering of Class II and Advisor Class shares have
been designated Class I shares. Additional series and 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 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 affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the Board in its
discretion or by shareholders holding at least 10% of the outstanding shares. In
certain circumstances, we are required to help you communicate with other
shareholders about the removal of a Board member.
As of December 24, 1997, Franklin Templeton Trust Company TTEE for ValuSelect
Franklin Resources PSP, P.O. Box 2438, Rancho Cordova, CA 95741-2438 owned of
record and beneficially more than 25% of the outstanding shares of Pacific
Fund's Advisor Class.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. Please note that as
of January 1, 1998, shares of the Fund are not available to retirement plans
through Franklin Templeton's ValuSelect(R) program. Retirement plans in Franklin
Templeton's ValuSelect program before January 1, 1998, however, may continue to
invest in the Fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE PACIFIC FUND
DOES NOT CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum investments
are:
o To open your account: $5,000,000*
o To add to your account: $25*
*We may waive or lower these minimums for certain investors. Please see
"Minimum Investments" below. We also
reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
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METHOD STEPS TO FOLLOW
- - - ------------------ ------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the Fund
with your check made payable to the
Fund.
For additional investments:
Send a check made payable to the Fund. Please include your
account number on the check.
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BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a wire control
number and wire instructions. You need a new wire control
number every time you wire money into your account. If you
do not have a currently effective wire control number, we
will return the money to the bank, and we will not credit
the purchase to your account.
2. For an initial investment you must also return your signed
shareholder application to the Fund.
IMPORTANT DEADLINES: If we receive your call before 1:00
p.m. Pacific time and the bank receives the wired funds and
reports the receipt of wired funds to the Fund by 3:00 p.m.
Pacific time, we will credit the purchase to your account
that day. If we receive your call after 1:00 p.m. or the
bank receives the wire after 3:00 p.m., we will credit the
purchase to your account the following business day.
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THROUGH YOUR DEALER Call your investment representative
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MINIMUM INVESTMENTS
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in Advisor
Class or Class Z shares of any of the Franklin Templeton Funds.
The Fund may waive or lower its minimum investment requirement for certain
purchases. A lower minimum initial investment requirement applies to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs, subject to a
$250,000 minimum initial investment requirement or a $100,000 minimum
initial investment requirement for an individual client
2. Qualified registered investment advisors or certified financial
planners who have clients invested in the Franklin Mutual Series Fund
Inc. on October 31, 1996, or who buy through a broker-dealer or service
agent who has entered into an agreement with Distributors, subject to a
$1,000 minimum initial investment requirement
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
5. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject to a
$1 million initial investment in Advisor Class shares
No minimum initial investment requirement applies to purchases by:
1. Accounts managed by the Franklin Templeton Group
2. The Franklin Templeton Profit Sharing 401(k) Plan
3. Defined contribution plans such as 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, and that (i) are sponsored by an
employer with at least 10,000 employees, or (ii) have plan assets of
$100 million or more
4. Trust companies and bank trust departments initially investing in 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
5. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if
the group as a whole meets the $5 million minimum investment
requirement. 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 Franklin Templeton Fund sales and other
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.
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, call Retirement Plan Services.
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.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
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, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
- - - -----------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- - - -----------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share
certificates for the shares you want to
exchange
- - - ---------------------------------- --------------------------------------------
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.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, 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. 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 Retirement Plan Services 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 have: (i) requested an
exchange out of the Smaller Companies Fund within two weeks of an earlier
exchange request, (ii) exchanged shares out of the Smaller Companies Fund
more than twice in a calendar quarter, or (iii) exchanged shares equal to
at least $5 million, or more than 1% of the Smaller Companies Fund's net
assets. Shares under common ownership or control are combined for these
limits. If you have exchanged 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.
o Currently, the Pacific Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations 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.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares of
that fund. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- - - -------------------------------- -----------------------------------------------
METHOD STEPS TO FOLLOW
- - - -------------------------------- -----------------------------------------------
BY MAIL 1. Send us signed written instructions. If you
would like your redemption proceeds wired to a
bank account, your instructions should include:
o The name, address and telephone number of
the bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or
credit union, the name of the corresponding
bank and the account number
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 other
requirements.
------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like
your redemption proceeds wired to a bank
account, other than an escrow account, you must
first sign up for the wire feature. To sign up,
send us written instructions, with a signature
guarantee. To avoid any delay in processing,
the instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
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. If there are no
share certificates issued for the shares you
want to sell or you have already returned
them to the Fund Unless you are selling shares
in a Trust Company retirement plan account
Unless the address on your account was
changed by phone within the last 15 days
If you do not want the ability to redeem
by phone to apply to your account, please
let us know.
- - - -------------------------------------------------------------------------------
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 would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 4:00 p.m. Eastern time, your wire payment will be
sent the next business day. For requests received in proper form after 4:00 p.m.
Eastern time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently 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 Retirement Plan Services.
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 and you will then receive a portion of the price you paid back in
the form of a taxable 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 the same class of shares of another Franklin Templeton
Fund. 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.
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. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The Net
Asset Value we use when you buy or sell shares is the one 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.
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 close of the NYSE, generally 4:00 p.m. Eastern
time. You can find the prior day's closing Net Asset Value 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.
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 are 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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of transactions
or account changes. These include transactions or account changes that you could
also make by phone, such as certain redemptions of $50,000 or less, exchanges
between identically registered accounts, and changes to the address of record.
For most other types of transactions or changes, written instructions must be
signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed by
all registered owners on the account.
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. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. 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 and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account 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 may also record calls. 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 us written instructions,
as described elsewhere in this prospectus.
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. We also will not be liable for any loss if we
follow instructions by phone that we reasonably believe are genuine or if you
are unable to execute a transaction by phone.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to 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 Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you 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, we cannot accept instructions to change owners on the account unless ALL
owners agree in writing, even if the law in your state says otherwise. 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. You should register your account as a trust only if you have a valid
written trust document. This avoids 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 cannot 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.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have told us that
you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to 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.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - ."
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 shareholder 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. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
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.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account; and
o obtain price information about any Franklin Templeton Fund.
You will need the Fund's code number to use TeleFACTS(R). The Smaller Companies
Fund's code number is 691 and the Pacific Fund's code number is 690.
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.
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.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more 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, Distributors and Investment
Counsel are located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg,
Florida 33733-8030. You may also contact us by phone at one of the numbers
listed below.
HOURS OF OPERATION
(EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 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
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Pacific Fund offers three classes of
shares, designated "Class I," "Class II," and "Advisor Class" and the Smaller
Companies Fund offers two classes of shares designated "Class I" and "Advisor
Class." The classes have proportionate interests in the Fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DEPOSITARY RECEIPTS - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
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 TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
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
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the Fund's sub-advisor
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MANAGERS - Advisers and Investment Counsel
MARKET TIMERS - Market Timers generally include market timing or asset
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 or whose transactions include
frequent or large exchanges.
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
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.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
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
TEMPLETON FOREIGN SMALLER COMPANIES FUND
TEMPLETON PACIFIC GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.........................
What are the Risks of Investing in the Fund?.................
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 About
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......................................
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
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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 goal of each Fund is to seek long-term growth
of capital. The Smaller Companies Fund seeks to achieve its goal by investing
primarily in equity securities of smaller capitalization companies outside the
U.S. The Pacific Fund seeks to achieve its goal by investing at least 65% of its
total assets in equity securities that trade on the Pacific Rim markets 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 Pacific Rim activities.
References to the "Fund" in this SAI refer to each fund individually, unless the
context indicates otherwise.
The Prospectus, dated March 1, 1998, 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.
This SAI describes the Pacific Fund's Class I and Class II shares and the
Smaller Companies Fund's Class I shares. Each Fund currently offers another
class of shares with a different sales charge and expense structure, which
affects performance. This class is described in a separate SAI and prospectus.
For more information, contact your investment representative or call 1-800/DIAL
BEN.
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:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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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?"
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
DEBT SECURITIES. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's Net Asset Value.
FOREIGN 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 Managers, 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 Managers believe
that the currency of a particular country may suffer a substantial decline
against the U.S. dollar, they 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 Fund 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 the Fund and its
Shareholders" 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 Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other 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 which may be similar to those
described above in which a Fund may invest, consistent with its goal and
policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as 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 RISKS OF INVESTING IN THE FUND?
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 of 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 Managers believe 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 by the Managers to be of equivalent quality.
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 "BBB" by S&P or "Baa" by 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. 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.
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. The Smaller Companies Fund will rely on the Managers' judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Managers 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 securityholder 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.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
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 OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE
YEARS
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65)
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 (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (53)
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. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65)
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, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 54 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57)
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.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 57 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (59)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 51 of the investment companies in
the Franklin Templeton Group of Funds; FORMERLY Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, and President, National Association
of Securities Dealers, Inc.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.; Treasurer,
Franklin Advisory Services, Inc.; Treasurer and Chief Financial Officer,
Franklin Investment Advisory Services, Inc.; President, Franklin Templeton
Services, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case may be, of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
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.; President, Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 37 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (71)
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 and Director,
ILA Financial Services, Inc.; and officer and/or director or trustee, as the
case may be, of 17 of the investment companies in the Franklin Templeton 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, the nonaffiliated Board members also serve as
directors or trustees 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 THE FRANKLIN TEMPLETON
FRANKLIN TEMPLETON GROUP OF FUNDS ON
NAME GROUP OF FUNDS* WHICH EACH SERVES**
- - - --------------------------------------------------------------------------------
Frank H. Abbott, III..................... $[] 28
Harris J. Ashton......................... [] 52
S. Joseph Fortunato...................... [] 54
David W. Garbellano***................... [] n/a
Frank W.T. LaHaye........................ [] 27
Gordon S. Macklin........................ [] 51
*For the calendar year ended December 31, 1997.
**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 59 registered investment companies, with approximately 172 U.S. based
funds or series.
***Deceased, September 27, 1997.
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 or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of 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 9, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 131
shares of the Pacific Fund - Class I, 158 shares of Smaller Companies Fund -
Class I, 1,190 shares of Smaller Companies Fund - Advisor Class, (or less than
1% of the total outstanding shares of each Fund's Class I shares and the Smaller
Companies Fund's Advisor Class), and 3,705 shares of Pacific Fund - Advisor
Class (or 4.11% of the outstanding shares of Pacific Fund's Advisor Class).
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and
uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGERS AND SERVICES PROVIDED. The Fund's investment manager is
Advisers and the sub-advisor is INVESTMENT COUNSEL. Advisers 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. Adviser's
activities are subject to the review and supervision of the Board to whom it
renders periodic reports of the Fund's investment activities. Advisers and its
officers, directors and employees are covered by fidelity insurance 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."
Under an agreement with Advisers, Investment Counsel is the sub-advisor of each
Fund. Investment Counsel provides Advisers with investment management advice and
assistance. Investment Counsel recommends the optimal equity allocation and
provides advice regarding the Fund's investments. Investment Counsel also
determines which securities will be purchased, retained or sold and executes
these transactions.
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 1% of the value of net assets up to
and including $100,000,000; 0.90% of the value of net assets over $100,000,000
up to and including $250,000,000; 0.80% of the value of the net assets over
$250,000,000 up to and including $500,000,000; and 0.75% of the value of net
assets over $500,000,000. The fee is computed at the close of business on the
last business day of each month. Each class pays its proportionate share of the
management fee.
Under the sub-advisory agreement, Advisers pays INVESTMENT COUNSEL a
sub-advisory fee, in U.S. dollars, equal to an annual rate of 0.50% of the value
of of the Fund's average daily net assets up to and including $100,000,000;
0.40% of the value of the Fund's average daily net assets over $100,000,000 up
to and including $250,000,000; 0.30% of the value of the Fund's average daily
net assets over $250,000,000 up to and including $500,000,000; and 0.25% of the
value of the Fund's average daily net assets over $500,000,000.
INVESTMENT COUNSEL pays all expenses incurred by it through its activities under
the subadvisory agreement with Advisers, other than the cost of securities
purchased for the Fund and brokerage commissions in connection with these
purchases.
For the fiscal years ended October 31, 1995, 1996 and 1997, management fees for
the Pacific Fund totaling $526,350, $623,230 and $571,117, respectively, were
paid to Advisers. For the same periods, Advisers paid INVESTMENT COUNSEL
sub-advisory fees of $238,685, $332,419 and $291,799.
For the fiscal years ended October 31, 1995 and 1996, management fees for the
Smaller Companies Fund totaling $517,232 and $595,387, respectively, were paid
to Advisers. For the fiscal year ended October 31, 1997, management fees, before
any advance waiver, totaled $958,913 for the Smaller Companies Fund. Under an
agreement by Advisers to limit its fees, the Smaller Companies Fund paid
management fees totaling $866,624. For the periods ended October 31, 1995, 1996
and 1997 Advisers paid INVESTMENT COUNSEL sub-advisory fees of $222,583,
$317,709 and $416,361, respectively.
MANAGEMENT AGREEMENTS. The management and sub-advisory agreements are in effect
until April 30, 1998. They may continue in effect for successive annual periods
if their 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 either 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 on 60 days' written notice to Advisers, or by either Advisers
or INVESTMENT COUNSEL on not less than 60 days' written notice to the Fund, and
will automatically terminate in the event of its assignment, as defined in the
1940 Act. The sub-advisory agreement may be terminated without penalty at any
time by the Board or by vote of the holders of a majority of the Fund's
outstanding voting securities, or by either Advisers or INVESTMENT COUNSEL on
not less than 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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
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 Pacific Fund. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of the Smaller Companies Fund's
assets. 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, 1997, 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, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
The Managers select brokers and dealers to execute the Fund's portfolio
transactions 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. For portfolio transactions
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 are based to a large degree on the professional opinions of the persons
responsible for placement and review of the transactions. These opinions are
based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. The Managers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
Managers, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The Managers may pay certain brokers commissions that are higher than those
another broker may charge, if the Managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services they receive. This may be viewed in terms of either the particular
transaction or the Managers' overall responsibilities to client accounts over
which they exercises investment discretion. The services that brokers may
provide to the Managers include, among others, supplying information about
particular companies, markets, countries, or local, regional, national or
transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and appropriate
assistance to the Managers in carrying out their investment advisory
responsibilities. These services may not always directly benefit the Fund. They
must, however, be of value to the Managers in carrying out their overall
responsibilities to their clients.
It is not possible to place a dollar value on the special executions or on the
research services the Managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits the Managers to supplement their own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the Managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, 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 the Managers 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, 1995, 1996 and 1997, the Pacific Fund
paid brokerage commissions totaling $193,647, $121,723 and $141,188,
respectively, and the Smaller Companies Fund paid brokerage commissions totaling
$48,199, $132,084 and $372,889, respectively.
As of October 31, 1997, 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 Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the 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, the 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 the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS 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 may 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 without a front-end
sales charge, 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.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
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 acquired more than 90 days before the Letter is filed, will be counted
towards completion of the Letter, but they 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 before 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 before 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 goal 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. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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. 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 as of the scheduled close of the
NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE observes
the following holidays: New Year's Day, Martin Luther King Jr. 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 the Managers.
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 before 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 NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the 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 NYSE. 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 NYSE that will not be
reflected in the computation of the Net Asset Value. 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 ABOUT DISTRIBUTIONS AND TAXES
DISTRIBUTIONS.
1. DISTRIBUTIONS OF NET INVESTMENT INCOME.
The Funds receive income generally in the form of dividends, interest, original
issue, market and acquisition discount, and other income derived from its
investments. This income, less expenses incurred in the operation of a Fund,
constitute its net investment income from which dividends may be paid to you.
Any distributions by a Fund from such income will be taxable to you as ordinary
income, whether you take them in cash or in additional shares.
2. DISTRIBUTIONS OF CAPITAL GAINS.
The Funds may derive capital gains and losses in connection with sales or other
dispositions of their portfolio securities. Distributions derived from the
excess of net short-term capital gain over net long-term capital loss will be
taxable to you as ordinary income. Distributions paid from long-term capital
gains realized by a Fund will be taxable to you as long-term capital gain,
regardless of how long you have held your shares in a Fund. Any net short-term
or long-term capital gains realized by the Fund (net of any capital loss
carryovers) generally will be distributed once each year, and may be distributed
more frequently, if necessary, in order to reduce or eliminate federal excise or
income taxes on a Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Funds are required
to report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS" gains resulting from securities sold by the Fund after July 28,
1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The Act also provides for a new maximum rate of tax on capital gains of 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Funds will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook (call toll-free 1-800-342-5236). This
handbook has been revised to include 1997 Act tax law changes, and will be
available in January, 1998. Questions concerning each investor's personal tax
reporting should be addressed to the investor's personal tax advisor.
3. CERTAIN DISTRIBUTIONS PAID IN JANUARY.
Distributions which are declared in October, November or December and paid to
you in January of the following year, will be treated for tax purposes as if
they had been received by you on December 31 of the year in which they were
declared. The Funds will report this income to you on your Form 1099-DIV for the
year in which these distributions were declared.
4. EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS.
Most foreign exchange gains realized on the sale of debt instruments are treated
as ordinary income by a Fund. Similarly, foreign exchange losses realized by a
Fund on the sale of debt instruments are generally treated as ordinary losses by
a Fund. These gains when distributed will be taxable to you as ordinary
dividends, and any losses will reduce the Fund's ordinary income otherwise
available for distribution to you. This treatment could increase or reduce the
Fund's ordinary income distributions to you, and may cause some or all of the
Fund's previously distributed income to be classified as a return of capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
5. INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS.
The Funds will inform you of the amount and character of your distributions at
the time they are paid, and will advise you of the tax status for federal income
tax purposes of such distributions shortly after the close of each calendar
year. Shareholders who have not held Fund shares for a full year may have
designated and distributed to them as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of their investment in a Fund.
TAXES.
1. ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY.
Each Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. The Trustees reserve
the right not to maintain the qualification of a Fund as a regulated investment
company if they determine such course of action to be beneficial to you. In such
case, a Fund will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains, and distributions to you will be taxed as ordinary
dividend income to the extent of a Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a Fund
must meet certain specific requirements, including:
o A Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. Government securities and securities of
other regulated investment companies) can exceed 5% of the Fund's total
assets;
o A Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o A Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
2. EXCISE TAX DISTRIBUTION REQUIREMENTS.
The Code requires each Fund to distribute at least 98% of its taxable ordinary
income earned during the calendar year and 98% of its capital gain net income
earned during the twelve month period ending October 31 (in addition to
undistributed amounts from the prior year) to you by December 31 of each year in
order to avoid federal excise taxes. Each Fund intends to declare and pay
sufficient dividends in December (or in January that are treated by you as
received in December) but does not guarantee and can give no assurances that its
distributions will be sufficient to eliminate all such taxes.
3. REDEMPTION OF FUND SHARES.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. The tax law requires that you recognize a gain or
loss in an amount equal to the difference between your tax basis and the amount
you received in exchange for your shares, subject to the rules described below.
If you hold your shares as a capital asset, the gain or loss that you realize
will be capital gain or loss, and will be long-term for federal income tax
purposes if you have held your shares for more than one year at the time of
redemption or exchange. Any loss incurred on the redemption or exchange of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any long-term capital gains distributed to you by such Fund on
those shares. The holding periods and categories of capital gain that apply
under the 1997 Act are described above the "DISTRIBUTIONS" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in such
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
4. DEFERRAL OF BASIS.
All or a portion of the sales charge that you paid for your shares in a Fund
will be excluded from your tax basis in any of the shares sold within 90 days of
their purchase (for the purpose of determining gain or loss upon the sale of
such shares) if you reinvest the sales proceeds in such Fund or in another Fund
in the Franklin Templeton Group of Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated because of your
reinvestment with Franklin Templeton. The portion of the sales charge excluded
from your tax basis in the shares sold will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment in another Franklin Templeton fund.
5. U.S. GOVERNMENT OBLIGATIONS.
Many states grant tax-free status to dividends paid to you from interest earned
on direct obligations of the U.S. Government, subject in some states to minimum
investment requirements that must be met by a Fund. Investments in GNMA/FNMA
securities, bankers' acceptances, commercial paper and repurchase agreements
collateralized by U.S. Government securities do not generally qualify for
tax-free treatment. At the end of each calendar year, each Fund will provide you
with the percentage of any dividends paid that may qualify for tax-free
treatment on your personal income tax return. You should consult with your own
tax advisor to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different for
corporations, corporate shareholders should consult with their corporate tax
advisors about whether any of their distributions may be exempt from corporate
income or franchise taxes.
6. DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS.
As a corporate shareholder, you should note that a percentage of the dividends
paid by a Fund for the most recent calendar year qualified for the
dividends-received deduction. You will be permitted in some circumstances to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by a Fund
as eligible for such treatment. Dividends so designated by a Fund must be
attributable to dividends earned by such Fund from U.S. corporations that were
not debt-financed.
Under the 1997 Act, the amount that a Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by such Fund were debt-financed or held by such
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculations.
7. INVESTMENT IN COMPLEX SECURITIES.
The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules.
Over-the-counter options on debt securities and equity options, including
options on stock and on narrow-based stock indexes, will be subject to tax under
Section 1234 of the Code, generally producing a long-term or short-term capital
gain or loss upon exercise, lapse, or closing out of the option or sale of the
underlying stock or security. Certain other options, futures and forward
contracts entered into by a Fund are generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by a
Fund will be marked-to-market (i.e., treated as if it were sold for fair market
value) on the last business day of such Fund's fiscal year (and on other dates
as prescribed by the Code), and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
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. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. 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-capital losses
within a Fund. The acceleration of income on Section 1256 positions may require
a Fund to accrue taxable income without the corresponding receipt of cash. In
order to generate cash to satisfy the distribution requirements of the Code, a
Fund may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the sale
of Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income distributed to you by a Fund.
When a Fund holds an option or contract which substantially diminishes such
Fund's risk of loss with respect to another position of such Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term capital
losses into long-term capital losses. A Fund may make certain tax elections 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.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a Fund
must recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt instruments.
A Fund will generally be treated as making a constructive sale when it: 1)
enters into a short sale on the same property, 2) enters into an offsetting
notional principal contract, or 3) enters into a futures or forward contract to
deliver the same or substantially similar property. Other transactions
(including certain financial instruments called collars) will be treated as
constructive sales as provided in Treasury regulations to be published. There
are also certain exceptions that apply for transactions that are closed before
the end of the 30th day after the close of the taxable year.
Distributions paid to you by a Fund of ordinary income and short-term capital
gains arising from a Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. Each
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.
8. INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES.
Each Fund is authorized to invest in foreign currency denominated securities.
Such investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time a Fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time a Fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "Section 988" gains
or losses, may increase or decrease the amount of a Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by such Fund.
If a Fund's Section 988 losses exceed such Fund's other net investment company
taxable income during a taxable year, such Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
The 1997 Act generally requires that foreign income be translated into U.S.
dollars at the average exchange rate for the tax year in which the transactions
are conducted. Certain exceptions apply to taxes paid more than two years after
the taxable year to which they relate. This new law may require a Fund to track
and record adjustments to foreign taxes paid on foreign securities in which it
invests. Under a Fund's current reporting procedure, foreign security
transactions are recorded generally at the time of each transaction using the
foreign currency spot rate available for the date of each transaction. Under the
new law, a Fund will be required to record at fiscal year end (and at calendar
year end for excise tax purposes) an adjustment that reflects the difference
between the spot rates recorded for each transaction and the year-end average
exchange rate for all of a Fund's foreign securities transactions. There is a
possibility that the mutual fund industry will be given relief from this new
provision, in which case no year-end adjustment will be required.
Each Fund is also permitted to engage in certain interest rate and foreign
currency swaps. The federal income tax treatment of these investments in unclear
in certain respects. The interest income and foreign currency gains realized on
such investments, may, in some circumstances, result in the realization of
income not qualifying under the 90% income test. To the extent that a Fund
invests in interest rate and currency swap transactions, it intends to limit its
investments to the extent necessary to comply with the qualifying income
requirement.
Each Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of a Fund at the
end of its fiscal year are invested in securities of foreign corporations, a
Fund may elect to pass-through to you your pro rata share of foreign taxes paid
by a Fund. If this election is made, you will be (i) required to include in your
gross income your pro rata share of foreign source income (including any foreign
taxes paid by a Fund), and, (ii) entitled to either deduct your share of such
foreign taxes in computing your taxable income or to claim a credit for such
taxes against your U.S. income tax, subject to certain limitations under the
Code. You will be informed by the Funds at the end of each calendar year
regarding the availability of any such foreign tax credits and the amount of
foreign source income (including any foreign taxes paid by each Fund). If a Fund
elects to pass through to you the foreign income taxes that it has paid, you
will be informed at the end of the calendar year of the amount of foreign taxes
paid and foreign source income that must be included on your federal income tax
return. If a Fund invests 50% or less of its total assets in foreign
corporations, it will not be entitled to pass-though to you your pro-rata share
of the foreign taxes paid by such Fund. In this case, these taxes will be taken
as a deduction by a Fund, and the income reported to you will be the net amount
after these deductions.
9. INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES.
Each Fund may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If a Fund receives an "excess distribution" with respect to PFIC stock, such
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by a Fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which a Fund held the PFIC
shares. Each Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by a Fund. Certain distributions from a
PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
Each Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
is share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC during such period. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market a Fund's PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. A Fund would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction would be
limited to the amount of any net mark-to-market gains previously included with
respect to that particular PFIC security. If a Fund were to make this second
PFIC election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by a Fund (if any), the amounts distributable to you by a Fund, the
time at which these distributions must be made, and whether these distributions
will be classified as ordinary income or capital gain distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after a Fund acquires shares in that corporation. While a Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
10. CONVERSION TRANSACTIONS.
Gains realized by a Fund from transactions that are deemed to be "conversion
transactions" under the Code, and that would otherwise produce capital gain may
be recharacterized as ordinary income to the extent that such gain does not
exceed an amount defined as the "applicable imputed income amount". A conversion
transaction is any transaction in which substantially all of a Fund's expected
return is attributable to the time value of a Fund's net investment in such
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 transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
11. STRIPPED PREFERRED STOCK.
Occasionally, a Fund may purchase "stripped preferred stock" that is subject to
special tax treatment. Stripped preferred stock is defined as certain preferred
stock issues where ownership of the stock has been separated from the right to
receive dividends that have not yet become payable. The stock must have a fixed
redemption price, must not participate substantially in the growth of the
issuer, and must be limited and preferred as to dividends. The difference
between the redemption price and purchase price is taken into Fund income over
the term of the instrument as if it were original issue discount. The amount
that must be included in each period generally depends on the original yield to
maturity, adjusted for any prepayments of principal.
12. INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS.
Each Fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause a Fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. A Fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in order
to maintain its qualification as a regulated investment company and to avoid
income reporting and excise taxes at the Fund level. PIK bonds are subject to
similar tax rules concerning the amount, character and timing of income required
to be accrued by a Fund. Bonds acquired in the secondary market for a price less
than their stated redemption price, or revised issue price in the case of a bond
having OID, are said to have been acquired with market discount. For these
bonds, a Fund may elect to accrue market discount on a current basis, in which
case a Fund will be required to distribute any such accrued discount. If a Fund
does not elect to accrue market discount into income currently, gain recognized
on sale will be recharacterized as ordinary income instead of capital gain to
the extent of any accumulated market discount on the obligation.
13. DEFAULTED OBLIGATIONS.
Each Fund may be required to accrue income on defaulted obligations and to
distribute such income to you even though it is not currently receiving interest
or principal payments on such obligations. In order to generate cash to satisfy
these distribution requirements, a Fund may be required to dispose of portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering 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.
In connection with the offering of the Pacific Fund's shares, aggregate
underwriting commissions for the fiscal years ended October 31, 1995, 1996 and
1997 were $255,959, $412,861 and $483,600, respectively. After allowances to
dealers, Distributors retained $28,742, $46,160 and $64,068 in net underwriting
discounts and commissions and received $0, $0 and $600 in connection with
redemptions or repurchases of shares for the respective years. For the Smaller
Companies Fund's shares, aggregate underwriting commissions for the same fiscal
periods were $222,274, $336,526 and $1,059,592, respectively. After allowances
to dealers, Distributors retained $25,127, $38,426 and $156,055 in net
underwriting discounts and commissions and received $0, $0 and $0 in connection
with redemptions or repurchase of shares for the respective years. Distributors
may be entitled to reimbursement under the 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
Smaller Companies Fund and Pacific Fund Class I and Class II have separate
distribution plans or "Rule 12b-1 plans" that were adopted pursuant to Rule
12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, each 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. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
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 the 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, 1997, the total amounts paid by the
Smaller Companies Fund and by the Pacific Growth Fund pursuant to the Class I
and Class II plans were $238,459, $92,093 and $6,054,respectively,which were
used for the following purposes:
SMALLER
COMPANIES
FUND PACIFIC GROWTH FUND
CLASS I CLASS I CLASS II
- - - -----------------------------------------------------------------------------
Advertising $ 2,884 $ 2,260 $ 2
Printing and mailing of prospectuses
other than to current shareholders 50,469 13,005 16
Payments to underwriters 14,384 4,627 152
Payments to broker-dealers 170,722 73,301 5,884
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 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 the periods indicated below 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 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, which 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 returns the Funds for the indicated periods ended October
31, 1997 were as follows:
...... ONE FIVE SINCE
FUND NAME... YEAR INCEPTION
- - - ---------------------------------------------------------------------------
Pacific Fund - Class I -28.74% 2.38% 3.61%*
Pacific Fund - Class II N/A N/A -29.71%**
Smaller Companies Fund 7.65% 13.64% 11.39%*
:
* Inception 9/20/91
**Inception 1/02/97
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
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, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return the Fund for the indicated
periods ended October 31, 1997 were as follows:
ONE- FIVE- SINCE
FUND NAME YEAR YEAR INCEPTION
- - - --------------------------------------------------------------------------------
Pacific Fund - Class I* -28.74% 12.49% 24.18%*
Pacific Fund - Class II** N/A N/A -29.69**
Smaller Companies Fund* 7.65% 89.49% 93.39%*
* Inception 9/20/91
**Inception 1/02/97
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 the Franklin 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 Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 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 NYSE.
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, and 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(R) 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 - 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 - 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 Fund's 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 49 years and
now services more than 2.8 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, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $215 billion in assets under
management for more than 5.8 million U.S. based mutual fund shareholder and
other accounts. The Franklin Templeton Group of Funds offers 121 U.S. based
open-end investment companies to the public. The Fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of December 24, 1997, the principal shareholders of the Fund, beneficial or
of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- - - --------------------------------------------------------------------------------
PACIFIC FUND - ADVISOR CLASS
- - - -------------------------------------
Franklin Templeton Trust Company
TTEE
for ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 71,870.555 76.35%
- - - -------------------------------------
Franklin Trust Company TTEE
For the SEP-IRA of
Charles R. Leffler FBO
Charles R. Leffler
1610 W. Ethans Glen Dr.
Palantine, IL 60067-09008 5,499.553 5.84%
- - - -------------------------------------
SMALLER COMPANIES FUND - ADVISOR
CLASS
- - - -------------------------------------
Franklin Templeton Trust Company
TTEE
for ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 48,736.076 15.21%
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 outstanding shares of any other class.
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, before 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 the Franklin Templeton Group 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 by the close of the business day following the day clearance is
granted; (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, 1997, including the auditors'
report, are incorporated herein by reference.
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
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Pacific Fund offers three classes of
shares, designated "Class I," "Class II" and "Advisor Class" and the Smaller
Companies Fund offers two classes of shares designated "Class I" and "Advisor
Class." The classes have proportionate interests in the Fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
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.
INVESTMENT COUNSEL - Templeton Investment Counsel, Inc., the Fund's sub-advisor
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MANAGERS - Advisers and INVESTMENT COUNSEL
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.
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.
PROSPECTUS - The prospectus for the Fund's Class I and Class II shares dated
March 1, 1998, 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.
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 high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present 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. These
bonds lack outstanding investment characteristics, and in fact, have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. 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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN TEMPLETON INTERNATIONAL TRUST - ADVISOR CLASS
TEMPLETON FOREIGN SMALLER COMPANIES FUND
TEMPLETON PACIFIC GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?.........................
What are the Risks of Investing in the Fund?.................
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 About
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 goal of each Fund is
to seek long-term growth of capital. The Smaller Companies Fund seeks to
achieve its goal by investing primarily in equity securities of smaller
capitalization companies outside the U.S. The Pacific Fund seeks to achieve
its goal by investing at least 65% of its total assets in equity securities
that trade on Pacific Rim markets 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 Pacific Rim activities. References to the "Fund" in this
SAI refer to each fund individually, unless the context indicates otherwise.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated
March 1, 1998, 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.
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:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- - - ------------------------------------------------------------------------------
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?"
Equity Securities. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The
owner of an equity security may participate in a company's success through
the receipt of dividends which are distributions of earnings by the company
to its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred
stock. Preferred stockholders typically receive greater dividends but may
receive less appreciation than common stockholders and may have greater
voting rights as well. Equity securities may also include convertible
securities, warrants or rights. Convertible securities typically are debt
securities or preferred stocks which are convertible into common stock after
certain time periods or under certain circumstances. Warrants or rights give
the holder the right to purchase a common stock at a given time for a
specified price.
Debt Securities. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its
payment obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Fund's Net Asset Value.
Foreign 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 Fund
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 the Fund
and its Shareholders" 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 Stocks ("PERCS"),
which provide an investor, such as the Fund, with the opportunity to earn
higher dividend income than is available on a company's common stock. PERCS
are preferred stocks that generally feature a mandatory conversion date, as
well as a capital appreciation limit which is usually expressed in terms of a
stated price. Most PERCS expire three years from the date of issue, at which
time they are convertible into common stock of the issuer. PERCS are
generally not convertible into cash at maturity. Under a typical arrangement,
after three years PERCS convert into one share of the issuer's common stock
if the issuer's common stock is trading at a price below that set by the
capital appreciation limit, and into less than one full share if the issuer's
common stock is trading at a price above that set by the capital appreciation
limit. The amount of that fractional share of common stock is determined by
dividing the price set by the capital appreciation limit by the market price
of the issuer's common stock. PERCS can be called at any time prior to
maturity, and hence do not provide call protection. If called early, however,
the issuer must pay a call premium over the market price to the investor.
This call premium declines at a preset rate daily, up to the maturity date.
The Fund may also invest in other 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 which may be
similar to those described above in which a Fund may invest, consistent with
its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing
of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and the Fund's ability to dispose of particular
securities, when necessary, to meet the Fund's liquidity needs or in response
to a specific economic event, such as 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 RISKS OF INVESTING IN THE FUND?
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, European
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
depositaries.
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 of 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 by the Managers to be of equivalent quality.
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 BBB by S&P
or Baa by 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. 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.
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. The Smaller Companies Fund will rely on the
Managers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the Managers 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 securityholder 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.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the
Fund intends to dispose of the investment as soon as practicable while
maximizing the return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
Officers and Trustees
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 Offices Principal Occupation
Name, Age and Address with the Trust During the Past Five
Years
Frank H. Abbott, III (76)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director or trustee, as the case may be, of 28 of the investment companies in
the Franklin Templeton Group of Funds.
Harris J. Ashton (65)
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 (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the
Franklin Templeton Group of Funds.
*Harmon E. Burns (53)
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.
and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin/Templeton Investor Services, Inc.; and
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 57 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (65)
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, General
Host Corporation (nursery and craft centers); and director or trustee, as
the case may be, of 54 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc., Franklin Templeton Services, Inc. and General Host
Corporation (nursery and craft centers); and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57)
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.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
57 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68)
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 Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds.
Gordon S. Macklin (59)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (financial services); Director, Fund
American Enterprises Holdings, Inc., MCI Communications Corporation, CCC
Information Services Group, Inc. (information services), MedImmune, Inc.
(biotechnology), Shoppers Express (home shopping), and Spacehab, Inc.
(aerospace services); and director or trustee, as the case may be, of 51 of
the investment companies in the Franklin Templeton Group of Funds; formerly
Chairman, Hambrecht and Quist Group, Director, H & Q Healthcare Investors,
and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (37)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Senior Vice President and Treasurer, Franklin Advisers, Inc.;
Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief Financial
Officer, Franklin Investment Advisory Services, Inc.; President, Franklin
Templeton Services, Inc.; Senior Vice President, Franklin/Templeton Investor
Services, Inc.; and officer and/or director or trustee, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief
Operating Officer, Franklin Investment Advisory Services, Inc.; and officer
of 57 of the investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41)
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.; President, Chief Executive Officer, Chief
Investment Officer and Director, Franklin Institutional Services Corporation;
Chairman and Director, Templeton Investment Counsel, Inc.; Vice President,
Franklin Advisers, Inc.; officer and/or director of some of the subsidiaries
of Franklin Resources, Inc.; and officer and/or director or trustee, as the
case may be, of 37 of the investment companies in the Franklin Templeton
Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 30 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (71)
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 and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 17 of the investment companies in the
Franklin Templeton 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, the nonaffiliated Board members also
serve as directors or trustees 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 the Franklin Templeton
Franklin Templeton Group of Funds on
Name Group of Funds* Which Each Serves**
- - - -----------------------------------------------------------------------------
Frank H. Abbott, III..................... $ 28
Harris J. Ashton......................... 52
S. Joseph Fortunato...................... 54
David W. Garbellano***................... N/A
Frank W.T. LaHaye........................ 27
Gordon S. Macklin........................ 51
*For the calendar year ended December 31, 1997.
**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 59 registered investment companies, with
approximately 172 U.S. based funds or series. ***Deceased, September 27, 1997.
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 or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
Fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of 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 9, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 132
shares of the Pacific Fund - Class I, 2,841 shares of Smaller Companies Fund
- - - - Class I, 1,190 shares of Smaller Companies Fund - Advisor Class, (or less
than 1% of the total outstanding shares of each Fund's Class I shares and the
Smaller Companies Fund's Advisor Class), and 3,705 shares of Pacific Fund -
Advisor Class (or 4.11% of the total outstanding shares of Pacific Fund's
Advisor Class). Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
Investment Management and Other Services
Investment Managers and Services Provided. The Fund's investment manager is
Advisers. Advisers 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. Advisers' activities are subject to the review and
supervision of the Board to whom it renders periodic reports of the Fund's
investment activities. Advisers and its officers, directors and employees are
covered by fidelity insurance 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."
Under an agreement with Advisers, Investment Counsel is the sub-advisor of
each Fund. Investment Counsel provides Advisers with investment management
advice and assistance. Investment Counsel recommends the optimal equity
allocation and provides advice regarding the Fund's investments. Investment
Counsel also determines which securities will be purchased, retained or sold
and executes these transactions.
Management Fees. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 1% of the value of net assets up to
and including $100,000,000; 0.90% of the value of net assets over
$100,000,000 up to and including $250,000,000; 0.80% of the value of the net
assets over $250,000,000 up to and including $500,000,000; and 0.75% of the
value of net assets over $500,000,000. The fee is computed at the close of
business on the last business day of each month. Each class of the Fund's
shares pays its proportionate share of the management fee.
Under the sub-advisory agreement, Advisers pays Investment Counsel a
sub-advisory fee, in U.S. dollars, equal to an annual rate of 0.50% of the
value of the Fund's average daily net assets up to and including
$100,000,000; 0.40% of the value of the Fund's average daily net assets over
$100,000,000 up to and including $250,000,000; 0.30% of the value of the
Fund's average daily net assets over $250,000,000 up to and including
$500,000,000; and 0.25% of the value of the Fund's average daily net assets
over $500,000,000.
Investment Counsel pays all expenses incurred by it through its activities
under the sub-advisory agreement with Advisers, other than the cost of
securities purchased for the Fund and brokerage commissions in connection
with these purchases.
For the fiscal years ended October 31, 1995, 1996 and 1997, management fees
for the Pacific Fund totaling $526,350, $623,230 and $571,117, respectively,
were paid to Advisers. For the same periods, Advisers paid Investment Counsel
sub-advisory fees of $238,685, $332,419 and $284,645, respectively.
For the fiscal years ended October 31, 1995 and 1996, management fees
totaling $517,232 and $595,387, respectively, were paid to Advisers. For the
fiscal year ended October 31, 1997, management fees, before any advance
waiver, totaled $958,913 for the Smaller Companies Fund. Under an agreement
by Advisers to limit its fees, the Smaller Companies Fund paid management
fees totaling $866,624. For the same periods, Advisers paid Investment
Counsel sub-advisory fees of $222,583 $317,709 and $451,416, respectively
Management Agreement. The management and sub-advisory agreements are in
effect until April 30, 1998. They may continue in effect for successive
annual periods if their 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 either 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 on 60
days' written notice to Advisers, or by either Advisers or Investment Counsel
on not less than 60 days' written notice to the Fund, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act. The
sub-advisory agreement may be terminated without penalty at any time by the
Board or by vote of the holders of a majority of the Fund's outstanding
voting securities, or by either Advisers or Investment Counsel on not less
than 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. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these
services per benefit plan participant Fund account per year may not exceed
the per account fee payable by the Fund to Investor Services in connection
with maintaining shareholder accounts.
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 Pacific Fund. The Chase Manhattan Bank, at its principal office
at MetroTech Center, Brooklyn, New York 11245, and at the offices of its
branches and agencies throughout the world, acts as custodian of the Smaller
Companies Fund's assets. 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, 1997, 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, 1997.
How does the Fund Buy Securities for its Portfolio?
The Managers select brokers and dealers to execute the Fund's portfolio
transactions 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. For portfolio
transactions 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 are based to a large degree on the professional
opinions of the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals
in the securities industry and information available to them about the level
of commissions being paid by other institutional investors of comparable
size. The Managers will ordinarily place orders to buy and sell
over-the-counter securities on a principal rather than agency basis with a
principal market maker unless, in the opinion of the Managers, a better price
and execution can otherwise be obtained. Purchases of portfolio securities
from underwriters will include a commission or concession paid by the issuer
to the underwriter, and purchases from dealers will include a spread between
the bid and ask price.
The Managers may pay certain brokers commissions that are higher than those
another broker may charge, if the Managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and
research services it receives. This may be viewed in terms of either the
particular transaction or Advisers' overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the Managers include, among others, supplying
information about particular companies, markets, countries, or local,
regional, national or transnational economies, statistical data, quotations
and other securities pricing information, and other information that provides
lawful and appropriate assistance to the Managers in carrying out their
investment advisory responsibilities. These services may not always directly
benefit the Fund. They must, however, be of value to the Managers in carrying
out their overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the Managers receive from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services permits the Managers to supplement
their own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the Managers and their
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Fund's officers are satisfied that the
best execution is obtained, the sale of Fund 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 NASD, 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 the Managers 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, 1995, 1996 and 1997, the Pacific
Fund paid brokerage commissions totaling $193,647, $121,723 and $141,188,
respectively, and the Smaller Companies Fund paid brokerage commissions
totaling $48,199, $132,084 and $372,889, respectively.
As of October 31, 1997, 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 laws of states where the Fund
offers its shares may differ from federal law. Banks and financial
institutions that sell shares of the Fund may be required by state law to
register as Securities Dealers.
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.
Other Payments to Securities Dealers. Distributors and/or its affiliates
provide financial support to various Securities Dealers that sell shares of
the Franklin Templeton Group of Funds. This support is based primarily on the
amount of sales of fund shares. The amount of support may be affected by:
total sales; net sales; levels of redemptions; the proportion of a Securities
Dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a Securities Dealer's support of, and participation in, Distributors'
marketing programs; a Securities Dealer's compensation programs for its
registered representatives; and the extent of a Securities Dealer's marketing
programs relating to the Franklin Templeton Group of Funds. Financial support
to Securities Dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain Securities Dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
NASD's rules.
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 goal 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. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
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.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the Fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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. 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 as of the scheduled close of the
NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is open for
trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Martin Luther King, Jr. 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 the Managers.
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
before 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 NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the Net Asset Value is not calculated. Thus, the
calculation of the Net Asset Value 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 NYSE. The value of these securities used in
computing the Net Asset Value 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 NYSE that will
not be reflected in the computation of the Net Asset Value. 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 About Distributions and Taxes
Distributions.
1. Distributions of Net Investment Income.
The Funds receive income generally in the form of dividends, interest,
original issue, market and acquisition discount, and other income derived
from its investments. This income, less expenses incurred in the operation of
a Fund, constitute its net investment income from which dividends may be paid
to you. Any distributions by a Fund from such income will be taxable to you
as ordinary income, whether you take them in cash or in additional shares.
2. Distributions of Capital Gains.
The Funds may derive capital gains and losses in connection with sales or
other dispositions of their portfolio securities. Distributions derived from
the excess of net short-term capital gain over net long-term capital loss
will be taxable to you as ordinary income. Distributions paid from long-term
capital gains realized by a Fund will be taxable to you as long-term capital
gain, regardless of how long you have held your shares in a Fund. Any net
short-term or long-term capital gains realized by the Fund (net of any
capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on a Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Funds are
required to report the capital gain distributions paid to you from gains
realized on the sale of portfolio securities using the following categories:
"28% rate gains": gains resulting from securities sold by the Fund after
July 28, 1997 that were held for more than one year but not more than 18
months, and securities sold by the Fund before May 7, 1997 that were held for
more than one year. These gains will be taxable to individual investors at a
maximum rate of 28%.
"20% rate gains" gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than 18 months, and under a transitional
rule, securities sold by the Fund between May 7 and July 28, 1997 (inclusive)
that were held for more than one year. These gains will be taxable to
individual investors at a maximum rate of 20% for individual investors in the
28% or higher federal income tax brackets, and at a maximum rate of 10% for
investors in the 15% federal income tax bracket.
The Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year
gains." For individuals in the 15% bracket, qualified 5-year gains are net
gains on securities held for more than 5 years which are sold after December
31, 2000. For individuals who are subject to tax at higher rates, qualified
5-year gains are net gains on securities which are purchased after December
31, 2000 and are held for more than 5 years. Taxpayers subject to tax at the
higher rates may also make an election for shares held on January 1, 2001 to
recognize gain on their shares in order to qualify such shares as qualified
5-year property.
The Funds will advise you at the end of each calendar year of the amount of
its capital gain distributions paid during the calendar year that qualify for
these maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook (call toll-free 1-800-342-5236). This
handbook has been revised to include 1997 Act tax law changes, and will be
available in January, 1998. Questions concerning each investor's personal tax
reporting should be addressed to the investor's personal tax advisor.
3. Certain Distributions Paid in January.
Distributions which are declared in October, November or December and paid to
you in January of the following year, will be treated for tax purposes as if
they had been received by you on December 31 of the year in which they were
declared. The Funds will report this income to you on your Form 1099-DIV for
the year in which these distributions were declared.
4. Effect of Foreign Investments on Distributions.
Most foreign exchange gains realized on the sale of debt instruments are
treated as ordinary income by a Fund. Similarly, foreign exchange losses
realized by a Fund on the sale of debt instruments are generally treated as
ordinary losses by a Fund. These gains when distributed will be taxable to
you as ordinary dividends, and any losses will reduce the Fund's ordinary
income otherwise available for distribution to you. This treatment could
increase or reduce the Fund's ordinary income distributions to you, and may
cause some or all of the Fund's previously distributed income to be
classified as a return of capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by a Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a
single return or $600 or less on a joint return during any year (all of which
must be reported on IRS Form 1099-DIV from the Fund to the investor) to
bypass the burdensome and detailed reporting requirements on the supporting
foreign tax credit schedule (Form 1116) and report foreign taxes paid
directly on page 2 of Form 1040. You should note that this simplified
procedure will not be available until calendar year 1998.
5. Information on the Tax Character of Distributions.
The Funds will inform you of the amount and character of your distributions
at the time they are paid, and will advise you of the tax status for federal
income tax purposes of such distributions shortly after the close of each
calendar year. Shareholders who have not held Fund shares for a full year may
have designated and distributed to them as ordinary income or capital gain a
percentage of income that is not equal to the actual amount of such income
earned during the period of their investment in a Fund.
Taxes.
1. Election to be Taxed as a Regulated Investment Company.
Each Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code, has qualified as such for its most recent fiscal
year, and intends to so qualify during the current fiscal year. The Trustees
reserve the right not to maintain the qualification of a Fund as a regulated
investment company if they determine such course of action to be beneficial
to you. In such case, a Fund will be subject to federal, and possibly state,
corporate taxes on its taxable income and gains, and distributions to you
will be taxed as ordinary dividend income to the extent of a Fund's available
earnings and profits.
In order to qualify as a regulated investment company for tax purposes, a
Fund must meet certain specific requirements, including:
o A Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. Government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total
assets, and, with respect to 50% of the Fund's total assets, no
investment (other than cash and cash items, U.S. Government securities
and securities of other regulated investment companies) can exceed 5%
of the Fund's total assets;
o A Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and
o A Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal
years.
2. Excise Tax Distribution Requirements.
The Code requires each Fund to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain
net income earned during the twelve month period ending October 31 (in
addition to undistributed amounts from the prior year) to you by December 31
of each year in order to avoid federal excise taxes. Each Fund intends to
declare and pay sufficient dividends in December (or in January that are
treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
3. Redemption of Fund Shares.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. The tax law requires that you recognize a gain
or loss in an amount equal to the difference between your tax basis and the
amount you received in exchange for your shares, subject to the rules
described below. If you hold your shares as a capital asset, the gain or loss
that you realize will be capital gain or loss, and will be long-term for
federal income tax purposes if you have held your shares for more than one
year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated
as a long-term capital loss to the extent of any long-term capital gains
distributed to you by such Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above
the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your
Fund shares will be disallowed to the extent that you purchase other shares
in such Fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
4. Deferral of Basis.
All or a portion of the sales charge that you paid for your shares in a Fund
will be excluded from your tax basis in any of the shares sold within 90 days
of their purchase (for the purpose of determining gain or loss upon the sale
of such shares) if you reinvest the sales proceeds in such Fund or in another
Fund in the Franklin Templeton Group of Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated because
of your reinvestment with Franklin Templeton. The portion of the sales charge
excluded from your tax basis in the shares sold will equal the amount that
the sales charge is reduced on your reinvestment. Any portion of the sales
charge excluded from your tax basis in the shares sold will be added to the
tax basis of the shares you acquire from your reinvestment in another
Franklin Templeton fund.
5. U.S. Government Obligations.
Many states grant tax-free status to dividends paid to you from interest
earned on direct obligations of the U.S. Government, subject in some states
to minimum investment requirements that must be met by a Fund. Investments in
GNMA/FNMA securities, bankers' acceptances, commercial paper and repurchase
agreements collateralized by U.S. Government securities do not generally
qualify for tax-free treatment. At the end of each calendar year, each Fund
will provide you with the percentage of any dividends paid that may qualify
for tax-free treatment on your personal income tax return. You should consult
with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this
income are different for corporations, corporate shareholders should consult
with their corporate tax advisors about whether any of their distributions
may be exempt from corporate income or franchise taxes.
6. Dividends-Received Deduction for Corporations.
As a corporate shareholder, you should note that a percentage of the
dividends paid by a Fund for the most recent calendar year qualified for the
dividends-received deduction. You will be permitted in some circumstances to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by a
Fund as eligible for such treatment. Dividends so designated by a Fund must
be attributable to dividends earned by such Fund from U.S. corporations that
were not debt-financed.
Under the 1997 Act, the amount that a Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by such Fund were debt-financed or held by
such Fund for less than a 46 day period during a 90 day period beginning 45
days before the ex-dividend date of the corporate stock. Similarly, if your
Fund shares are debt-financed or held by you for less than this same 46 day
period, then the dividends-received deduction may also be reduced or
eliminated. Even if designated as dividends eligible for the
dividends-received deduction, all dividends (including the deducted portion)
must be included in your alternative minimum taxable income calculations.
7. Investment in Complex Securities.
The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules.
Over-the-counter options on debt securities and equity options, including
options on stock and on narrow-based stock indexes, will be subject to tax
under Section 1234 of the Code, generally producing a long-term or short-term
capital gain or loss upon exercise, lapse, or closing out of the option or
sale of the underlying stock or security. Certain other options, futures and
forward contracts entered into by a Fund are generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by a Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of such Fund's fiscal year (and on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain 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. Under legislation pending in technical
corrections to the 1997 Act, the 60% long-term capital gain portion will
qualify as 20% rate gain and will be subject to tax to individual investors
at a maximum rate of 20% for investors in the 28% or higher federal income
tax brackets, or at a maximum rate of 10% for investors in the 15% federal
income tax bracket. While foreign currency is marked-to-market at year end,
gain or loss realized as a result will always be ordinary. Even though
marked-to-market, gains and losses realized on foreign currency and foreign
security investments will generally be treated as ordinary income. 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-capital
losses within a Fund. The acceleration of income on Section 1256 positions
may require a Fund to accrue taxable income without the corresponding receipt
of cash. In order to generate cash to satisfy the distribution requirements
of the Code, a Fund may be required to dispose of portfolio securities that
it otherwise would have continued to hold or to use cash flows from other
sources such as the sale of Fund shares. In these ways, any or all of these
rules may affect the amount, character and timing of income distributed to
you by a Fund.
When a Fund holds an option or contract which substantially diminishes such
Fund's risk of loss with respect to another position of such Fund (as might
occur in some hedging transactions), this combination of positions could be
treated as a "straddle" for tax purposes, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term
capital losses into long-term capital losses. A Fund may make certain tax
elections 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.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, a
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain
debt instruments. A Fund will generally be treated as making a constructive
sale when it: 1) enters into a short sale on the same property, 2) enters
into an offsetting notional principal contract, or 3) enters into a futures
or forward contract to deliver the same or substantially similar property.
Other transactions (including certain financial instruments called collars)
will be treated as constructive sales as provided in Treasury regulations to
be published. There are also certain exceptions that apply for transactions
that are closed before the end of the 30th day after the close of the taxable
year.
Distributions paid to you by a Fund of ordinary income and short-term capital
gains arising from a Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income.
Each 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.
8. Investments in Foreign Currencies and Foreign Securities.
Each Fund is authorized to invest in foreign currency denominated
securities. Such investments, if made, will have the following additional
tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time a Fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's net investment company taxable income, which,
in turn, will affect the amount of income to be distributed to you by such
Fund.
If a Fund's Section 988 losses exceed such Fund's other net investment
company taxable income during a taxable year, such Fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your Fund shares will be
reduced by a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your Fund shares will be treated as
capital gain to you.
The 1997 Act generally requires that foreign income be translated into U.S.
dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than
two years after the taxable year to which they relate. This new law may
require a Fund to track and record adjustments to foreign taxes paid on
foreign securities in which it invests. Under a Fund's current reporting
procedure, foreign security transactions are recorded generally at the time
of each transaction using the foreign currency spot rate available for the
date of each transaction. Under the new law, a Fund will be required to
record at fiscal year end (and at calendar year end for excise tax purposes)
an adjustment that reflects the difference between the spot rates recorded
for each transaction and the year-end average exchange rate for all of a
Fund's foreign securities transactions. There is a possibility that the
mutual fund industry will be given relief from this new provision, in which
case no year-end adjustment will be required.
Each Fund is also permitted to engage in certain interest rate and foreign
currency swaps. The federal income tax treatment of these investments in
unclear in certain respects. The interest income and foreign currency gains
realized on such investments, may, in some circumstances, result in the
realization of income not qualifying under the 90% income test. To the extent
that a Fund invests in interest rate and currency swap transactions, it
intends to limit its investments to the extent necessary to comply with the
qualifying income requirement.
Each Fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the total assets of a Fund at
the end of its fiscal year are invested in securities of foreign
corporations, a Fund may elect to pass-through to you your pro rata share of
foreign taxes paid by a Fund. If this election is made, you will be (i)
required to include in your gross income your pro rata share of foreign
source income (including any foreign taxes paid by a Fund), and, (ii)
entitled to either deduct your share of such foreign taxes in computing your
taxable income or to claim a credit for such taxes against your U.S. income
tax, subject to certain limitations under the Code. You will be informed by
the Funds at the end of each calendar year regarding the availability of any
such foreign tax credits and the amount of foreign source income (including
any foreign taxes paid by each Fund). If a Fund elects to pass through to you
the foreign income taxes that it has paid, you will be informed at the end of
the calendar year of the amount of foreign taxes paid and foreign source
income that must be included on your federal income tax return. If a Fund
invests 50% or less of its total assets in foreign corporations, it will not
be entitled to pass-though to you your pro-rata share of the foreign taxes
paid by such Fund. In this case, these taxes will be taken as a deduction by
a Fund, and the income reported to you will be the net amount after these
deductions.
9. Investment in Passive Foreign Investment Company securities.
Each Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs").
In general, a foreign corporation is classified as a PFIC if at least
one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income.
If a Fund receives an "excess distribution" with respect to PFIC stock, such
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by a
Fund to you. In general, under the PFIC rules, an excess distribution is
treated as having been realized ratably over the period during which a Fund
held the PFIC shares. Each Fund itself will be subject to tax on the portion,
if any, of an excess distribution that is so allocated to prior Fund taxable
years, and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by a
Fund. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of PFIC
rules, certain excess distributions might have been classified as capital
gain. This may have the effect of increasing Fund distributions to you that
are treated as ordinary dividends rather than long-term capital gain
dividends.
Each Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross
income is share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, the 1997 Act
provides for another election that would involve marking-to-market a Fund's
PFIC shares at the end of each taxable year (and on certain other dates as
prescribed in the Code), with the result that unrealized gains would be
treated as though they were realized. A Fund would also be allowed an
ordinary deduction for the excess, if any, of the adjusted basis of its
investment in the PFIC stock over its fair market value at the end of the
taxable year. This deduction would be limited to the amount of any net
mark-to-market gains previously included with respect to that particular PFIC
security. If a Fund were to make this second PFIC election, tax at the Fund
level under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the amount
of tax payable by a Fund (if any), the amounts distributable to you by a
Fund, the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is
a PFIC, and that there is always a possibility that a foreign corporation
will become a PFIC after a Fund acquires shares in that corporation. While a
Fund will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and
it reserves the right to make such investments as a matter of its fundamental
investment policy.
10. Conversion Transactions.
Gains realized by a Fund from transactions that are deemed to be "conversion
transactions" under the Code, and that would otherwise produce capital gain
may be recharacterized as ordinary income to the extent that such gain does
not exceed an amount defined as the "applicable imputed income amount". A
conversion transaction is any transaction in which substantially all of a
Fund's expected return is attributable to the time value of a Fund's net
investment in such 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 transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
Section 263(g) of the Code dealing with capitalized carrying costs.
11. Stripped Preferred Stock.
Occasionally, a Fund may purchase "stripped preferred stock" that is subject
to special tax treatment. Stripped preferred stock is defined as certain
preferred stock issues where ownership of the stock has been separated from
the right to receive dividends that have not yet become payable. The stock
must have a fixed redemption price, must not participate substantially in the
growth of the issuer, and must be limited and preferred as to dividends. The
difference between the redemption price and purchase price is taken into Fund
income over the term of the instrument as if it were original issue discount.
The amount that must be included in each period generally depends on the
original yield to maturity, adjusted for any prepayments of principal.
12. Investments in Original Issue Discount (OID) and Market Discount (MD)
Bonds.
Each Fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause a Fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. A Fund is required to
accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the Fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by a Fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, a Fund may elect to accrue market discount
on a current basis, in which case a Fund will be required to distribute any
such accrued discount. If a Fund does not elect to accrue market discount
into income currently, gain recognized on sale will be recharacterized as
ordinary income instead of capital gain to the extent of any accumulated
market discount on the obligation.
13. Defaulted Obligations.
Each Fund may be required to accrue income on defaulted obligations and to
distribute such income to you even though it is not currently receiving
interest or principal payments on such obligations. In order to generate
cash to satisfy these distribution requirements, a Fund may be required to
dispose of portfolio securities that it otherwise would have continued to
hold or to use cash flows from other sources such as the sale of Fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering 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 does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class 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.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized
performance quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or
express performance 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 the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable 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.
The average annual total returns for Advisor Class for the indicated periods
ended October 31, 1997 were as follows:
From
One Five Inception
Fund Name Year Year (9/20/91)
Pacific Fund -24.38% 3.60% 4.62%
Smaller Companies Fund 14.55% 15.05% 12.53%
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
Cumulative Total Return. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at Net Asset Value. Cumulative total return, however, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for Advisor Class for
the indicated periods ended October 31, 1997 were as follows:
From
One Five Inception
Fund Name Year Year (9/20/91)
Pacific Fund -24.38% 19.36% 31.81%
Smaller Companies Fund 14.55% 101.56% 105.73%
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
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 the Franklin 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 Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) 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(R) 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 NYSE.
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, and 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 CS 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 - 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 - 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 Fund's 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 49 years
and now services more than 2.8 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, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $215 billion in
assets under management for more than 5.8 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
121 U.S. based open-end investment companies to the public. The Fund may
identify itself by its NASDAQ symbol or CUSIP number.
As of December 24, 1997, the principal shareholders of the Fund, beneficial
or of record, were as follows:
Name and Address Share Amount Percentage
Pacific Fund - ADVISOR CLASS
- - - -------------------------------------
Franklin Templeton Trust
Company TTEE
for ValuSelect
Franklin Resources PSP
P.O. Box 2438
Rancho Cordova, CA 95741-2438 71,870.555 76.35%
- - - -------------------------------------
Franklin Trust Company TTEE
For the SEP-IRA of
Charles R. Leffler FBO
Charles R. Leffler
1610 W. Ethans Glen Dr.
Palantine, IL 60067-09008 5,499.553 5.84%
- - - -------------------------------------
Smaller Companies Fund - ADVISOR
CLASS
- - - -------------------------------------
Franklin Templeton Trust
Company TTEE
for ValuSelect
P.O. Box 2438
Rancho Cordova, CA 95741-2438 48,736.076 15.21%
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 outstanding shares of any other
class.
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,
before 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 the Franklin Templeton Group 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 by the close of the business day following the
day clearance is granted; (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, 1997,
including the auditors' report, are incorporated herein by reference.
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
CD - Certificate of deposit
Class I, Class II and Advisor Class - The Pacific Fund offers three classes
of shares, designated "Class I," "Class II" and "Advisor Class" and the
Smaller Companies Fund offers two classes of shares designated "Class I" and
"Advisor Class." The classes have proportionate interests in the Fund's
portfolio. They differ, however, primarily in their sales charge and expense
structures.
Code - Internal Revenue Code of 1986, as amended
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
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.
Investment Counsel - Templeton Investment Counsel, Inc., the Fund's
sub-advisor
Investor Services - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
Managers - Advisers and Investment Counsel
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.
NYSE - New York Stock Exchange
Prospectus - The prospectus for Advisor Class shares of the Fund dated March
1, 1998, 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 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.
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 high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact
have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may
be small.
Caa - Bonds rated Caa are of poor standing. 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Commercial Paper Ratings
Moody's
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
File Nos.
33-41340
811-6336
FORM N-1A
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated October 31, 1997 as
filed with the SEC electronically on form type N-30D on December 18,
1997
(i) Report of Independent Accountants
(ii) Financial Highlights
(iii) Statements of Investments, October 31. 1997
(iv) Statements of Assets and Liabilities - October 31, 1997.
(v) Statements of Operations - for the year ended October 31, 1997
(vi) Statements of Changes in Net Assets for the years ended
October 31, 1997 and 1996
(vii) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated by reference, except exhibits
8(ii), 8(iii), 8(iv), 8(v), 8(vi), 11(i), 15(ii), 18(i), 18(ii), 27(i),
27(ii), 27(iii), 27(iv) and 27(v) 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) 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
(iii) 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
(iv) 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. 33-4134
Filing Date: December 29, 1995
(v) 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 April 19, 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 Sub-advisory
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 Sub-advisory
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) Forms of Dealer Agreements between Franklin
Templeton Distributors, Inc. and Securities Dealers
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) 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
(ii) Amendment to Custody Agreement between Franklin Templeton
International Trust on behalf of Templeton Foreign Smaller
Companies Fund and Chase Manhattan Bank, N.A. dated July 24,
1996
(iii) Master Custody Agreement between Registrant and Bank of New
York dated February 16, 1997
(iv) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York
(v) Amendment dated October 15, 1997 to Master Custody Agreement
between Registrant and Bank of New York
(vi) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 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;
Not Applicable
(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 Accountants
(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: Franklin High Income Trust
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 between the Registrant and
Franklin/Templeton Distributors, Inc. 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
(ii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Templeton Pacific Growth Fund - Class
II and Franklin/Templeton Distributors,
Inc. dated January 1, 1997
(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 of Ccomputation 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) Multiple Class Plan for Templeton Pacific Growth
Fund dated June 18, 1996
(ii) Multiple Class Plan for Templeton Foreign Smaller
Companies Fund dated October 18, 1996
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for Templeton Pacific Growth
Fund - Class I
(ii) Financial Data Schedule for Templeton Pacific Growth
Fund - Class II
(iii) Financial Data Schedule for Templeton Pacific Growth
Fund - Advisor Class
(iv) Financial Data Schedule for Templeton Foreign Smaller
Companies Fund - Class I
(v) Financial Data Schedule for Templeton Foreign Smaller
Companies Fund - Advisor Class
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1997, the number of record holders of each series of the
Registrant was as follows:
NUMBER OF RECORD HOLDERS
CLASS I CLASS II ADVISOR CLASS
Templeton Foreign Smaller
Companies Fund 11,813 N/A 78
Templeton Pacific Growth Fund 8,237 460 77
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 the 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 by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the Declaration of Trust, By-Laws, Management Agreement and
Distribution Agreements previously filed as exhibits and incorporated herein by
reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said By-Laws shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The officers and trustees of the Registrant's manager also serve as officers
and/or directors or trustees for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. 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 trustees
during the past two years.
a) 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 a
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton 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 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 94404-1585.
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 percent of the Registrant's outstanding shares to assist its
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 has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the 30th day of December 1997.
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
Rupert H. Johnson, Jr. Officer and Trustee
Dated: December 30, 1997
MARTIN L FLANAGAN* Principal Accounting Officer
Martin L. Flanagan Dated: December 30, 1997
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: December 30, 1997
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: December 30, 1997
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: December 30, 1997
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: December 301, 1997
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: December 30, 1997
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: December 30, 1997
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: December 30, 1997
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: December 30, 1997
*By /s/ Larry L. Greene
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) Agreement and Declaration of Trust for Franklin
International Trust dated March 19, 1991 *
EX-99.B1(iii) Certificate of Amendment to Certificate of Trust *
for Franklin International Trust dated August 20,
1991
EX-99.B1(iv) Certificate of Amendment to Certificate of Trust *
for Franklin International Trust dated May 14, 1992
EX-99.B1(v) 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 April 19, 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 Sub-advisory *
Agreement between Franklin Advisers, Inc.
and Templeton Investment Counsel, Inc.
dated January 1, 1993
EX-99.B5(iii) Franklin International Equity Fund Sub-advisory *
Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. dated January 1,
1993
EX-99.B6(i) Amended and Restated Distribution Agreement
between Registrant and Franklin Templeton
Distributors, Inc. dated April 23, 1995 *
EX-99.B6(ii) Forms of Dealer Agreements between *
Franklin Templeton Distributors, Inc.
and Securities Dealers
EX-99.B6(iii) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc. dated April 23, 1995
EX-99.B8(i) Custody Agreement Between Franklin International *
Trust and Chase Manhattan Bank, NT & SA dated July
28, 1995
EX-99.B8(ii) Amendment to Custody Agreement between Attached
Franklin Templeton International Trust on
behalf of Templeton Foreign Smaller Companies
Fund and Chase Manhattan Bank, N.A. dated
July 24, 1996
EX-99.B8(iii) Master Custody Agreement between Attached
Registrant and Bank of New York dated
February 16, 1997
EX-99.B8(iv) Amendment dated May 7, 1997 to Master Attached
Custody Agreement between Registrant
and Bank of New York
EX-99.B8(v) Amendment dated october 15, 1997 to Attached
Master Custody Agreement between
Registrant and Bank of New York
EX-99.B8(vi) Terminal Link Agreement between Attached
Registrant and Bank of New York dated
February 16, 1996
EX-99.B11(i) Consent of Independent Accountants 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 between the Registrant
and Franklin/Templeton Distributors,
Inc. dated July 1, 1993
EX-99.B15(ii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of
Templeton Pacific Growth Fund - Class II
and Franklin/Templeton Distributors, Inc.
dated January 1, 1997
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 for Templeton Pacific Attached
Growth Fund dated June 18, 1996
EX-99.B18(ii) Multiple Class Plan for Templeton Foreign Attached
Smaller Companies Fund dated October 18, 1996
EX-27.B(i) Financial Data Schedule for Templeton Attached
Pacific Growth Fund - Class I
EX-27.B(ii) Financial Data Schedule for Templeton Attached
Pacific Growth Fund - Class II
EX-27.B(iii) Financial Data Schedule for Templeton Attached
Pacific Growth Fund - Advisor Class
EX-27.B(iv) Financial Data Schedule for Templeton Attached
Foreign Smaller Companies Fund -
Class I
EX-27.B(v) Financial Data Schedule for Templeton Attached
Foreign Smaller Companies Fund -
Advisor Class
*Incorporated by Reference
AMENDMENT, dated July 24, 1996 to the July 28, 1995 custody agreement
("Agreement") between the Franklin Templeton International Trust (formerly known
as Franklin International Trust) on behalf of Templeton Foreign Smaller
Companies Fund (formerly known as Franklin International Equity Fund)
("Customer"), having a place of business at 777 Mariners Island Boulevard, San
Mateo, CA 94404, and The Chase Manhattan Bank, N.A. ("Bank"), having a place of
business at One Chase Manhattan Plaza, New York, N.Y. 10081
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement.
Section 2. The Agreement is amended as follows by adding the following
as new ss.15:
"(a) "CMBI" shall mean Chase Manhattan Bank International, an
indirect wholly-owned subsidiary of Bank, located in Moscow, Russia, and any
nominee companies appointed by it.
"(b) "International Financial Institution" shall mean any bank
in the top 1,000 (together with their affiliated companies) as measured by "Tier
1" capital or any borker/dealer in the top 100 as measured by capital.
"(c) "Negligence" shall mean the failure to exercise
"Reasonable Care".
"(d) "No-Action Letter" shall mean the response of the
Securities and Exchange Commission's Office of Chief Counsel of Investment
Management, dated April 18, 1995, in respect of the Templeton Russia Fund,
Inc. (SEC Ref. No. 95-151-CC, File No. 811-8788) providing "no-action" relief
under ss.17(f) of The Investment Company Act of 1940, as amended, and SEC Rule
17f-5 thereunder, in connection with custody of such Templeton Russia Fund,
Inc.'s investments in Russia Securities.
"(e) "Reasonable Care" shall mean the use of reasonable care
under the applicable circumstances as measured by the custodial practices
prevailing in Russia of International Financial Institutions acting as
custodians for their institutional investor clients in Russia.
"(f) "Registrar Company" shall mean any entity providing share
registration services to an issuer of Russian Securities.
"(g) "Registrar Contract" shall mean a contract between CMBI
and a Registrar Company (and as the same may be amended from time to time)
containing INTER ALIA, the contractual provisions described at paragraphs
(a)-(e) on pps. 5-6 of the No-Actioon Letter.
"(h) "Russian Security" shall mean a Security issued by a
Russian issuer.
"(i)" 'Share Extract" shall mean: (i) an extract of its share
registration books issued by a Registrar Company indicating an investor's
ownership of a security; and (ii) a form prepared by CMBI or its agent in those
cases where a Registrar Company is unwilling to issue a Share Extract.
Section 3. Section 6(a) of the Agreement is amended by adding the
following at the end thereof: "With respect to Russia, payment for Russian
Securities shall not be made prior to the issuance of the Share Extract relating
to such Russian Security. Delivery of Russian Securities may be made in
accordance with the Customary or established securities trading or securities
processing practices and procedures in Russia. Delivery of Russian Securities
may also be made in any manner specifically required by Instructions acceptable
to the Bank. Customer shall promptly supply such transaction and settlement
information as may be requested by Bank or CMBI in connection with particular
transactions."
Section 4. Section 8 of the Agreement is amended by adding a new
paragraph to the end thereof as follows: "It is understood and agreed that Bank
need only use its reasonable efforts with respect to performing the functions
described in the ss.8 with respect to Russian Securities.
Section 5. Section 12(a)(i) of the Agreement is amended with respect to
Russian custody by deleting the phrase "reasonable care" wherever it appears and
substituting, in lieu thereof, the phrase "Reasonable Care".
Section 6. Section 12(a)(i) of the Agreement is further amended with
respect to Russian custody by inserting the following at the end of the first
sentence thereof: "; provided that, with respect to Russian Securities Bank's
responsibilities shall be limited to safekeeping of relevant Share Extracts."
Section 7. Section 12(a)(i) of the Agreement is further amended with
respect to Russian custody by inserting the following after the second sentence
thereof: "Delegation by Bank to CMBI shall not relieve Bank of any
responsibility to Customer for any loss due to such delegation, and Bank shall
be liable for any loss or claim arising out of or in connection with the
performance by CMBI of such delegated duties to the same extent as if Bank had
itself provided the custody services hereunder. In connection with the
foregoing, neither Bank nor CMBI shall assume responsibility for, and neither
shall be liable for, any action or inaction of any Registrar Company and no
Registrar Company shall be, or shall be deemed to be, Bank, CMBI, a
Subcustodian, a securities depository or the employee, agent or personnel of any
of the foregoing. To the extent that CMBI employs agents to perform any of the
functions to be performed by Bank or CMBI with respect to Russian Securities,
neither Bank nor CMBIshall be responsible for any act, omission, default or for
the solvency of any such agent unless the appointment of such agent was made
with Negligence or in bad faith, except that where Bank or CMBI uses (I) an
affiliated nominee or (ii) an agent to perform the share registration or share
confirmation functions described in paragraphs (a)-(e) on pps. 5-6 or the
No-Action Letter, and, to the extent applicable to CMBI, the share registration
functions described on pps. 2-3 of the No-Action Letter, Bank and CMBI shall be
liable to Customer as if CMBI were responsible for performing such services
itself.
Section 8. Section 12(a)(ii) is amended with respect to Russian
custody by deleting the word "negligently" and substituting, in lieu thereof,
the word "Negligence".
Section 9. Section 12(a)(iii) is amended with respect to Russian
custody by deleting the word "negligence" and substituting, in lieu thereof, the
word "Negligence.
Section 10. Add anew Section 16 to the Agreement as follows:
"(a) Bank will advise Customer (and will update such advice
from time to time as changes occur) of those Registrar Companies with which CMBI
has entered into a Registrar Contract. Bank shall cause CMBI both to monitor
each Registrar Company and to promptly advise Customer and its investment
advisor when CMBI has actual knowledge of the occurrence of any one or more of
the events described in paragraphs (I)-(v) on pps. 8-9 of the No-Action Letter
with respect to a Registrar Company that serves in that capacity for any issuer
the shares of which are held by Customer.
"(b) Where Customer is considering investing in the Russian
Securities of an issuer as to which CMBI does not have a Registrar Contract with
the issuer's Registrar Company, Customer may request that Bank ask that CMBI
both consider whether it would be willing to attempt to enter into such a
Registrar Contract and to advise Customer of its willingness to do so. Where
CMBI has agreed to make such an attempt, Bank will advise Customer of the
occurrence of any one or more of the events described in paragraphs (i)-(iv) on
pps. 8-9 of the No-Action Letter of which CMBI has actual knowledge.
"(c) Where Customer is considering investing in the Russian
Securities of an issuer as to which CMBI has a Registrar Contract with the
issuer's Registrar Company, Customer may advise Bank of its interest in
investing in such issuer and, in such event, Bank will advise Customer of the
occurrence of any one or more of the events described in paragraphs (I)-(v) on
pps. 8-9 or the No-Action Letter of which CMBI has actual knowledge."
Section 11. Add a new Section 17 to theAgreement as follows: "Customer
shall pay for and hold Bank and CMBI harmless from any liability or loss
resulting from the imposition or assessment of any taxes or other governmental
charges, and any related expenses incurred by Bank, CMBI or their respective
agents with respect to income on Customer's Russian Securities.
Section 12. Add a new Section 18 to the Agreement as follows" "Customer
acknowledges that CMBI may not be able, in given cases and despite its
reasonable efforts, to obtain a Share Extract from a Registrar Company and CMBI
shall not be liable in any such event including with respect to any losses
resulting from such failure."
Section 13. Add a new Section 19 to the Agreement as follows" "Customer
acknowledges that it has received, reviewed and understands Bank's market report
for Russia, including, but not limited to, the risks described therein."
Section 14. Add a new Section 20 to the Agreement as follows: "Subject
to the cooperation of a Registrar Company, for at least the first two years
following CMBI's first use of a Registrar Company, Bank shall cause CMBI to
conduct share confirmations on at least a quarterly basis, although thereafter
confirmations may be conducted on a less frequent basis if Customer's Board of
Directors, in consultation with CMBI, determines it to be appropriate."
Section 15. Add a new Section 21 to the Agreement as follows: "Bank
shall cause CMBI to prepare for distribution to Customer's Board of Directors a
quarterly report identifying: (I) any concerns it has regarding the Russian
share registration system that should be brought to the attention of the Board
of Directors; and (ii) the steps CMBI has taken during the reporting period to
ensure that Customer's interests continue to be appropriately recorded."
Section 16. Add a new Section 22 to the Agreement as follows: "Except
as provided in new ss.16(b), the services to be provided by Bank hereunder will
be provided only in relation to Russian Securities for which CMBI has entered
into a Registrar Contract with the relevant Registrar Company."
******************************
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
FRANKLIN TEMPLETON INTERNATIONAL TRUST (formerly known as Franklin International
Trust), on behalf of TEMPLETON FOREIGN SMALLER COMPANIES FUND (formerly known
As Franklin International Equity Fund) THE CHASE MANHATTAN BANK, N.A.
By: /S/ D.R. GATZEK By: /S/LENORE VANDEN-HANDEL
Name: Deborah R. Gatzek Name: Lenore Vanden-Handel
Title: Vice President Title: Vice President
& Secretary
Date: July 24, 1996 Date: July 24, 1996
MASTER CUSTODY AGREEMENT
THIS CUSTODY AGREEMENT ("Agreement") is made and entered into
as of February 16, 1996, by and between each Investment Company listed on
Exhibit A, for itself and for each of its Series listed on Exhibit A, and BANK
OF NEW YORK, a New York corporation authorized to do a banking business (the
"Custodian").
RECITALS
A. Each Investment Company is an investment company registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") that invests and reinvests, for itself or on behalf of its Series, in
Domestic Securities and Foreign Securities.
B. The Custodian is, and has represented to each Investment
Company that the Custodian is, a "bank" as that term is defined in Section
2(a)(5) of the Investment Company Act of 1940, as amended, and is eligible to
receive and maintain custody of investment company assets pursuant to Section
17(f) and Rule 17f-2 thereunder.
C. The Custodian and each Investment Company, for itself and
for each of its Series, desire to provide for the retention of the Custodian as
a custodian of the assets of each Investment Company and each Series, on the
terms and subject to the provisions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:
Section 1.0 FORM OF AGREEMENT
Although the parties have executed this Agreement in the form
of a Master Custody Agreement for administrative convenience, this Agreement
shall create a separate custody agreement for each Investment Company and for
each Series designated on Exhibit A, as though each Investment Company had
separately executed an identical custody agreement for itself and for each of
its Series. No rights, responsibilities or liabilities of any Investment Company
or Series shall be attributed to any other Investment Company or Series.
Section 1.1 DEFINITIONS
For purposes of this Agreement, the following terms shall have
the respective meanings specified below:
"Agreement" shall mean this Custody Agreement.
"Board" shall mean the Board of Trustees, Directors or
Managing General Partners, as applicable, of an Investment Company.
"Business Day" with respect to any Domestic Security means any
day, other than a Saturday or Sunday, that is not a day on which banking
institutions are authorized or required by law to be closed in The City of New
York and, with respect to Foreign Securities, a London Business Day. "London
Business Day" shall mean any day on which dealings and deposits in U.S. dollars
are transacted in the London interbank market.
"Custodian" shall mean Bank of New York.
"Domestic Securities" shall have the meaning provided in
Subsection 2.1 hereof.
"Executive Committee" shall mean the executive committee of a
Board.
"Foreign Custodian" shall have the meaning provided in Section
4.1 hereof.
"Foreign Securities" shall have the meaning provided in
Section 2.1 hereof.
"Foreign Securities Depository" shall have the meaning
provided in Section 4.1 hereof.
"Fund" shall mean an entity identified on Exhibit A as an
Investment Company, if the Investment Company has no series,
or a Series.
"Investment Company" shall mean an entity identified on
Exhibit A under the heading "Investment Company."
"Investment Company Act" shall mean the Investment Company Act
of 1940, as amended.
"Securities" shall have the meaning provided in Section 2.1
hereof.
"Securities System" shall have the meaning provided in Section
3.1 hereof.
"Securities System Account" shall have the meaning provided in
Subsection 3.8(a) hereof.
"Series" shall mean a series of an Investment Company which is
identified as such on Exhibit A.
"Shares" shall mean shares of beneficial interest of the
Investment Company.
"Subcustodian" shall have the meaning provided in Subsection
3.7 hereof, but shall not include any Foreign Custodian.
"Transfer Agent" shall mean the duly appointed and acting
transfer agent for each Investment Company.
"Writing" shall mean a communication in writing, a
communication by telex, facsimile transmission, bankwire or
other teleprocess or electronic instruction system acceptable
to the Custodian.
Section 2. APPOINTMENT OF CUSTODIAN; DELIVERY OF ASSETS
2.1 APPOINTMENT OF CUSTODIAN. Each Investment Company hereby
appoints and designates the Custodian as a custodian of the assets of each Fund,
including cash denominated in U.S. dollars or foreign currency ("cash"),
securities the Fund desires to be held within the United States ("Domestic
Securities") and securities it desires to be held outside the United States
("Foreign Securities"). Domestic Securities and Foreign Securities are sometimes
referred to herein, collectively, as "Securities." The Custodian hereby accepts
such appointment and designation and agrees that it shall maintain custody of
the assets of each Fund delivered to it hereunder in the manner provided for
herein.
2.2 DELIVERY OF ASSETS. Each Investment Company may deliver to
the Custodian Securities and cash owned by the Funds, payments of income,
principal or capital distributions received by the Funds with respect to
Securities owned by the Funds from time to time, and the consideration received
by the Funds for such Shares or other securities of the Funds as may be issued
and sold from time to time. The Custodian shall have no responsibility
whatsoever for any property or assets of the Funds held or received by the Funds
and not delivered to the Custodian pursuant to and in accordance with the terms
hereof. All Securities accepted by the Custodian on behalf of the Funds under
the terms of this Agreement shall be in "street name" or other good delivery
form as determined by the Custodian.
2.3 SUBCUSTODIANS. The Custodian may appoint BNY Western Trust
Company as a Subcustodian to hold assets of the Funds in accordance with the
provisions of this Agreement. In addition, upon receipt of Proper Instructions
and a certified copy of a resolution of the Board or of the Executive Committee,
and certified by the Secretary or an Assistant Secretary, of an Investment
Company, the Custodian may from time to time appoint one or more other
Subcustodians or Foreign Custodians to hold assets of the affected Funds in
accordance with the provisions of this Agreement.
2.4 NO DUTY TO MANAGE. The Custodian, a Subcustodian or a
Foreign Custodian shall not have any duty or responsibility to manage or
recommend investments of the assets of any Fund held by them or to initiate any
purchase, sale or other investment transaction in the absence of Proper
Instructions or except as otherwise specifically provided herein.
Section 3. DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF THE FUNDS
HELD BY THE CUSTODIAN
3.1 HOLDING SECURITIES. The Custodian shall hold and
physically segregate from any property owned by the Custodian, for the account
of each Fund, all non-cash property delivered by each Fund to the Custodian
hereunder other than Securities which, pursuant to Subsection 3.8 hereof, are
held through a registered clearing agency, a registered securities depository,
the Federal Reserve's book-entry securities system (referred to herein,
individually, as a "Securities System"), or held by a Subcustodian, Foreign
Custodian or in a Foreign Securities Depository.
3.2 DELIVERY OF SECURITIES. Except as otherwise provided
in Subsection 3.5 hereof, the Custodian, upon receipt of Proper
Instructions, shall release and deliver Securities owned by a Fund and held by
the Custodian in the following cases or as otherwise directed in Proper
Instructions:
(a) except as otherwise provided herein, upon sale of such
Securities for the account of the Fund and receipt by the Custodian, a
Subcustodian or a Foreign Custodian of payment therefor;
(b) upon the receipt of payment by the Custodian, a
Subcustodian or a Foreign Custodian in connection with any repurchase agreement
related to such Securities entered into by the Fund;
(c) in the case of a sale effected through a Securities
System, in accordance with the provisions of Subsection 3.8 hereof;
(d) to a tender agent or other authorized agent in connection
with (i) a tender or other similar offer for Securities owned by the Fund, or
(ii) a tender offer or repurchase by the Fund of its own Shares;
(e) to the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable; provided, that in any
such case, the cash or other consideration is to be delivered to the Custodian,
a Subcustodian or a Foreign Custodian;
(f) to the issuer thereof, or its agent, for transfer into
the name or nominee name of the Fund, the name or nominee name of the
Custodian, the name or nominee name of any Subcustodian or Foreign Custodian;
or for exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new Securities are to be delivered
to the Custodian, a Subcustodian or Foreign Custodian;
(g) to the broker selling the same for examination in
accordance with the "street delivery" custom;
(h) for exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, or reorganization of the issuer of
such Securities, or pursuant to a conversion of such Securities; provided that,
in any such case, the new Securities and cash, if any, are to be delivered to
the Custodian or a Subcustodian;
(i) in the case of warrants, rights or similar securities, the
surrender thereof in connection with the exercise of such warrants, rights or
similar Securities or the surrender of interim receipts or temporary Securities
for definitive Securities; provided that,in any such case, the new Securities
and cash, if any, are to be delivered to the Custodian, a subcustodian or a
Foreign Custodian;
(j) for delivery in connection with any loans of Securities
made by the Fund, but only against receipt by the Custodian, a Subcustodian or a
Foreign Custodian of adequate collateral as determined by the Fund (and
identified in Proper Instructions communicated to the Custodian), which may be
in the form of cash or obligations issued by the United States government, its
agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the account of the Custodian, a
Subcustodian or a Foreign Custodian in the Federal Reserve's book-entry
securities system, the Custodian will not be held liable or responsible for the
delivery of Securities owned by the Fund prior to the receipt of such
collateral;
(k) for delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
by the Custodian, a Subcustodian or a Foreign Custodian of amounts borrowed;
(l) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a broker-dealer relating to compliance with the rules of registered clearing
corporations and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements
in connection with transactions by the Fund;
(m) for delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, a Subcustodian or a Foreign Custodian
and a futures commission merchant, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any contract market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund;
(n) upon the receipt of instructions from the Transfer Agent
for delivery to the Transfer Agent or to the holders of Shares in connection
with distributions in kind in satisfaction of requests by holders of Shares for
repurchase or redemption; and
(o) for any other proper purpose, but only upon receipt of
Proper Instructions, and a certified copy of a resolution of the Board or of
the Executive Committee certified by the Secretary or an Assistant Secretary
of the Fund, specifying the securities to be delivered, setting forth the
purpose for which such delivery is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom delivery of such
securities shall be made.
3.3 REGISTRATION OF SECURITIES. Securities held by the
Custodian, a Subcustodian or a Foreign Custodian (other than bearer Securities)
shall be registered in the name or nominee name of the appropriate Fund, in the
name or nominee name of the Custodian or in the name or nominee name of any
Subcustodian or Foreign Custodian. Each Fund agrees to hold the Custodian, any
such nominee, Subcustodian or Foreign Custodian harmless from any liability as a
holder of record of such Securities.
3.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts for each Fund, subject only to draft or order
by the Custodian acting pursuant to the terms of this Agreement, and shall hold
in such account or accounts, subject to the provisions hereof, all cash received
by it hereunder from or for the account of each Fund, other than cash maintained
by a Fund in a bank account established and used in accordance with Rule 17f-3
under the Fund Act. Funds held by the Custodian for a Fund may be deposited by
it to its credit as Custodian in the banking departments of the Custodian, a
Subcustodian or a Foreign Custodian. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. In the event a Fund's account for any reason
becomes overdrawn, or in the event an action requested in Proper Instructions
would cause such an account to become overdrawn, the Custodian shall immediately
notify the affected Fund.
3.5 COLLECTION OF INCOME; TRADE SETTLEMENT; CREDITING OF
ACCOUNTS. The Custodian shall collect income payable with respect to Securities
owned by each Fund, settle Securities trades for the account of each Fund and
credit and debit each Fund's account with the Custodian in connection therewith
as stated in this Subsection 3.5. This Subsection shall not apply to repurchase
agreements, which are treated in Subsection 3.2(b), above.
(a) Upon receipt of Proper Instructions, the Custodian shall
effect the purchase of a Security by charging the account of the Fund on the
contractual settlement date, and by making payment against delivery. If the
seller or selling broker fails to deliver the Security within a reasonable
period of time, the Custodian shall notify the Fund and credit the transaction
amount to the account of the Fund, but the Custodian shall have no further
liability or responsibility for the transaction.
(b) Upon receipt of Proper Instructions, the Custodian shall
effect the sale of a Security by withdrawing a certificate or other indicia
of ownership from the account of the Fund and by making delivery against
payment, and shall credit the account of the Fund with the amount of such
proceeds on the contractual settlement date. If the purchaser or the
purchasing broker fails to make payment within a reasonable period of time, the
Custodian shall notify the Fund, debit the Fund's account for any amounts
previously credited to it by the Custodian as proceeds of the transaction and,
if delivery has not been made, redeposit the Security into the account of the
Fund.
(c) The Fund is responsible for ensuring that the Custodian
receives timely and accurate Proper Instructions to enable the Custodian to
effect settlement of any purchase or sale. If the Custodian does not receive
such instructions within the required time period, the Custodian shall have no
liability of any kind to any person, including the Fund, for failing to effect
settlement on the contractual settlement date. However, the Custodian shall use
its best reasonable efforts to effect settlement as soon as possible after
receipt of Proper Instructions.
(d) The Custodian shall credit the account of the Fund with
interest income payable on interest bearing Securities on payable date.
Dividends and other amounts payable with respect to Domestic Securities and
Foreign Securities shall be credited to the account of the Fund when received
by the Custodian. The Custodian shall not be required to commence suit or
collection proceedings or resort to any extraordinary means to collect such
income and other amounts payable with respect to Securities owned by the Fund.
The collection of income due the Fund on Domestic Securities loaned pursuant
to the provisions of Subsection 3.2(j) shall be the responsibility of the Fund.
The Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is entitled. The Custodian shall have no liability to
any person, including the Fund, if the Custodian credits the account of the
Fund with such income or other amounts payable with respect to Securities owned
by the Fund (other than Securities loaned by the Fund pursuant to Subsection
3.2(j) hereof) and the Custodian subsequently is unable to collect such income
or other amounts from the payors thereof within a reasonable time period, as
determined by the Custodian in its sole discretion. In such event, the
Custodian shall be entitled to reimbursement of the amount so credited to the
account of the Fund.
3.6 PAYMENT OF FUND MONIES. Upon receipt of Proper
Instructions the Custodian shall pay out monies of a Fund in the following
cases or as otherwise directed in Proper Instructions:
(a) upon the purchase of Securities, futures contracts or
options on futures contracts for the account of the Fund but only, except as
otherwise provided herein, (i) against the delivery of such securities, or
evidence of title to futures contracts or options on futures contracts, to the
Custodian or a Subcustodian registered pursuant to Subsection 3.3 hereof or in
proper form for transfer; (ii) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in Subsection
3.8 hereof; or (iii) in the case of repurchase agreements entered into between
the Fund and the Custodian, another bank or a broker-dealer (A) against
delivery of the Securities either in certificated form to the Custodian or a
Subcustodian or through an entry crediting the Custodian's account at the
appropriate Federal Reserve Bank with such Securities or (B) against delivery of
the confirmation evidencing purchase by the Fund of Securities owned by the
Custodian or such broker-dealer or other bank along with written evidence of the
agreement by the Custodian or such broker-dealer or other bank to repurchase
such Securities from the Fund;
(b) in connection with conversion, exchange or surrender of
Securities owned by the Fund as set forth in Subsection 3.2 hereof;
(c) for the redemption or repurchase of Shares issued by the
Fund;
(d) for the payment of any expense or liability incurred by
the Fund, including but not limited to the following payments for the account of
the Fund: custodian fees, interest, taxes, management, accounting, transfer
agent and legal fees and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred expenses;
and
(e) for the payment of any dividends or distributions declared
by the Board with respect to the Shares.
3.7 APPOINTMENT OF SUBCUSTODIANS. The Custodian may appoint
BNY Western Trust Company or, upon receipt of Proper Instructions, another bank
or trust company, which is itself qualified under the Investment Company Act to
act as a custodian (a "Subcustodian"), as the agent of the Custodian to carry
out such of the duties of the Custodian hereunder as a Custodian may from time
to time direct; provided, however, that the appointment of any Subcustodian
shall not relieve the Custodian of its responsibilities or liabilities
hereunder.
3.8 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. The Custodian
may deposit and/or maintain Domestic Securities owned by a Fund in a Securities
System in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(a) the Custodian may hold Domestic Securities of the Fund in
the Depository Trust Company or the Federal Reserve's book entry system or,
upon receipt of Proper Instructions, in another Securities System provided that
such securities are held in an account of the Custodian in the Securities System
("Securities System Account") which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
(b) the records of the Custodian with respect to Domestic
Securities of the Fund which are maintained in a Securities System shall
identify by book-entry those Domestic Securities belonging to the Fund;
(c) the Custodian shall pay for Domestic Securities purchased for
the account of the Fund upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Securities System Account, an
(ii) the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian shall transfer
Domestic Securities sold for the account of the Fund upon (A) receipt of advice
from the Securities System that payment for such securities has been
transferred to the Securities System Account, and (B) the making of an entry on
the records of the Custodian to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Securities System of
transfers of Domestic Securities for the account of the Fund shall be
maintained for the Fund by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund confirmation of
the transfer to or from the account of the Fund in the form of a written advice
or notice; and
(d) upon request, the Custodian shall provide the Fund with
any report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding domestic
securities deposited in the Securities System.
3.9 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or accounts for
and on behalf of a Fund, into which account or accounts may be transferred cash
and/or Securities, including Securities maintained in an account by the
Custodian pursuant to Section 3.8 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer or futures
commission merchant, relating to compliance with the rules of registered
clearing corporations and of any national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or securities in connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the Fund,
and (iii) for other proper corporate purposes, but only, in the case of this
clause (iii), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board or of the Executive Committee certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
3.10 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificates and affidavits for all federal
and state tax purposes in connection with receipt of income or other payments
with respect to domestic securities of each Fund held by it and in connection
with transfers of such securities.
3.11 PROXIES. The Custodian shall, with respect to the
Securities held hereunder, promptly deliver to each Fund all proxies, all proxy
soliciting materials and all notices relating to such Securities. If the
Securities are registered otherwise than in the name of a Fund or a nominee of a
Fund, the Custodian shall use its best reasonable efforts, consistent with
applicable law, to cause all proxies to be promptly executed by the registered
holder of such Securities in accordance with Proper Instructions.
3.12 COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. The
Custodian shall transmit promptly to each Fund all written information
(including, without limitation, pendency of calls and maturities of Securities
and expirations of rights in connection therewith and notices of exercise of put
and call options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of
Securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to each Fund all written information
received by the Custodian from issuers of the Securities whose tender or
exchange is sought and from the party (or its agents) making the tender or
exchange offer. If a Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three Business Days prior to the date of which the
Custodian is to take such action.
3.13 REPORTS BY CUSTODIAn. The Custodian shall each business
day furnish each Fund with a statement summarizing all transactions and entries
for the account of the Fund for the preceding day. At the end of every month,
the Custodian shall furnish each Fund with a list of the cash and portfolio
securities showing the quantity of the issue owned, the cost of each issue and
the market value of each issue at the end of each month. Such monthly report
shall also contain separate listings of (a) unsettled trades and (b) when-issued
securities. The Custodian shall furnish such other reports as may be mutually
agreed upon from time-to-time.
Section 4. CERTAIN DUTIES OF THE CUSTODIAN WITH RESPECT TO ASSETS OF
THE FUNDS HELD OUTSIDE THE UNITED STATES
4.1 CUSTODY OUTSIDE THE UNITED STATES. Each Fund authorizes
the Custodian to hold Foreign Securities and cash in custody accounts which have
been established by the Custodian with (i) its foreign branches, (ii) foreign
banking institutions, foreign branches of United States banks and subsidiaries
of United States banks or bank holding companies (each a "Foreign Custodian")
and (iii) Foreign Securities depositories or clearing agencies (each a "Foreign
Securities Depository"); provided, however, that the appropriate Board or
Executive Committee has approved in advance the use of each such Foreign
Custodian and Foreign Securities Depository and the contract between the
Custodian and each Foreign Custodian and that such approval is set forth in
Proper Instructions and a certified copy of a resolution of the Board or of the
Executive Committee certified by the Secretary or an Assistant Secretary of the
appropriate Investment Company. Unless expressly provided to the contrary in
this Section 4, custody of Foreign Securities and assets held outside the United
States by the Custodian, a Foreign Custodian or through a Foreign Securities
Depository shall be governed by this Agreement, including Section 3 hereof.
4.2 ASSETS TO BE HELD. The Custodian shall limit the
securities and other assets maintained in the custody of its foreign branches,
Foreign Custodians and Foreign Securities Depositories to: (i) "foreign
securities", as defined in paragraph (c) (1) of Rule 17f-5 under the Fund Act,
and (ii) cash and cash equivalents in such amounts as the Custodian or an
affected Fund may determine to be reasonably necessary to effect the Fund's
Foreign Securities transactions.
4.3 OMITTED.
4.4 SEGREGATION OF SECURITIES. The Custodian shall identify on
its books and records as belonging to the appropriate Fund, the Foreign
Securities of each Fund held by each Foreign Custodian.
4.5 AGREEMENTS WITH FOREIGN CUSTODIANS. Each agreement between
the Custodian and a Foreign Custodian shall be substantially in the form as
delivered to the Investment Companies for their Boards' review, and shall not be
amended in a way that materially adversely affects any Fund without the prior
written consent of the Fund. Upon request, the Custodian shall certify to the
Funds that an agreement between the Custodian and a Foreign Custodian meets the
requirements of Rule 17f-5 under the 1940 Act.
4.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUNDS. Upon
request of a Fund, the Custodian will use its best reasonable efforts to arrange
for the independent accountants or auditors of the Fund to be afforded access to
the books and records of any Foreign Custodian insofar as such books and records
relate to the custody by any such Foreign Custodian of assets of the Fund.
4.7 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNTS. Upon receipt of
Proper Instructions, the Custodian shall instruct the appropriate Foreign
Custodian to transfer, exchange or deliver Foreign Securities owned by a Fund,
but, except to the extent explicitly provided herein, only in any of the cases
specified in Subsection 3.2. Upon receipt of Proper Instructions, the Custodian
shall pay out or instruct the appropriate Foreign Custodian to pay out monies of
a Fund in any of the cases specified in Subsection 3.6. Notwithstanding anything
herein to the contrary, settlement and payment for Foreign Securities received
for the account of a Fund and delivery of Foreign Securities maintained for the
account of a Fund may be effected in accordance with the customary or
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such securities from such
purchaser or dealer. Foreign Securities maintained in the custody of a Foreign
Custodian may be maintained in the name of such entity or its nominee name to
the same extent as set forth in Section 3.3 of this Agreement and each Fund
agrees to hold any Foreign Custodian and its nominee harmless from any liability
as a holder of record of such securities.
4.8 LIABILITY OF FOREIGN CUSTODIAN. Each agreement between the
Custodian and a Foreign Custodian shall, unless otherwise mutually agreed to by
the Custodian and a Fund, require the Foreign Custodian to exercise reasonable
care or, alternatively, impose a contractual liability for breach of contract
without an exception based upon a standard of care in the performance of its
duties and to indemnify and hold harmless the Custodian from and against any
loss, damage, cost, expense, liability or claim arising out of or in connection
with the Foreign Custodian's performance of such obligations, excepting,
however, Citibank, N.A., and its subsidiaries and branches, where the
indemnification is limited to direct money damages and requires that the claim
be promptly asserted. At the election of a Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims against a
Foreign Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim, unless such
subrogation is prohibited by local law.
4.9 MONITORING RESPONSIBILITIES.
(a) The Custodian will promptly inform each Fund in the
event that the Custodian learns of a material adverse change in the financial
condition of a Foreign Custodian or learns that a Foreign Custodian's financial
condition has declined or is likely to decline below the minimum levels required
by Rule 17f-5 of the 1940 Act.
(b) The custodian will furnish such information as may be
reasonably necessary to assist each Investment Company's Board in its annual
review and approval of the continuance of all contracts or arrangements with
Foreign Subcustodians.
Section 5. PROPER INSTRUCTIONS
As used in this Agreement, the term "Proper Instructions"
means instructions of a Fund received by the Custodian via telephone or in
Writing which the Custodian believes in good faith to have been given by
Authorized Persons (as defined below) or which are transmitted with proper
testing or authentication pursuant to terms and conditions which the Custodian
may specify. Any Proper Instructions delivered to the Custodian by telephone
shall promptly thereafter be confirmed in accordance with procedures, and
limited in subject matter, as mutually agreed upon by the parties. Unless
otherwise expressly provided, all Proper Instructions shall continue in full
force and effect until canceled or superseded. If the Custodian requires test
arrangements, authentication methods or other security devices to be used with
respect to Proper Instructions, any Proper Instructions given by the Funds
thereafter shall be given and processed in accordance with such terms and
conditions for the use of such arrangements, methods or devices as the Custodian
may put into effect and modify from time to time. The Funds shall safeguard any
testkeys, identification codes or other security devices which the Custodian
shall make available to them. The Custodian may electronically record any Proper
Instructions given by telephone, and any other telephone discussions, with
respect to its activities hereunder. As used in this Agreement, the term
"Authorized Persons" means such officers or such agents of a Fund as have been
properly appointed pursuant to a resolution of the appropriate Board or
Executive Committee, a certified copy of which has been provided to the
Custodian, to act on behalf of the Fund under this Agreement. Each of such
persons shall continue to be an Authorized Person until such time as the
Custodian receives Proper Instructions that any such officer or agent is no
longer an Authorized Person.
Section 6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority
from a Fund:
(a) make payments to itself or others for minor expenses of
handling Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
(b) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
(c) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the Securities and property of the Fund except as otherwise
provided in Proper Instructions.
Section 7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any
instructions (conveyed by telephone or in Writing), notice, request, consent,
certificate or other instrument or paper believed by it to be genuine and to
have been properly given or executed by or on behalf of a Fund. The Custodian
may receive and accept a certified copy of a resolution of a Board or Executive
Committee as conclusive evidence (a) of the authority of any person to act in
accordance with such resolution or (b) of any determination or of any action by
the Board or Executive Committee as described in such resolution, and such
resolution may be considered as in full force and effect until receipt by the
Custodian of written notice by an Authorized Person to the contrary.
Section 8. DUTY OF CUSTODIAN TO SUPPLY INFORMATION
The Custodian shall cooperate with and supply necessary
information in its possession (to the extent permissible under applicable law)
to the entity or entities appointed by the appropriate Board to keep the books
of account of a Fund and/or compute the net asset value per Share of the
outstanding Shares of a Fund.
Section 9. RECORDS
The Custodian shall create and maintain all records relating
to its activities under this Agreement which are required with respect to such
activities under Section 31 of the Investment Company Act and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the appropriate
Investment Company and shall at all times during the regular business hours of
the Custodian be open for inspection by duly authorized officers, employees or
agents of the Investment Company and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at a Fund's request, supply the Fund
with a tabulation of Securities and Cash owned by the Fund and held by the
Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
Section 10. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for
its services and expenses as Custodian, as agreed upon from time to time between
each Investment Company, on behalf of each Fund, and the Custodian. In addition,
should the Custodian in its discretion advance funds (to include overdrafts) to
or on behalf of a Fund pursuant to Proper Instructions, the Custodian shall be
entitled to prompt reimbursement of any amounts advanced. In the event of such
an advance, and to the extent permitted by the 1940 Act and the Fund's policies,
the Custodian shall have a continuing lien and security interest in and to the
property of the Fund in the possession or control of the Custodian or of a third
party acting in the Custodian's behalf, until the advance is reimbursed. Nothing
in this Agreement shall obligate the Custodian to advance funds to or on behalf
of a Fund, or to permit any borrowing by a Fund except for borrowings for
temporary purposes, to the extent permitted by the Fund's policies.
Section 11. RESPONSIBILITY OF CUSTODIAN
The Custodian shall be responsible for the performance of only
such duties as are set forth herein or contained in Proper Instructions and
shall use reasonable care in carrying out such duties. The Custodian shall be
liable to a Fund for any loss which shall occur as the result of the failure of
a Foreign Custodian engaged directly or indirectly by the Custodian to exercise
reasonable care with respect to the safekeeping of securities and other assets
of the Fund to the same extent that the Custodian would be liable to the Fund if
the Custodian itself were holding such securities and other assets. Nothing in
this Agreement shall be read to limit the responsibility or liability of the
Custodian or a Foreign Custodian for their failure to exercise reasonable care
with regard to any decision or recommendation made by the Custodian or
Subcustodian regarding the use or continued use of a Foreign Securities
Depository. In the event of any loss to a Fund by reason of the failure of the
Custodian or a Foreign Custodian engaged by such Foreign Custodian or the
Custodian to utilize reasonable care, the Custodian shall be liable to the Fund
to the extent of the Fund's damages, to be determined based on the market value
of the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances. The
Custodian shall be held to the exercise of reasonable care in carrying out this
Agreement, and shall not be liable for acts or omissions unless the same
constitute negligence or willful misconduct on the part of the Custodian or any
Foreign Custodian engaged directly or indirectly by the Custodian. Each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including legal
fees and expenses) incurred by the Custodian or its nominess in connection with
the performance of this Agreement with respect to such Fund, except such as may
arise from any negligent action, negligent failure to act or willful misconduct
on the part of the indemnified entity or any Foreign Custodian. The Custodian
shall be entitled to rely, and may act, on advice of counsel (who may be counsel
for a Fund) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian need not
maintain any insurance for the benefit of any Fund.
All collections of funds or other property paid or distributed
in respect of Securities held by the Custodian, agent, Subcustodian or Foreign
Custodian hereunder shall be made at the risk of the Funds. The Custodian shall
have no liability for any loss occasioned by delay in the actual receipt of
notice by the Custodian, agent, Subcustodian or by a Foreign Custodian of any
payment, redemption or other transaction regarding securities in respect of
which the Custodian has agreed to take action as provided in Section 3 hereof.
The Custodian shall not be liable for any action taken in good faith upon Proper
Instructions or upon any certified copy of any resolution of the Board and may
rely on the genuineness of any such documents which it may in good faith believe
to be validly executed. Notwithstanding the foregoing, the Custodian shall not
be liable for any loss resulting from, or caused by, the direction of a Fund to
maintain custody of any Securities or cash in a foreign country including, but
not limited to, losses resulting from nationalization, expropriation, currency
restrictions, civil disturbance, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation or other similar occurrences,
or events beyond the control of the Custodian. Finally, the Custodian shall not
be liable for any taxes, including interest and penalties with respect thereto,
that may be levied or assessed upon or in respect of any assets of any Fund held
by the Custodian.
Section 12. LIMITED LIABILITY OF EACH INVESTMENT COMPANY
The Custodian acknowledges that it has received notice of and
accepts the limitations of liability as set forth in each Investment Company's
Agreement and Declaration of Trust, Articles of Incorporation, or Agreement of
Limited Partnership. The Custodian agrees that each Fund's obligation hereunder
shall be limited to the assets of the Fund, and that the Custodian shall not
seek satisfaction of any such obligation from the shareholders of the Fund nor
from any Board Member, officer, employee, or agent of the Fund or the Investment
Company on behalf of the Fund.
Section 13. EFFECTIVE PERIOD; TERMINATION
This Agreement shall become effective as of the date of its
execution and shall continue in full force and effect until terminated as
hereinafter provided. This Agreement may be terminated by each Investment
Company, on behalf of a Fund, or by the Custodian by 90 days notice in Writing
to the other provided that any termination by an Investment Company shall be
authorized by a resolution of the Board, a certified copy of which shall
accompany such notice of termination, and provided further, that such resolution
shall specify the names of the persons to whom the Custodian shall deliver the
assets of the affected Funds held by the Custodian. If notice of termination is
given by the Custodian, the affected Investment Companies shall, within 90 days
following the giving of such notice, deliver to the Custodian a certified copy
of a resolution of the Boards specifying the names of the persons to whom the
Custodian shall deliver assets of the affected Funds held by the Custodian. In
either case the Custodian will deliver such assets to the persons so specified,
after deducting therefrom any amounts which the Custodian determines to be owed
to it hereunder (including all costs and expenses of delivery or transfer of
Fund assets to the persons so specified). If within 90 days following the giving
of a notice of termination by the Custodian, the Custodian does not receive from
the affected Investment Companies certified copies of resolutions of the Boards
specifying the names of the persons to whom the Custodian shall deliver the
assets of the Funds held by the Custodian, the Custodian, at its election, may
deliver such assets to a bank or trust company doing business in the State of
California to be held and disposed of pursuant to the provisions of this
Agreement or may continue to hold such assets until a certified copy of one or
more resolutions as aforesaid is delivered to the Custodian. The obligations of
the parties hereto regarding the use of reasonable care, indemnities and payment
of fees and expenses shall survive the termination of this Agreement.
Section 14. MISCELLANEOUS
14.1 RELATIONSHIP. Nothing contained in this Agreement shall
(i) create any fiduciary, joint venture or partnership relationship between the
Custodian and any Fund or (ii) be construed as or constitute a prohibition
against the provision by the Custodian or any of its affiliates to any Fund of
investment banking, securities dealing or brokerages services or any other
banking or financial services.
14.2 FURTHER ASSURANCES. Each party hereto shall furnish to
the other party hereto such instruments and other documents as such other party
may reasonably request for the purpose of carrying out or evidencing the
transactions contemplated by this Agreement.
14.3 ATTORNEYS' FEES. If any lawsuit or other action or
proceeding relating to this Agreement is brought by a party hereto against the
other party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (including allocated costs and
disbursements of in-house counsel), in addition to any other relief to which the
prevailing party may be entitled.
14.4 NOTICES. Except as otherwise specified herein, each
notice or other communication hereunder shall be in Writing and shall be
delivered to the intended recipient at the following address (or at such other
address as the intended recipient shall have specified in a written notice given
to the other parties hereto):
if to a Fund or Investment Company: if to the Custodian:
[Fund or Investment Company] The Bank of New York
c/o Franklin Resources, Inc. Mutual Fund Custody Manager
777 Mariners Island Blvd. BNY Western Trust Co.
San Mateo, CA 94404 550 Kearney St., Suite 60
Attention: Chief Legal Officer San Francisco, CA 94108
14.5 HEADINGS. The underlined headings contained herein are
for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the interpretation
hereof.
14.6 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original and both of which, when
taken together, shall constitute one agreement.
14.7 GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed in all respects by, the laws of the State of New
York (without giving effect to principles of conflict of laws).
14.8 FORCE MAJEURE. Notwithstanding the provisions of Section
11 hereof regarding the Custodian's general standard of care, no failure, delay
or default in performance of any obligation hereunder shall constitute an event
of default or a breach of this agreement, or give rise to any liability
whatsoever on the part of one party hereto to the other, to the extent that such
failure to perform, delay or default arises out of a cause beyond the control
and without negligence of the party otherwise chargeable with failure, delay or
default; including, but not limited to: action or inaction of governmental,
civil or military authority; fire; strike; lockout or other labor dispute;
flood; war; riot; theft; earthquake; natural disaster; breakdown of public or
common carrier communications facilities; computer malfunction; or act,
negligence or default of the other party. This paragraph shall in no way limit
the right of either party to this Agreement to make any claim against third
parties for any damages suffered due to such causes.
14.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and assigns, if any.
14.10 WAIVER. No failure on the part of any person to exercise
any power, right, privilege or remedy hereunder, and no delay on the part of any
person in the exercise of any power, right, privilege or remedy hereunder, shall
operate as a waiver thereof; and no single or partial exercise of any such
power, right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
14.11 AMENDMENTS. This Agreement may not be amended, modified,
altered or supplemented other than by means of an agreement or instrument
executed on behalf of each of the parties hereto.
14.12 SEVERABILITY. In the event that any provision of this
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
14.13 PARTIES IN INTEREST. None of the provisions of this
Agreement is intended to provide any rights or remedies to any person other than
the Investment Companies, for themselves and for the Funds, and the Custodian
and their respective successors and assigns, if any.
14.14 PRE-EMPTION OF OTHER AGREEMENTS. In the event of any
conflict between this Agreement, including without limitation any amendments
hereto, and any other agreement which may now or in the future exist between the
parties, the provisions of this Agreement shall prevail.
14.15 VARIATIONS OF PRONOUNS. Whenever required by the context
hereof, the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; and the neuter
gender shall include the masculine and feminine genders.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
THE BANK OF NEW YORK
By: /s/FRED RICCIARDI
Its: SENIOR VICE PRESIDENT
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: /s/H. BURNS
Harmon E. Burns
Their: VICE PRESIDENT
By: /s/DEBORAH R. GATZEK
Deborah R. Gatzek
Their: VICE PRESIDENT & SECRETARY
*Incorporated by Reference
AMENDMENT, dated May 7, 1997, to the Master Custody Agreement ("Agreement")
between each Investment Company listed on Exhibit A to the Agreement and The
Bank of New York dated February 16, 1996.
It is hereby agreed as follows:
A. Unless otherwise provided herein, all terms and conditions of the
Agreement are expressly incorporated herein by reference and, except as modified
hereby, the Agreement is confirmed in all respects. Capitalized terms used
herein without definition shall have the meanings ascribed to them in the
Agreement.
B. The Agreement shall be amended to add a new Section 4. 1 0 as
follows:
4.10 ADDITIONAL DUTIES WITH RESPECT TO RUSSIAN SECURITIES.
(a) Upon 3 business days prior written notice from a Fund that
it will invest in any security issued by a Russian issuer ("Russian Security"),
the Custodian shall to the extent required and in accordance with the terms of
the Subcustodian Agreement between the Custodian and Credit Suisse ("Foreign
Custodian") dated as of August 8, 1996 (the "Subcustodian Agreement") direct the
Foreign Custodian to enter into a contract ("Registrar Contract") with the
entity providing share registration services to the Russian issuer ("Registrar")
containing substantially the following protective provisions:
(1) REGULAR SHARE CONFIRMATIONS. Each Registrar Contract
must establish the Foreign Custodian's right to conduct regular share
confirmations on behalf of the Foreign Custodian's customers.
(2) PROMPT RE-REGISTRATIONS. Registrars must be obligated
to effect re-registrations within 72 hours (or such other specified time as the
United States Securities and Exchange Commission (the "SEC") may deem
appropriate by rule, regulation, order or "no-action" letter) of receiving the
necessary documentation.
(3) USE OF NOMINEE NAME. The Registrar Contract must
establish the Foreign Custodian's right to hold shares not held directly in the
beneficial owner's name in the name of the Foreign Custodian's nominee.
(4) AUDITOR VERIFICATION. The Registrar Contract must allow
the independent auditors of the Custodian and the Custodian's clients to obtain
direct access to the share register for the independent auditors of each of the
Foreign Custodian's clients.
(5) SPECIFICATION OF REGISTRAR'S RESPONSIBILITIES AND
LIABILITIES. The contract must set forth: (1) the Registrar's responsibilities
with regard to corporate actions and other distributions; (ii) the Registrar's
liabilities as established under the regulations applicable to the Russian share
registration -system and (iii) the procedures for making a claim against and
receiving compensation from the registrar in the event a loss is incurred.
(b) The Custodian shall, in accordance with the Subcustodian
Agreement, direct the Foreign Custodian to conduct regular share confirmations,
which shall require the Foreign Custodian to (1) request either a duplicate
share extract or some other sufficient evidence of verification and (2)
determine if the Foreign Custodian's records correlate with those of the
Registrar. For at least the first two years following the Foreign Custodian's
first use of a Registrar in connection with a Fund investment, and subject to
the cooperation of the Registrar, the Foreign Custodian will conduct these share
confirmations on at least a quarterly basis, although thereafter they may be
conducted on a less frequent basis, but no less frequently than annually, if the
Fund's Board of Directors, in consultation with the Custodian, determine it
appropriate.
(c) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Subcustodian to maintain custody of the Fund's share
register extracts or other evidence of verification obtained pursuant to
paragraph (b) above.
(d) The Custodian shall, pursuant to the Subcustodian
Agreement, direct the Foreign Custodian to comply with the rules, regulations,
orders and "no-action" letters of the SEC with respect to
(1) the receipt, holding, maintenance, release and delivery
of Securities; and
(2) providing notice to the Fund and its Board of Directors
of events specified in such rules, regulations, orders and letters.
(e) The Custodian shall have no liability for the action or
inaction of any Registrar or securities depository utilized in connection with
Russian Securities except to the extent that any such action or inaction was the
result of the Custodian's negligence. With respect to any costs, expenses,
damages, liabilities or claims, including attorneys' and accountants' fees
(collectively, "Losses") incurred by a Fund as a result of the acts or the
failure to act by any Foreign Custodian or its subsidiary in Russia
("Subsidiary"), the Custodian shall take appropriate action to recover such
Losses from the Foreign Custodian or Subsidiary. The Custodian's sole
responsibility and liability to a Fund with respect to any Losses shall be
limited to amounts so received from the Foreign Custodian or Subsidiary
(exclusive of costs and expenses incurred by the Custodian) except to the extent
that such losses were the result of the Custodian's negligence.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
THE BANK OF NEW YORK
By:/s/ Stephen E. Grunston
Name: STEPHEN E. GRUNSTON
Title: Vice President
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A TO THE AGREEMENT
By:/s/ Deborah R. Gatzek
Name: Deborah R. Gatzek
Title: Vice President
By:/s/ Karen L. Skidmore
Name: Karen L. Skidmore
Title: Assistant Vice President
Amendment to Master Custody Agreement
The Bank of New York and each of the Investment Companies listed on Exhibit A,
for itself and on behalf of its specified series, hereby amend the Master
Custody Agreement dated as of February 16, 1996, by replacing Exhibit A with the
attached.
Dated as of: October 15, 1997
INVESTMENT COMPANIES
By: /s/ D.R. GATZEK
Deborah R. Gatzek
Title: Vice President &
Secretary
THE BANK OF NEW YORK
By: /s/ STEPHEN E. GRUNSTON
STEPHEN E. GRUNSTON
Title: Vice President
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund Delaware Business Trust
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin Tax-Exempt Money Fund California Corporation
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Michigan Tax-Free Income Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Natural Resources Securities Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Rising Dividends Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Valuemark Funds Massachusetts Business Trust Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
Capital Growth Fund
Templeton International Smaller Companies Fund
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Principal Maturity Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
Franklin Floating Rate Trust Delaware Business Trust
</TABLE>
TERMINAL LINK AGREEMENT
AGREEMENT made as of February 16, 1996 between The Bank of New York as custodian
(the "Custodian") and each Investment Company listed on Exhibit A, for itself
and for each of Series listed on Exhibit A (each, a "Fund").
WHEREAS, the parties have entered into a Master Custody Agreement dated
as of February 16, 1996;
WHEREAS, the parties desire to provide for the electronic transmission
of instructions from each Fund to the Custodian, as and to the extent permitted
by the Master Custody Agreement; and
WHEREAS, the Board of Directors, Trustees or Managing General Partners,
as applicable, of each Investment Company have previously authorized each
Investment Company to enter into the Master Custody Agreement;
NOW, THEREFORE, in consideration for the mutual promises set forth, the parties
agree as follows:
A. Except as otherwise provided herein, all terms shall have the same meaning as
in the Master Custody Agreement.
B. The term "Certificate" shall mean any Proper Instruction by a Fund to the
Custodian communicated by the Terminal Link.
C . The term "Officer" shall mean an Authorized Person as defined in section 5
of the Master Custody Agreement.
D. The term "Terminal Link" shall mean an electronic data transmission link
between a Fund, Franklin Templeton Investor Services, Inc. acting as agent for
the Fund ("FTISI"), and the Custodian requiring in connection with each use of
the Terminal Link by or on behalf of the Fund use of an authorization code
provided by the Custodian and at least two access codes established by the Fund.
Each Fund represents that FTISI will maintain a transmission line to the
Custodian and has been selected by the Fund to receive electronic data
transmissions from the Custodian or the Fund and forward the same to the Fund or
the Custodian, respectively.
E. TERMINAL LINK
1. The Terminal Link shall be utilized by a Fund only for the purpose of the
Fund providing Certificates to the Custodian with respect to transactions
involving Securities or for the transfer of money to be applied to the payment
of dividends, distributions or redemptions of Fund Shares, and shall be utilized
by the Custodian only for the purpose of providing notices to the Fund. Such use
shall commence only after a Fund shall have established access codes and
safekeeping procedures to safeguard and protect the confidentiality and
availability of such access codes, and shall have reviewed the safekeeping
procedures established by FTISI to assure that transmissions inputted by the
Fund, and only such transmissions, are forwarded by FTISI to the Custodian
without any alteration or omission. Each use of the Terminal Link by a Fund
shall constitute a representation and warranty that the Terminal Link is being
used only for the purposes permitted hereby, that at least two Officers have
each utilized an access code, that such safekeeping procedures have been
established by the Fund, that FTISI has safekeeping procedures reviewed by the
Fund to assure that all transmissions inputted by the Fund, and only such
transmissions, are forwarded by FTISI to the Custodian without any alteration or
omission by FTISI, and that such use does not, to the Fund's knowledge,
contravene the Investment Company Act of 1940, as amended, or the rules or
regulations thereunder.
2. Each Fund shall obtain and maintain at its own cost and expense all equipment
and services, including, but not limited to communications services, necessary
for it to utilize the Terminal Link, and the Custodian shall not be responsible
for the reliability or availability of any such equipment or services.
3. Each Fund acknowledges that any data bases made available as part of, or
through the Terminal Link and any proprietary data, software, processes,
information and documentation (other than which are or become part of the public
domain or are legally required to be made available to the public)
(collectively, the "Information"), are the exclusive and confidential property
of the Custodian. Each Fund shall, and shall cause others to which it discloses
the Information, including without limitation FTISI, to keep the Information
confidential, by using the same care and discretion it uses with respect to its
own confidential property and trade secrets, and shall neither make nor permit
any disclosure without the express prior written consent of the Custodian.
4. Upon termination of this Agreement for any reason, the Fund shall return to
the Custodian any and all copies of the Information which are in the Fund's
possession or under its control, or which the Fund distributed to third parties,
including without limitation FTISI. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all information whether or not copyrighted.
5. The Custodian reserves the right to modify the Terminal Link from time to
time without notice to the Funds or FTISI, except that the Custodian shall give
the Funds notice not less than 75 days in advance of any modification which
would materially adversely affect the Funds' operation. The Funds agree that
neither the Funds nor FTISI shall modify or attempt to modify the Terminal Link
without the Custodian's prior written consent. Each Fund acknowledges that any
software or procedures provided the Fund or FTISI as part of the Terminal Link
are the property of the Custodian and, accordingly, agrees that any
modifications to the Terminal Link, whether by the Fund, FTISI or the Custodian
and whether with or without the Custodian's consent, shall become the property
of the Custodian.
6. The Custodian, the Funds, FTISI and any manufacturers and suppliers utilized
by the Custodian, the Funds or FTISI in connection with the Terminal Link, make
no warranties or representations to any other party, express or implied, in fact
or in law, including but not limited to warranties of merchantability and
fitness for a particular purpose.
7. Each Fund will cause its officers and employees to treat the authorization
codes and the access codes applicable to Terminal Link with extreme care, and
irrevocably authorizes the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. Each Fund acknowledges
that it is its responsibility to assure that only its officers and authorized
persons of FTISI use the Terminal Link on its behalf, and that the Custodian
shall not be responsible nor liable for any action taken in good faith in
reliance upon a Certificate, nor for any alteration, omission, or failure to
promptly forward by FTISI.
8. (a) Except as otherwise specifically provided in Section 8(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the result of the negligence of the Custodian,
provided however, that the Custodian shall have no liability under this Section
8 if the Fund fails to comply with the provisions of section 10.
(b) The Custodian's liability for its negligence in executing or
failing to act in accordance with a Certificate received through Terminal Link
shall be only with respect to a transfer of funds or assets which is not made in
accordance with such Certificate, and shall be subject to Section 11 of this
Article and contingent upon the Fund complying with the provisions of Section 10
of this Article, and shall be limited to the extent of the Fund's damages,
without reference to any special conditions or circumstances.
9. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which a Fund or FTISI may incur or
experience by reason of any malfunction of such equipment or software, even if
the Custodian or any manufacturer or supplier has been advised of the
possibility of such damages, nor with respect to the use of the Terminal Link
shall the Custodian or any such manufacturer or supplier be liable for acts of
God, or with respect to the following to the extent beyond such person's
reasonable control: machine or computer breakdown or malfunction, interruption
or malfunction of communication facilities, labor difficulties or any other
similar or dissimilar cause.
10. Each Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, the Terminal Link as promptly
as practicable, and in any event within 24 hours after the earliest of (i)
discovery thereof, or (ii) the business day on which discovery should have
occurred through the exercise of reasonable care. The Custodian shall promptly
advise the Fund or FTISI whenever the Custodian learns of any errors, omissions
or interruption in, or delay or unavailability of, the Terminal Link.
11. The Custodian shall acknowledge to each affected Fund or to FTISI, by use of
the Terminal Link, receipt of each Certificate the Custodian receives through
the Terminal Link, and in the absence of such acknowledgment the Custodian shall
not be liable for any failure to act in accordance with such Certificate and the
Funds may not claim that such Certificate was received by the Custodian. Such
acknowledgment, which may occur after the Custodian has acted upon such
Certificate, shall be given on the same day on which such Certificate is
received.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers, thereunto duly authorized and their respective
seals to be hereto affixed as of the day and year first above written.
THE BANK OF NEW YORK
By: /s/FRED RICCIARDI
Title: SENIOR VICE PRESIDENT
THE INVESTMENT COMPANIES LISTED ON EXHIBIT A
By: /s/H.E. BURNS
Harmon E. Burns
Title: Vice President
By: DEBORAH R. GATZEK
Deborah R. Garzek
Title: Vice President & Secretary
THE BANK OF NEW YORK
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Adjustable Rate Securities Portfolio
AGE High Income Fund, Inc. Colorado Corporation
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Gold Fund California Corporation
Franklin Government Securities Trust Massachusetts Business Trust
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Franklin International Equity Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Gov't Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Adjustable Rate Securities Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Managed Trust Massachusetts Business Trust Franklin Corporate Qualified Dividend Fund
Franklin Rising Dividends Fund
Franklin Investment Grade Income Fund
Franklin Institutional Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Income Fund, Inc. New York Corporation
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Tax-Advantaged International
Bond Fund California Limited Partnership
Franklin Tax-Advantaged U.S. Government
Securities Fund California Limited Partnership
Franklin Tax-Advantaged High Yield
Securities Fund. California Limited Partnership
Franklin Premier Return Fund California Corporation
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Institutional MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Tax-Exempt Money Fund California Corporation
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Business Trust Franklin North Carolina Tax-Free Income Fund
(cont.) Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
Franklin Templeton Global Trust Massachusetts Business Trust Franklin Templeton German Government Bond Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund II
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Valuemark Funds Massachusetts Business Trust Money Market Fund
Growth and Income Fund
Precious Metals Fund
Real Estate Securities Fund
Utility Equity Fund
High Income Fund
Templeton Global Income Securities Fund
Investment Grade Intermediate Bond Fund
Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Adjustable U.S. Government Fund
Rising Dividends Fund
Templeton Pacific Growth Fund
Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Small Cap Fund
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin Late Day Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin U.S. Treasury Money Market Portfolio
Franklin Institutional Adjustable U.S. Government
Securities Fund
Franklin Institutional Adjustable Rate Securities
Fund
Franklin U.S. Government Agency Money Market Fund
Franklin Cash Reserves Fund
MidCap Growth Portfolio Delaware Business Trust
Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market
Portfolio
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Principal Maturity Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 10
to the Registration Statement of Franklin Templeton International Trust on Form
N-1A File No. 33-41340 of our report dated November 26, 1997 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, 1997, which is incorporated by
reference in the Registration Statement.
COOPERS & LYBRAND L.L.P.
San Franciscso, California
December 30, 1997
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON INTERNATIONAL TRUST
II. Fund: TEMPLETON PACIFIC GROWTH FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Trustees of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund
shall pay (i) to Distributors for payment to dealers or others, or (ii) directly
to others, an amount not to exceed the above-stated maximum service fee per
annum of the Class' average daily net assets represented by shares of the Class,
as may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to
Paragraph 1(a) above to assist in the distribution and promotion of shares of
the Class. Payments made to Distributors under the Plan may be used for, among
other things, 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 pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above
shall be used to pay dealers or others for, among other things, furnishing
personal services and maintaining shareholder accounts, which services include,
among other things, assisting in establishing and maintaining customer accounts
and records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which
include payments specified in paragraphs 1 and 2, plus any other payments deemed
to be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a
quarterly basis, a written report of the monies reimbursed to it and to others
under the Plan, and shall furnish the Board with such other information as the
Board may reasonably request in connection with the payments made under the Plan
in order to enable the Board to make an informed determination of whether the
Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may
be terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of
the Fund's non-interested Board members shall be committed to the discretion of
such non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: January 1, 1997
FRANKLIN TEMPLETON INTERNATIONAL TRUST
By:/S/ D.R. GATZEK
Deborah R. Gatzek
Vice President & Secretary
Franklin/Templeton Distributors, Inc.
By:/S/ H.E. BURNS
Harmon E. Burns
Executive Vice President
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 "Distributor") 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
Deborah R. Gatzek
Secretary
FRANKLIN TEMPLETON INTERNATIONAL TRUST
on behalf of
TEMPLETON FOREIGN SMALLER COMPANIES 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 Foreign Smaller Companies 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 two classes of shares, to be known as Class I
shares, and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging
from 0% - 4.50%. 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 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 "Distributor") 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.
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 Plan for the Class I 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 and Class Z
Shares shall relate to differences in Rule 12b-1 plan expenses, as described in
the applicable Rule 12b-1 Plan.
6. There shall be no conversion features associated with the Class I
and Class Z Shares.
7. Shares of Class I and 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 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 Foreign Smaller
Companies Fund, by a majority of the Trustees of the Trust on October 18, 1996
/s/DEBORAH R. GATZEK
Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Pacific Growth Fund, October 31, 1997, annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000876441
<NAME> FRANKLIN TEMPLETON INTERNATIONAL TRUST
<SERIES>
<NUMBER> 001
<NAME> TEMPLETON PACIFIC GROWTH FUND-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 49071468
<INVESTMENTS-AT-VALUE> 38600924
<RECEIVABLES> 2992845
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3791005
<TOTAL-ASSETS> 45384774
<PAYABLE-FOR-SECURITIES> 362803
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 400721
<TOTAL-LIABILITIES> 763524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 54770605
<SHARES-COMMON-STOCK> 3765681
<SHARES-COMMON-PRIOR> 4120190
<ACCUMULATED-NII-CURRENT> 46074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 275115
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10470544)
<NET-ASSETS> 44621250
<DIVIDEND-INCOME> 1409661
<INTEREST-INCOME> 86730
<OTHER-INCOME> 0
<EXPENSES-NET> 936374
<NET-INVESTMENT-INCOME> 560017
<REALIZED-GAINS-CURRENT> 202900
<APPREC-INCREASE-CURRENT> (13054143)
<NET-CHANGE-FROM-OPS> (12291226)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (436548)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5435941
<NUMBER-OF-SHARES-REDEEMED> (5815156)
<SHARES-REINVESTED> 24706
<NET-CHANGE-IN-ASSETS> (15118593)
<ACCUMULATED-NII-PRIOR> 34376
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (35070)
<GROSS-ADVISORY-FEES> 571117
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 936374
<AVERAGE-NET-ASSETS> 55620825
<PER-SHARE-NAV-BEGIN> 14.50
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> (3.65)
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.88
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Pacific Growth Fund, October 31, 1997, annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000876441
<NAME> FRANKLIN TEMPLETON INTERNATIONAL TRUST
<SERIES>
<NUMBER> 002
<NAME> TEMPLETON PACIFIC GROWTH FUND-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> JAN-02-1997<F1>
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 49071468
<INVESTMENTS-AT-VALUE> 38600924
<RECEIVABLES> 2992845
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3791005
<TOTAL-ASSETS> 45384774
<PAYABLE-FOR-SECURITIES> 362803
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 400721
<TOTAL-LIABILITIES> 763524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 54770605
<SHARES-COMMON-STOCK> 213423
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 46074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 275115
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10470544)
<NET-ASSETS> 44621250
<DIVIDEND-INCOME> 1409661
<INTEREST-INCOME> 86730
<OTHER-INCOME> 0
<EXPENSES-NET> 936374
<NET-INVESTMENT-INCOME> 560017
<REALIZED-GAINS-CURRENT> 202900
<APPREC-INCREASE-CURRENT> (13054143)
<NET-CHANGE-FROM-OPS> (12291226)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1123)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 505147
<NUMBER-OF-SHARES-REDEEMED> (291793)
<SHARES-REINVESTED> 69
<NET-CHANGE-IN-ASSETS> (15118593)
<ACCUMULATED-NII-PRIOR> 34376
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (35070)
<GROSS-ADVISORY-FEES> 571117
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 936374
<AVERAGE-NET-ASSETS> 732690
<PER-SHARE-NAV-BEGIN> 15.10
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> (4.31)
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 2.48<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OFFERING OF SALES JANUARY 2, 1997.
<F2>EXPENSE RATIO IS ANNUALIZED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Pacific Growth Fund, October 31, 1997, annual report and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000876441
<NAME> FRANKLIN TEMPLETON INTERNATIONAL TRUST
<SERIES>
<NUMBER> 003
<NAME> TEMPLETON PACIFIC GROWTH FUND-ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> JAN-02-1997<F1>
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 49071468
<INVESTMENTS-AT-VALUE> 38600924
<RECEIVABLES> 2992845
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3791005
<TOTAL-ASSETS> 45384774
<PAYABLE-FOR-SECURITIES> 362803
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 400721
<TOTAL-LIABILITIES> 763524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 54770605
<SHARES-COMMON-STOCK> 124697
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 46074
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 275115
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10470544)
<NET-ASSETS> 44621250
<DIVIDEND-INCOME> 1409661
<INTEREST-INCOME> 86730
<OTHER-INCOME> 0
<EXPENSES-NET> 936374
<NET-INVESTMENT-INCOME> 560017
<REALIZED-GAINS-CURRENT> 202900
<APPREC-INCREASE-CURRENT> (13054143)
<NET-CHANGE-FROM-OPS> (12291226)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3363)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 126880
<NUMBER-OF-SHARES-REDEEMED> (2401)
<SHARES-REINVESTED> 218
<NET-CHANGE-IN-ASSETS> (15118593)
<ACCUMULATED-NII-PRIOR> 34376
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (35070)
<GROSS-ADVISORY-FEES> 571117
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 936374
<AVERAGE-NET-ASSETS> 1040362
<PER-SHARE-NAV-BEGIN> 15.10
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> (4.30)
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.88
<EXPENSE-RATIO> 1.48<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OFFERING OF SALES JANUARY 2, 1997.
<F2>EXPENSE RATIO IS ANNUALIZED.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Foreign Smaller Companies Fund, October 31, 1997, annual report
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000876441
<NAME> FRANKLIN TEMPLETON INTERNATIONAL TRUST
<SERIES>
<NUMBER> 012
<NAME> TEMPLETON FOREIGN SMALLER COMPANIES FUND-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 104406030
<INVESTMENTS-AT-VALUE> 111219584
<RECEIVABLES> 1515896
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 13639371
<TOTAL-ASSETS> 126374851
<PAYABLE-FOR-SECURITIES> 570695
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 459752
<TOTAL-LIABILITIES> 1030447
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111986688
<SHARES-COMMON-STOCK> 8075535
<SHARES-COMMON-PRIOR> 4792931
<ACCUMULATED-NII-CURRENT> 1365788
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5178374
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6813554
<NET-ASSETS> 125344404
<DIVIDEND-INCOME> 2617658
<INTEREST-INCOME> 764918
<OTHER-INCOME> 0
<EXPENSES-NET> 1428329
<NET-INVESTMENT-INCOME> 1954247
<REALIZED-GAINS-CURRENT> 5445123
<APPREC-INCREASE-CURRENT> 2802188
<NET-CHANGE-FROM-OPS> 10201558
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1719949)
<DISTRIBUTIONS-OF-GAINS> (3465592)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5719497
<NUMBER-OF-SHARES-REDEEMED> (2764102)
<SHARES-REINVESTED> 327209
<NET-CHANGE-IN-ASSETS> 57377769
<ACCUMULATED-NII-PRIOR> 900210
<ACCUMULATED-GAINS-PRIOR> 3430123
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 958913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1520618
<AVERAGE-NET-ASSETS> 95357018
<PER-SHARE-NAV-BEGIN> 14.18
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 1.64
<PER-SHARE-DIVIDEND> (0.32)
<PER-SHARE-DISTRIBUTIONS> (0.71)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.06
<EXPENSE-RATIO> 1.48<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<F1>EXPENSE RATIO EXCLUDING WAIVER AND PAYMENT BY AFFILIATES IS 1.58%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Foreign Smaller Companies Fund, October 31, 1997, annual report
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000876441
<NAME> FRANKLIN TEMPLETON INTERNATIONAL TRUST
<SERIES>
<NUMBER> 022
<NAME> TEMPLETON FOREIGN SMALLER COMPANIES FUND-ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> JAN-02-1997<F1>
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 104406030
<INVESTMENTS-AT-VALUE> 111219584
<RECEIVABLES> 1515896
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 13639371
<TOTAL-ASSETS> 126374851
<PAYABLE-FOR-SECURITIES> 570695
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 459752
<TOTAL-LIABILITIES> 1030447
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111986688
<SHARES-COMMON-STOCK> 246892
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1365788
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5178374
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6813554
<NET-ASSETS> 125344404
<DIVIDEND-INCOME> 2617658
<INTEREST-INCOME> 764918
<OTHER-INCOME> 0
<EXPENSES-NET> 1428329
<NET-INVESTMENT-INCOME> 1954247
<REALIZED-GAINS-CURRENT> 5445123
<APPREC-INCREASE-CURRENT> 2802188
<NET-CHANGE-FROM-OPS> 10201558
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 400189
<NUMBER-OF-SHARES-REDEEMED> (153755)
<SHARES-REINVESTED> 458
<NET-CHANGE-IN-ASSETS> 57377769
<ACCUMULATED-NII-PRIOR> 900210
<ACCUMULATED-GAINS-PRIOR> 3430123
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 958913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1520618
<AVERAGE-NET-ASSETS> 1503937
<PER-SHARE-NAV-BEGIN> 14.00
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> 0.98
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.09
<EXPENSE-RATIO> 1.24<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OFFERING OF SALES JANUARY 2, 1997.
<F2>EXPENSE RATIO EXCLUDING WAIVER AND PAYMENT BY AFFILIATES IS 1.36%. EXPENSE
RATIO IS ANNUALIZED.
</FN>
</TABLE>
