As filed with the Securities and Exchange Commission on June 22, 1998
File Nos.
33-41340 and 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. 12
And/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment
No. 14
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
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(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) 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:
Templeton Pacific Growth Fund - Class I
Templeton Pacific Growth Fund - Class II
Templeton Foreign Smaller Companies Fund - Class I
Templeton Foreign Smaller Companies Fund - Class II
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 and II)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- ------------------------------------------------------------------------------
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How Does
the Fund Measure Performance?"
4. General Description of "How Is the Trust Organized?"; "How
Registrant 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 Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Trust 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 "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "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 and II)
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 History See Prospectus "How Is the Trust
Organized?"
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Investment Restrictions"
14. Management of the Fund "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees"; "Investment
Holders of Securities Management and Other Services";
"Miscellaneous Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation and Other "How Does the Fund Buy Securities
Practices for Its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How Are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information About
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"
SUPPLEMENT DATED JULY 1, 1998
TO THE PROSPECTUS OF
FRANKLIN TEMPLETON INTERNATIONAL TRUST
dated March 1, 1998
The prospectus is amended as follows:
I. The first sentence of the first paragraph on the front cover is replaced with
the following:
This prospectus describes Class I and Class II shares of the Templeton Foreign
Smaller Companies Fund (the "Smaller Companies Fund") and the Templeton Pacific
Growth Fund (the "Pacific Fund").
II. The section "Expense Summary" is replaced with the following:
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, except that for Smaller Companies Fund - Class II
it is based on the historical expenses of Smaller Companies Fund - Class I
shares for the same period. Pacific Fund - Class II expenses are annualized.
The Fund's actual expenses may vary.
Smaller Smaller
Companies Companies Pacific Pacific
Fund Fund Fund Fund
Class I Class II Class I Class II
- ------------------------------------------------------------------------------
A. Shareholder Transaction Expenses+
Maximum Sales Charge
(as a percentage of Offering Price) 5.75% 1.99% 5.75% 1.99%
Paid at time of purchase ........... 5.75%++ 1.00%+++ 5.75%++ 1.00%+++
Paid at redemption++++ ........... None 0.99% None 0.99%
Exchange Fee (per transaction) ... $5.00* $5.00* None None
B. Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees .................... 1.00%** 1.00%** 1.00% 1.00%
Rule 12b-1 Fees*** ................. 0.25% 1.00% 0.17% 1.00%
Other Expenses ..................... 0.33% 0.33% 0.46% 0.48%
Total Fund Operating Expenses ...... 1.58%** 2.33%** 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 - Class I ...... $73**** $105 $139 $235
Smaller Companies Fund - Class II ..... $43 $82 $133 $274
Pacific Fund - Class I ................ $73**** $106 $141 $240
Pacific Fund - Class II ............... $45 $86 $141 $289
For the same Class II investment, you would pay projected expenses of $33
(Smaller Companies Fund) or $35 (Pacific Fund) 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 you would pay is
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% for Class I and would have been 2.23% for Class II.
***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.
III. The section "Management Team" found under "Who Manages the Fund?" is
revised to add Juan J. Benito to the Smaller Companies Fund management team,
effective July 1997, and to add the following:
Juan J. Benito
Portfolio Manager of Investment Counsel
Mr. Benito is currently a portfolio manager and research analyst with Templeton
Investment Counsel, Inc. He holds an MBA from the Harvard Business School and a
BS/MS in engineering from the Polytechnical University of Valencia, Spain.
Prior to joining the Templeton organization in 1996, Mr. Benito was a
management consultant and case team leader with Monitor Company, a leading
global strategy consulting firm in Cambridge, Massachusetts (1994-1996). His
previous experience includes being an internal planning consultant with Duke
Power (1993-1994), a business development consultant with IBM Consulting Group
(1992), and a regional manager with Iberdrola, a large power utility company in
Spain (1987-1991). Mr. Benito's research responsibilities include coverage of
European small cap companies.
IV. The third, fourth and fifth paragraphs in the section "The Rule 12b-1 Plan"
found under "Who Manages the Fund?" are replaced with the following:
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Securities
Dealers may not be eligible to receive this portion of the Rule 12b-1 fees
associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
V. The first paragraph under "How Is the Trust Organized?" is replaced with the
following paragraph:
Each Fund is a diversified series of Franklin Templeton International Trust (the
"Trust"), an open-end management investment company, commonly called a mutual
fund. It was organized as a Delaware business trust on March 22, 1991, and is
registered with the SEC. As of January 1, 1997, the Smaller Companies Fund began
offering a new class of shares designated Templeton Foreign Smaller Companies
Fund - Advisor Class. All shares outstanding before the offering of Advisor
Class shares have been designated Templeton Foreign Smaller Companies Fund -
Class I. As of July 1, 1998, the Smaller Companies Fund began offering a new
class of shares designated Templeton Foreign Smaller Companies Fund - Class II.
As of January 1, 1997, the Pacific Fund began offering two new classes of shares
designated 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 Templeton Pacific Growth Fund - Class
I.
VI. The last paragraph under "How Is the Trust Organized?" is replaced with the
following paragraph:
As of June 2, 1998, Franklin Templeton Trust Company as trustee for ValuSelect
Resources Profit Sharing Plan owned of record and beneficially more than 25% of
the outstanding shares of Pacific Fund's Advisor Class.
VII. The last sentence in the section "TeleFACTS(R)" under "Services to Help You
Manage Your Account" is replaced with the following:
You will need the code number for each class to use TeleFACTS(R). The code
number for the Smaller Companies Fund is 191 for Class I and 291 for Class II.
The code number for the Pacific Fund is 190 for Class I and 290 for Class II.
VIII. The following terms and definitions are revised in the section "Useful
Terms and Definitions":
Class I, Class II and Advisor Class - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge and expense structures.
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. The holding period for Class I begins on the first day of
the month in which you buy shares. Regardless of when during the month you buy
Class I shares, they will age one month on the last day of that month and each
following month. The holding period for Class II begins on the day you buy your
shares. For example, if you buy Class II shares on the 18th of the month, they
will age one month on the 18th day of the next month and each following month.
PROSPECTUS & APPLICATION
FRANKLIN TEMPLETON INTERNATIONAL TRUST
MARCH 1, 1998
INVESTMENT STRATEGY
GLOBAL GROWTH
TEMPLETON FOREIGN SMALLER COMPANIES FUND
TEMPLETON PACIFIC GROWTH FUND
This prospectus describes Class I shares 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.
Each Fund 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 FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
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.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ................................................. 2
Financial Highlights ............................................ 4
How Does the Fund Invest Its Assets? ............................ 6
What Are the Risks of Investing in the Fund? .................... 9
Who Manages the Fund? ........................................... 11
How Does the Fund Measure Performance? ......................... 15
How Taxation Affects the Fund and Its Shareholders .............. 15
How Is the Trust Organized?...................................... 19
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................ 20
May I Exchange Shares for Shares of Another Fund? ............... 27
How Do I Sell Shares?............................................ 30
What Distributions Might I Receive From the Fund? ............... 33
Transaction Procedures and Special Requirements ................. 34
Services to Help You Manage Your Account ........................ 38
What If I Have Questions About My Account? ...................... 41
GLOSSARY
Useful Terms and Definitions .................................... 41
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.
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
COMPANIES FUND CLASS I CLASS II
- ------------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge 5.75% 5.75% 1.99%
(as a percentage of
Offering Price)
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 - Class I $73**** $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>
SMALLER COMPANIES FUND
CLASS I
FOR THE YEAR ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
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 1.58% 1.53% 1.63% 1.76% 2.27% 2.50% 2.50%**
payment by affiliates
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>
+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.
*Relates to purchases and sales of equity securities. Prior to fiscal year end
1996, disclosure of average commission
rate was not required.
**Annualized.
<TABLE>
<CAPTION>
PACIFIC FUND
CLASS I
YEAR ENDED OCTOBER 31,
<S> <C> <C> <C> <C> <C> <C> <C>
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 .8 -
-----------------------------------------------------------------------------------
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 1.63% 1.52% 1.72% 1.72% 2.31% 2.50% 2.50%**
payment by affiliates
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
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 IS THE FUND'S INVESTMENT STRATEGY?
SMALLER COMPANIES FUND
The Smaller Companies Fund tries to achieve its investment goal by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of smaller companies outside the U.S. Smaller companies generally are
those with market capitalizations of less than $1 billion.
The Fund may invest up to 35% of its total assets in any combination of:
o equity securities of larger capitalized issuers outside the U.S.;
o 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;
o both rated and unrated debt 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 that have their principal activities in the Pacific Rim.
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:
o 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;
o both rated and unrated debt and synthetic convertible securities. The Fund
currently has no intention of investing more than 5% of its net assets in
synthetic convertible securities.
WHAT KINDS OF SECURITIES DOES THE FUND PURCHASE?
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.
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 Smaller Companies 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.
The Pacific Fund may buy debt securities which 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.
DEPOSITARY RECEIPTS. The Funds may 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.
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?
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 respective 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.
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, use 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 T1/3% 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 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.
Because the Pacific Fund invests a significant amount of its assets in issuers
located in a particular region of the world, it may be subject to greater risks
and may experience greater volatility than a fund that is more broadly
diversified geographically.
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
indices; 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. To the extent the Fund enters into these
transactions, 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 $221 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 the
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 holds a BA in economic history from Durham University in England,
and is a Chartered Accountant and member of the Institute of Chartered
Accountants of England and Wales. 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 and was responsible for analysis of
continental European insurance companies. Currently, Mr. Rudolph has research
responsibilities for the shipping industry, small-cap Asian companies and
country coverage of India.
Peter A. Nori
Vice President of Investment Counsel
Mr. Nori holds a BS in finance and an MBA with an emphasis in finance from the
University of San Francisco. He is a Chartered Financial Analyst and a member of
the Association for Investment Management and Research. Mr. Nori completed
Franklin's management training program before moving into portfolio research in
1990 as an equity analyst and co-portfolio manager of the Franklin Convertible
Securities Fund. He joined the Templeton organization in January of 1994. As a
portfolio manager and research analyst, Mr. Nori currently manages several
separate accounts and mutual funds, and a variable annuity product. He has
global research responsibilities for the steel and data processing industries,
and country coverage of Austria.
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 holds a BA in international studies from Rhodes College and an MBA in
finance from Emory University. He is a Chartered Financial Analyst and a member
of the Financial Analysts Society. Before joining the Templeton organization in
1993, Mr. Howard was a portfolio manager and analyst with the Tennessee
Consolidated Retirement System in Nashville, Tennessee, where he was responsible
for research and management of the international equity portfolio, and
specialized in the Japanese equity market. As a portfolio manager and research
analyst with Templeton, Mr. Howard's research responsibilities include forest
products and paper. He is also responsible for country coverage of Japan and New
Zealand.
Mark R. Beveridge
Senior Vice President of Investment Counsel
Mr. Beveridge holds a BBA in Finance from the University of Miami. He is a
Chartered Financial Analyst and a Chartered Investment Counselor, and a member
of the South Florida Society of Financial Analysts and the International Society
of Financial Analysts. Before joining the Templeton organization in 1985 as a
security analyst, Mr. Beveridge was a principal with a financial accounting
software firm based in Miami, Florida. He is currently a portfolio manager and
research analyst with responsibility for non-life insurance and industrial
components industries. He also has country coverage of Argentina.
Gary Clemons
Senior Vice President of Investment Counsel
Mr. Clemons holds a BS from the University of Nevada - Reno and an MBA from the
University of Wisconsin - Madison. He joined Investment Counsel in 1993. Prior
to that time he was a research analyst at Templeton Quantitative Advisors, Inc.
in New York, where he was also responsible for management of a small
capitalization fund. As a portfolio manager and research analyst with Templeton,
Mr. Clemons has responsibility for the telecommunications industry and country
coverage of Columbia, Norway, Peru and Sweden.
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 0.47% 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
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 0.50% 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
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 the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Securities Dealers may
not be eligible to receive 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,
Securities Dealers may not be eligible to receive 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 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 CODE. BECAUSE
MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUND'S INVESTMENTS.
The Fund invests your money in the stocks, bonds and other securities that are
described in the section "How Does the Fund Invest Its Assets?" Special tax
rules may apply in determining the income and gains that the Fund earns on its
investments. These rules may, in turn, affect the amount of distributions that
the Fund pays to you. These special tax rules are discussed in the SAI.
TAXATION OF THE FUND. As a regulated investment company, the Fund generally pays
no federal income tax on the income and gains that it distributes to you.
HOW DOES THE FUND EARN INCOME AND GAINS?
The Fund earns dividends and interest (the Fund's "income") on its investments.
When the Fund sells a security for a price that is higher than it paid, it has a
gain. When the Fund sells a security for a price that is lower than it paid, it
has a loss. If the Fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the Fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The Fund's gains and losses are netted together, and, if the Fund
has a net gain (the Fund's "gains"), that gain will generally be distributed to
you.
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.
Distributions. Distributions from the Fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The Fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the Fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax 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.
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the Fund's income and gains on
its investments in stocks, bonds and other securities. The Fund's income and
short term capital gains are paid to you as ordinary dividends. The Fund's
long-term capital gains are paid to you as capital gain distributions. If the
Fund pays you an amount in excess of its income and gains, this excess will
generally be treated as a non-taxable distribution. These amounts, taken
together, are what we call the Fund's distributions to you.
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.
REDEMPTIONS AND EXCHANGES. If you redeem your shares or if you exchange your
shares in the Fund for shares in another Franklin Templeton Fund, you will
generally have a gain or loss that the IRS requires you to report on your income
tax return. If you exchange Fund shares held for 90 days or less and pay no
sales charge, or a reduced sales charge, for the new shares, all or a portion of
the sales charge you paid on the purchase of the shares you exchanged is not
included in their cost for purposes of computing gain or loss on the exchange.
If you hold your shares for six months or less, any loss you have will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by you from the Fund. All or a portion of any loss on the
redemption or exchange of your shares will be disallowed by the IRS if you
purchase other shares in the Fund within 30 days before or after your redemption
or exchange.
WHAT IS A REDEMPTION?
A redemption is a sale by you to the Fund of some or all of your shares in the
Fund. The price per share you receive when you redeem Fund shares may be more or
less than the price at which you purchased those shares. An exchange of shares
in the Fund for shares of another Franklin Templeton Fund is treated as a
redemption of Fund shares and then a purchase of shares of the other fund. When
you redeem or exchange your shares, you will generally have a gain or loss,
depending upon whether the basis in your shares is more or less than your cost
or other basis in the shares. Call Fund Information for a free shareholder Tax
Information Handbook if you need more information in calculating the gain or
loss on the redemption or exchange of your shares.
FOREIGN TAXES. If more than 50% of the value of the Fund's assets consist of
foreign securities, the Fund may elect to pass-through to you the amount of
foreign taxes it paid. If the Fund makes this election, your year-end statement
will show more taxable income than was actually distributed to you. However, you
will be entitled to either deduct your share of such taxes in computing your
taxable income or claim a foreign tax credit for 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.
WHAT IS FOREIGN TAX CREDIT?
A foreign tax credit is a tax credit for the amount of taxes imposed by a
foreign country on earnings of the Fund. When a foreign company in which the
Fund invests pays a dividend to the Fund, the dividend will generally be subject
to a withholding tax. The taxes withheld in foreign countries create credits
that you may use to offset your U.S. federal income tax.
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.
BACKUP WITHHOLDING. When you open an account, IRS regulations require that you
provide your taxpayer identification number ("TIN"), certify that it is correct,
and certify that you are not subject to backup withholding under IRS rules. If
you fail to provide a correct TIN or the proper tax certifications, the Fund is
required to withhold 31% of all the distributions (including ordinary dividends
and capital gain distributions), and redemption proceeds paid to you. The Fund
is also required to begin backup withholding on your account if the IRS
instructs the Fund to do so. The Fund reserves the right not to open your
account, or, alternatively, to redeem your 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.
WHAT IS A BACKUP WITHHOLDING?
Backup withholding occurs when the Fund is required to withhold and pay over to
the IRS 31% of your distributions and redemption proceeds. You can avoid backup
withholding by providing the Fund with your TIN, and by completing the tax
certifications on your shareholder application that you were asked to sign when
you opened your account. However, if the IRS instructs the Fund to begin backup
withholding, it is required to do so even if you provided the Fund with your TIN
and these tax certifications, and backup withholding will remain in place until
the Fund is instructed by the IRS that it is no longer required.
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 ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE TAX
TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES PAID
AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON TAX
INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND INFORMATION.
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, each Fund 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 February 2, 1998, Trust Company as trustee for ValuSelect - Resources
Profit Sharing Plan, P.O. Box 2438, Rancho Cordova, CA 95741-2438 owned of
record and beneficially more than 25% of the outstanding shares of Smaller
Companies Fund's Advisor Class and 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
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 investment
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.
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 th
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
o Higher front-end sales charges than Class II shares. There are 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 on purchases of $1 million or more sold
within one year o Lower annual expenses than Class II shares
CLASS II
o Lower front-end sales charges than Class I shares
o Contingent Deferred Sales Charge on purchases sold within 18 months
o Higher annual expenses than Class 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 AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under 50,000 5.75% 6.10% 5.00%
$50,000 but less than
$100,000 4.50% 4.71% 3.75%
$100,000 but less than
$250,000 3.50% 3.63% 2.80%
$250,000 but less than
$500,000 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.60%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "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.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class I shares of the Fund at a reduced sales
charge under the group purchase privilege before February 1, 1998, however, may
continue to do so.
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
6. Tender proceeds from the Templeton Vietnam Opportunities Fund, Inc. if you
have directed the proceeds to be invested in the Pacific Fund under the terms
of the "Offer to Purchase" dated December 19, 1997
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, SIMPLEs or SEPs 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. We may enter into a
special arrangement with a Securities Dealer, based on criteria established by
the Fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated 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.
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.
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 CALL YOUR INVESTMENT REPRESENTATIVE
DEALER
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 is
transferred out of the Franklin Templeton Funds or terminated 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 IRAs 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, normally 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.
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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number for the Smaller Companies Fund 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 and Distributors are located
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida 33733-8030.
Investment Counsel is located at 500 East Broward Boulevard, Ft. Lauderdale,
Florida 33394-3091. 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
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
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
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408 (p) of the Code
TELEFACTSAE - 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.
SUPPLEMENT DATED JULY 1, 1998
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN TEMPLETON INTERNATIONAL TRUST
DATED MARCH 1, 1998
As of July 1, 1998, the Templeton Foreign Smaller Companies Fund offers three
classes of shares: Templeton Foreign Smaller Companies Fund - Class I, Templeton
Foreign Smaller Companies Fund - Class II and Templeton Foreign Smaller
Companies Fund - Advisor Class. The Statement of Additional Information is
amended as follows to reflect this and other changes:
I. The first sentence of
the third paragraph on the cover is revised as follows:
This SAI describes each Fund's Class I and Class II shares.
II. The following is added to the section "Officers and Trustees":
As of June 2, 1998, the officers and Board members, as a group, owned of record
and beneficially the following shares of the Fund: approximately 134 shares of
the Pacific Fund - Class I, 3,020 shares of Smaller Companies Fund - Class I, 0
shares of Pacific Fund - Advisor Class and 1,266 shares of Smaller Companies
Fund - Advisor Class, or less than 1% of the total outstanding Class I and
Advisor Class shares of each Fund.
III. The first paragraph in the section "The Rule 12b-1 Plans" under the "The
Fund's Underwriter" is replaced with the following paragraph:
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.
IV. The two paragraphs in the section "The Rule 12b-1 Plans - The Class II Plan"
under "The Fund's Underwriter" are replaced with the following:
THE CLASS II PLAN. Under the Class II plan, the 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
Fund. Under the Class II plan, the Fund also pays an additional 0.25% per year
of Class II's average daily net assets, payable quarterly, as a servicing fee.
V. The following is added to the section "Miscellaneous Information":
As of June 2, 1998, the principal shareholders of the Fund, beneficial or
of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- -----------------------------------------------------------------------------
PACIFIC FUND -
ADVISOR CLASS
Trust Company as trustee 71,870.555 72.56%
for ValuSelect
Resources Profit Sharing Plan
P.O. Box 2438
Rancho Cordova, CA 95741-2438
VI. The following term and definition is revised under the section "Useful Terms
and Definitions":
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however,
primarily in their sales charge and expense structures.
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? .................. 2
What Are the Risks of
Investing in the Fund? ............................... 11
Investment Restrictions ............................... 16
Officers and Trustees ................................. 17
Investment Management
and Other Services ................................... 21
How Does the Fund Buy
Securities for Its Portfolio? ........................ 23
How Do I Buy, Sell
and Exchange Shares? ................................. 24
How Are Fund Shares Valued? ........................... 27
Additional Information on
Distributions and Taxes .............................. 28
The Fund's Underwriter ................................ 34
How Does the Fund
Measure Performance? ................................. 36
Miscellaneous Information ............................. 38
Financial Statements .................................. 39
Useful Terms and Definitions .......................... 39
Appendix
Description of Ratings ............................... 40
- -------------------------------------------------------------------------------
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. 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.
- -------------------------------------------------------------------------------
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?"
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.
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, 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 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 Occupations
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
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) Trustee
191 Clapboard Ridge
Stamford, CT 06830
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; and formerly
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers);
*Harmon E. Burns (53) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
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 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 54 of the investment companies in the Franklin Templeton
Group of Funds; and formerly Director, General Host Corporation (nursery and
craft centers);
Edith E. Holiday (46) Director
3239 38th Street, N.W.
Washington, DC 20016
Director (1993-present) of Amerada Hess Corporation and Hercules Incorporated;
Director of Beverly Enterprises, Inc. (1995-present) and H.J. Heinz Company
(1994-present; formerly, chairman (1995-1997) and trustee (1993-1997) of
National Child Research Center; assistant to the President of the United States
and Secretary of the Cabinet (1990-1993), general counsel to the United States
Treasury Department (1989-1990) and counselor to the Secretary and Assistant
Secretary for Public Affairs and Public Liaison-United States Treasury
Department (1988-1989); and trustee or director of 24 of the investment
companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson (65) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and formerly Director,General Host Corporation (nursery and craft
centers);
*Rupert H. Johnson, Jr. (57) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
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 56 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.,
Suite 102
Cupertino, CA 95014
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) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
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) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 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 56 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
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 56 of the
investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
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) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 33 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
R. Martin Wiskemann (71) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 16 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 BOARDS
TOTAL FEES IN THE FRANKLIN
RECEIVED FROM THE TEMPLETON GROUP
FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME GROUP OF FUNDS* EACH SERVES**
- --------------------------------------------------------------------------
Frank H. Abbott, III ................... $165,937 28
Harris J. Ashton ....................... 344,642 52
S. Joseph Fortunato .................... 361,562 54
David W. Garbellano*** ................. 91,317 N/A
Edith E. Holiday ....................... 72,875 24
Frank W.T. LaHaye ...................... 141,433 27
Gordon S. Macklin ...................... 337,292 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 57 registered investment companies, with approximately 170 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 February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 134
shares of the Pacific Fund - Class I, 3,020 shares of Smaller Companies Fund -
Class I, 1,359 shares of Pacific Fund - Advisor Class and 1,266 shares of
Smaller Companies Fund Advisor Class, or less than 1% of the total outstanding
shares of each Fund's Class I and Advisor Class shares. Many of the Board
members also own shares in other funds in the Franklin Templeton Group of Funds.
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 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 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 same periods, Advisers paid
Investment Counsel sub-advisory fees of $222,583, $317,709 and $451,416,
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 exercise 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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares, however, those who have shown an interest in the Franklin Templeton
Funds are more likely to be considered. To the extent permitted by their firm's
policies and procedures, a registered representative's expenses in attending
these meetings may be covered by Distributors.
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. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
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 close of the NYSE, normally
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 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 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 ON
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
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.
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. 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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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 is 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 securities of
foreign corporations, it will not be entitled to pass-through 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.
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 the 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
its 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.
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.
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.
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.
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 in connection with
redemptions or repurchase of shares for each of 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 amount paid by the Fund
pursuant to the Class I plan for the Smaller Companies Fund was $238,459 and the
total amounts paid by the Pacific Fund pursuant to the Class I and Class II
plans were $92,093 and $6,054,respectively, which were used for the following
purposes:
SMALLER
COMPANIES
FUND PACIFIC FUND
CLASS I CLASS I CLASS II
Advertising ............................. $2,884 $ 1,160 $ 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 for 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% 2.37% 3.60%*
Pacific Fund -
Class II...... N/A N/A -29.71%**
Smaller Companies
Fund ......... 7.65% 13.63% 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 returns for 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:
(i) unmanaged indices so that you may compare the Fund's results with those of a
group of unmanaged securities widely regarded by investors as representative of
the securities market in general; (ii) other groups of mutual funds tracked by
Lipper Analytical Services, Inc., a widely used independent research firm that
ranks mutual funds by overall performance, investment objectives and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, the Fund and the Managers may also refer to the following
information:
a) The Managers and their affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a similar
statistical organization.
b) The performance of U.S. equity and debt markets relative to foreign markets
prepared or published by Morgan Stanley Capital International(R) or a similar
financial organization.
c) The capitalization of U.S. and foreign stock markets as prepared or published
by the International Finance Corporation, Morgan Stanley Capital International
(R) or a similar financial organization.
d) The geographic and industry distribution of the Fund's portfolio and the
Fund's top ten holdings.
e) The gross national product and populations, including age characteristics,
literacy rates, foreign investment improvements due to a liberalization of
securities laws and a reduction of foreign exchange controls, and improving
communication technology, of various countries as published by various
statistical organizations.
f) To assist investors in understanding the different returns and risk
characteristics of various investments, the Fund may show historical returns of
various investments and published indices (e.g., Ibbotson Associates, Inc.
Charts and Morgan Stanley EAFE - Index).
g) The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
h) Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder
services.
i) Allegorical stories illustrating the importance of persistent long-term
investing.
j) The Fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or Morningstar, Inc.
k) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued or
"bargain" securities and its diversification by industry, nation and type of
stocks or other securities.
l) The number of shareholders in the Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin Templeton
Group of Funds or the dollar amount of fund and private account assets under
management.
m) Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
n) Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing, including the
following:
o "Never follow the crowd. Superior performance is possible only if you invest
differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
o "Buy low."
o "When buying stocks, search for bargains among quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else, there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even understand all the
questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or negative too often."
* Sir John Templeton sold the Templeton organization to Resources in October
1992 and resigned from the Board on April 16, 1995. He is no longer involved
with the investment management process.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on 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 2.9 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 $221 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 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 February 2, 1998, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
PACIFIC FUND -
CLASS II
William Stover 30,599.755 5.78%
P.O. Box 14280
Greensboro, NC
27415-4280
PACIFIC FUND -
ADVISOR CLASS
Trust Company as trustee 71,870.555 47.40%
for ValuSelect -
Resources Profit Sharing Plan
P.O. Box 2438
Rancho Cordova, CA
95741-2438
SMALLER COMPANIES
FUND - ADVISOR CLASS
Trust Company as
trustee 455,339.767 8.91%
for ValuSelect -
Resources Profit Sharing Plan
P.O. Box 2438
Rancho Cordova, CA
95741-2438
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.
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 and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis, and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (i 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 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
(1) 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) Financial Highlights
(ii) Statements of Investments, October 31. 1997
(iii) Statements of Assets and Liabilities - October 31, 1997.
(iv) Statements of Operations - for the year ended October 31,
1997
(v) Statements of Changes in Net Assets for the years ended
October 31, 1997 and 1996
(vi) Notes to Financial Statements
(vii)Report of Independent Accountants
b) Exhibits:
The following exhibits are incorporated by reference herein, except
exhibits 1(vi), 11(i), 15(iii), 17(i), 17 (ii) and 18(ii) 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
(vi) Certificate of Amendment to the Certificate of Trust of Franklin
International Trust dated December 14, 1995
(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 5 percent
of any class of equity securities of the Registrant;
Not Applicable
(4) copies of all instruments defining the rights of the holders of the
securities, being registered including, where applicable, the relevant
portion of the articles of incorporation or by-laws of the Registrant;
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. 11 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
Filing: Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(iii) Master Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(iv) Amendment dated May 7, 1997 to Master Custody Agreement
Between Registrant and Bank of New York
Filing: Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(v) Amendment dated October 15, 1997 to Master Custody
Agreement between Registrant and Bank of New York
Filing: Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(vi) Terminal Link Agreement between Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 6 to Registration Statement
on Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(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;
Not Applicable
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(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
(iii) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the Templeton Foreign Smaller Companies Fund - Class II
and Franklin/Templeton
Distributors, Inc. dated April 16, 1998
(16) schedule for computation of each performance quotation provided in the
registration statement in response to Item 22 (which need not be
audited).
Not Applicable
(17) Power of Attorney
(i) Power of Attorney dated April 16, 1998
(ii) Certificate of Secretary dated April 16, 1998
(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
Filing: Post-Effective Amendment No. 6 to Registration Statement on
Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(ii) Multiple Class Plan for Templeton Foreign Smaller
Companies Fund dated April 16, 1998
(27) Financial Data Schedule
Not applicable
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of April 30, 1998, 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 12,100 N/A 102
Templeton Pacific Growth Fund 9,265 943 71
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
a) The officers and trustees of the Registrant's manager Franklin Advisers,
Inc. ("Advisers")also serve as officers and/or directors or trustees for
(1) Advisers' corporate parent, Franklin Resources, Inc., and/or (2) other
investment companies in the Franklin Templeton Group of Funds. In addition,
Mr. Charles B. Johnson was formerly a director of General Host Corporation.
For additional information please see Part B and Schedules A and D of Form
ADV of Advisers (SEC File 801-26292), incorporated herein by reference,
which sets forth the officers and directors of 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.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("Investment Counsel"), 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
Investment Counsel (SEC File 801-15125), incorporated herein by reference,
which sets forth the officers and directors of the Investment Counsel and
information as to any business, profession, vocation or employment of a
substantial nature engages in by those officers and directors during the
past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin 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
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 certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 19th day
of June 1998.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(Registrant)
By: /s/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.* Trustee and Principal Executive
Rupert H. Johnson, Jr. Officer
Dated: June 19, 1998
MARTIN L FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: June 19, 1998
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: June 19, 1998
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: June 19, 1998
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: June 19, 1998
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: June 19, 1998
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: June 19, 1998
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: June 19, 1998
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: June 19, 1998
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: June 19, 1998
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: June 19, 1998
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney filed herein.)
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.B1(vi) Certificate of Amendment to Certificate of Attached
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.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 *
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 *
Registrant and Bank of New York
dated February 16, 1996
EX-99.B8(iv) Amendment dated May 7, 1997 to Master *
Custody Agreement between Registrant and
Bank of New York
EX-99.B8(v) Amendment dated October 15, 1997 to *
Master Custody Agreement between Registrant
And Bank of New York
EX-99.B8(vi) Terminal Link Agreement between *
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 N/A
EX-99.B15(i) Amended and Restated Distribution Plan Pursuant to *
Rule 12b-1 dated July 1, 1993
EX-99.B15(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
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of
the Templeton Foreign Smaller
Companies Fund Class II and
Franklin/Templeton Distributors,
Inc. dated April 16, 1998
EX-99.B16(i) Schedule for computation of performance N/A
quotations
EX-99.17(i) Power of Attorney dated April 16, 1998 Attached
EX-99.17(ii) Certificate of Secretary dated Attached
April 16, 1998
EX-99.B18(i) Multiple Class Plan for Templeton Pacific *
Growth Fund dated June 18, 1996
EX-99.B18(ii) Multiple Class Plan for Templeton Foreign Attached
Smaller Companies Fund dated April 16, 1998
*Incorporated by Reference
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF TRUST
OF
FRANKLIN INTERNATIONAL TRUST
The undersigned certifies that:
1. The name of the business trust is Franklin International Trust (the
"Business Trust")
2. The amendment to the Certificate of Trust of the Business Trust set
forth below (the "Amendment") has been duly authorized by the Board of
Trustees of the Business Trust.
The First Article of the Certificate of trust is hereby amended to read
as follows:
"The name of the Business Trust is FRANKLIN TEMPLETON INTERNATIONAL
TRUST."
3. Pursuant to Section 3810(b)(1)(c) of the Act, this Certificate of Amendment
to the Certificate of Trust of the Business Trust shall become effective
immediately upon filing with the Office of the Secretary of State of the
State of Delaware.
4. The Amendment is made pursuant to the authority granted to the Trustees of
the Business Trust under Section 3810(b)(2) of the Act and pursuant to the
authority set forth in the governing instrument of the business Trust.
IN WITNESS WHEREOF, the undersigned, being a trustee of the Business
Trust, has duly executed this Certificate of Amendment this 14th day of
December, 1995.
/s/Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
Trustee
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 12
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.
/s/COOPERS & LYBRAND L.L.P.
Ft. Lauderdale, Florida
June 19, 1998
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON INTERNATIONAL TRUST
II. Fund: TEMPLETON FOREIGN SMALLER COMPANIES
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. ("Advisers") 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: April 16, 1998
FRANKLIN TEMPLETON INTERNATIONAL TRUST
By:/s/Deborah R. Gatzek
--------------------
Deborah R. Gatzek
Vice President & Secretary
Franklin/Templeton Distributors, Inc.
By:/s/Harmon E. Burns
---------------------
Harmon E. Burns
Executive Vice President
POWER OF ATTORNEY
The undersigned officers and trustees of Franklin Templeton International
Trust (the "Registrant") hereby appoint MARK H. PLAFKER, HARMON E. BURNS,
DEBORAH R. GATZEK, KAREN L. SKIDMORE AND LARRY L. GREENE (with full power to
each of them to act alone) his attorney-in-fact and agent, in all capacities, to
execute, and to file any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement on Form
N-1A under the Investment Company Act of 1940, as amended, and under the
Securities Act of 1933 covering the sale of shares by the Registrant under
prospectuses becoming effective after this date, including any amendment or
amendments increasing or decreasing the amount of securities for which
registration is being sought, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority. Each of
the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 16th day of April, 1998.
/s/Rupert H. Johnson /s/Charles B. Johnson
Rupert H. Johnson, Jr., Charles B. Johnson,
Principal Executive Officer Trustee
and Trustee
/s/Frank H. Abbott, III /s/Harris J. Ashton
Frank H. Abbott, III, Harris J. Ashton,
Trustee Trustee
/s/Harmon E. Burns /s/S. Joseph Fortunato
Harmon E. Burns, S. Joseph Fortunato,
Trustee Trustee
/s/Edith E. Holiday /s/Frank W.T. LaHaye
Edith E. Holiday, Frank W. T. LaHaye,
Trustee Trustee
/s/Gordon S. Macklin /s/Diomedes Loo-Tam
Gordon S. Macklin, Diomedes Loo-Tam,
Trustee Principal Accounting Officer
/s/Martin L. Flanagan
Martin L. Flanagan,
Principal Financial Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of Franklin Templeton
International Trust (the "Trust").
As Secretary of the Trust, I further certify that the following
resolution was adopted by a majority of the Trustees of the Trust present at a
meeting held at 777 Mariners Island Boulevard, San Mateo, California, on
April 16, 1998.
RESOLVED, that a Power of Attorney, substantially in the form of
the Power of Attorney presented to this Board, appointing Harmon
E. Burns, Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene
and Mark H. Plafker as attorneys-in-fact for the purpose of
filing documents with the Securities and Exchange Commission, be
executed by each Trustee and designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: April 16, 1998
/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, and supersedes the Plan previously
adopted for the Fund
1. The Fund shall offer three classes of shares, to be known as Class I,
Class II shares and Advisor Class 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%.
Advisor Class 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.
Advisor Class 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 Advisor Class
Shares, and therefore, the Advisor Class 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
Advisor Class 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 Advisor Class 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 Advisor Class 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 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 April 16, 1998.
/s/Deborah R. Gatzek
--------------------
Deborah R. Gatzek
Secretary
