As filed with the Securities and Exchange Commission on February 28, 2000.
File Nos.
33-41340
811-6336
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ______
Post-Effective Amendment No. 15__ (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17__ (X)
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
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on March 1, 2000 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
Prospectus
Franklin
Templeton
International
Trust
INVESTMENT STRATEGY
GLOBAL GROWTH
Templeton Foreign Smaller Companies Fund - Class A, B & C
Templeton Pacific Growth Fund - Class A & C
March 1, 2000
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Templeton Foreign Smaller
Companies Fund
13 Templeton Pacific Growth Fund
23 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
24 Choosing a Share Class
29 Buying Shares
31 Investor Services
34 Selling Shares
36 Account Policies
39 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
TEMPLETON FOREIGN
SMALLER COMPANIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- ------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENT STRATEGIES The fund normally will invest at least 65% of
its total assets in equity securities of smaller companies located outside the
U.S. The fund's manager considers smaller companies to be generally those with
market capitalization of less than $1.5 billion at the time of purchase. In some
emerging markets, the fund may invest in companies that qualify as smaller
companies but that still are among the largest in the market. The fund may also
invest a portion of its assets in the equity securities of larger foreign
companies.
[Begin callout]
The fund invests primarily in the common stock of smaller companies outside the
U.S.
[End callout]
An equity security, or stock, represents a proportionate share of the ownership
of a company; its value is based on the success of the company's business, any
income paid to stockholders, the value of its assets, and general market
conditions. Common stocks and preferred stocks are examples of equity
securities.
The fund may invest more than 25% of its assets in the securities of issuers of
any one country.
The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of a company's
long-term earnings, asset value, cash flow potential, and balance sheet. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered. A stock price is a
"value" when it is less than the price at which the manager believes it would
trade if the market reflected all factors relating to the company's worth.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may be unable to pursue
its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- ------------------------------------------------------------------------------
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods. [End callout]
STOCKS Although this may not be the case in foreign markets, in the U.S.,
stocks, as a class, have historically outperformed other types of investments
over the long term, while individual stock prices tend to go up and down more
dramatically over the short term. These price movements may result from factors
affecting individual countries, regions, companies or industries, or the
securities market as a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by the
manager if other investors fail to recognize the company's value and bid up the
price, the markets favor faster-growing companies, or the factors that the
manager believes will increase the price of the security do not occur.
SMALLER COMPANIES While smaller companies may offer substantial opportunities
for capital growth, they also involve substantial risks and should be considered
speculative. 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, be unable to
generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established and
may never become established.
FOREIGN SECURITIES Securities of companies located outside the U.S. may involve
risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund has
investments are likely to affect the value of the fund's securities that trade
in that country. These movements will affect the fund's share price and fund
performance.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of internal and external
conflicts, the imposition of exchange controls, currency devaluations, foreign
ownership limitations, expropriation, restrictions on removal of currency and
other assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks.
EMERGING MARKETS. The fund's investments in developing or emerging markets are
subject to all of the risks of foreign investing generally and have additional
heightened risks due to a lack of established legal, political, business and
social frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. Short-term volatility in these markets is not unusual, nor are
declines in excess of 50%.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and companies
generally have less government supervision and regulation than in the U.S. The
fund may have greater difficulty voting proxies, exercising shareholder rights,
pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars. Devaluation of a currency by
a country's government or banking authority also will have a significant impact
on the value of any securities denominated in that currency. Currency markets
generally are not as regulated as securities markets.
EURO. On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have fully replaced the national
currencies of the following member countries: Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro and the new European Central Bank has control over each
country's monetary policies. These countries' governments, however, continue to
have the authority to set tax and spending policies and public debt levels.
Because this change to a single currency is new and untested, it is not possible
to predict the impact of the euro on currency values or on the business or
financial condition of European issuers whose securities the fund may hold in
its portfolio and, thus, the impact, if any, this will have on the fund's
performance. To the extent the fund holds non-U.S. dollar (euro or other)
denominated securities, it will also be exposed to currency risk due to
fluctuations in those currencies versus the U.S. dollar.
LIQUIDITY The fund may have difficulty selling certain securities because there
may be a thin trading market for a particular security at any given time. In
addition, a security that is not illiquid at the time it is purchased may
temporarily become illiquid. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when necessary
to meet the fund's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of an issuer.
INTEREST RATE Increases in interest rates may have a negative effect on the
types of companies in which the fund normally invests because these companies
may find it more difficult to obtain credit to expand, or may have more
difficulty meeting interest payments. Similarly, emerging market countries may
be especially sensitive to interest rate changes.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
[Insert graphic of bull and bear] PERFORMANCE
- ------------------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past eight calendar years. The
table shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
0.89% 33.02% -0.11% 10.71% 24.18% 2.91% -6.52% 25.27%
92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 '93
16.09%
WORST
QUARTER:
Q3 '98
- -16.63%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (9/20/91)
- ------------------------------------------------------------------------------
Templeton Foreign Smaller Companies
Fund - Class A/2/ 18.06% 9.32% 9.81%
MSCI EAFE Index/3/ 27.30% 13.15% 11.35%
1 YEAR
- ------------------------------------------------------------------------------
Templeton Foreign Smaller Companies
Fund - Class B/2/ 20.26%
MSCI EAFE Index/3/ 27.30%
SINCE
INCEPTION
1 YEAR (7/1/98)
- ------------------------------------------------------------------------------
Templeton Foreign Smaller Companies
Fund - Class C/2/ 21.97% 5.97%
MSCI EAFE Index/3/ 27.30% 20.30%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard and Poor's Micropal. The unmanaged MSCI Europe Australasia
Far East (EAFE(R)) Index tracks the performance of approximately 1,000
securities in 20 countries. It includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- ------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B/1/ CLASS C/2/
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None/3/ 4.00%/4/ 0.99%/5/
Exchange fee/6/ $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 24 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B/1/ CLASS C/2/
- -------------------------------------------------------------------------------
Management fees 0.98% 0.98% 0.98%
Distribution and service (12b-1) fees/7/
0.22% 0.98% 0.97%
Other expenses 0.45% 0.03% 0.45%
----- ----- -----
-------------------------------------
Total annual fund operating expenses 1.65% 1.99% 2.40%
===== ===== =====
-------------------------------------
1. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses for Class B is annualized.
2. The fund began offering Class C shares on July 1, 1998. Annual fund operating
expenses for Class C is annualized.
3. Except for investments of $1 million or more (see page 24) and purchases by
certain retirement plans without an initial sales charge.
4. Declines to zero after six years.
5. This is equivalent to a charge of 1% based on net asset value.
6. This fee is only for market timers (see page 37).
7. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $733/1/ $1,065 $1,420 $2,417
CLASS B $602 $924 $1,273 $2,229/2/
CLASS C $440 $841 $1,368 $2,809
If you do not sell your shares:
CLASS B $202 $624 $1,073 $2,229/2/
CLASS C $341 $841 $1,368 $2,809
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
[Insert graphic of briefcase] MANAGEMENT
- ------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage over
$235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Boulevard, Ft. Lauderdale, FL 33394,
is the fund's sub-advisor. Investment Counsel provides Advisers with
investment management advice and assistance.
The team responsible for the fund's management is:
SIMON RUDOLPH, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Rudolph has been a manager of the fund since 1997. He joined the Franklin
Templeton Group in 1997. Previously, he was an executive director with Morgan
Stanley.
PETER N. NORI CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Nori has been a manager of the fund since 1997. He joined the Franklin
Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.98% of its average daily net
assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
CLASS A YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999/1/ 1998 1997 1996 1995
PER SHARE DATA ($)
Net asset value, beginning of year 12.33 15.06 14.18 13.23 13.83
--------------------------------------------------
Net investment income .24 .26 .27 .35 .25
Net realized and unrealized 2.13 (2.08) 1.64 1.88 (.08)
gains (losses)
--------------------------------------------------
Total from investment operations 2.37 (1.82) 1.91 2.23 .17
--------------------------------------------------
Distributions from net (.27) (.24) (.32) (.25) (.19)
investment income
Distributions from net realized - (.67) (.71) (1.03) (.58)
gains
--------------------------------------------------
Total distributions (.27) (.91) (1.03) (1.28) (.77)
--------------------------------------------------
Net asset value, end of year 14.43 12.33 15.06 14.18 13.23
--------------------------------------------------
Total return (%)/2/ 19.51 (12.64) 14.25 18.49 1.75
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 102,684 113,964 121,619 67,967 50,947
1,000)
Ratios to average net assets:(%)
Expenses 1.65 1.48 1.48 1.53 1.63
Expenses, excluding waiver and
payments by affiliate 1.65 1.50 1.58 1.53 1.63
Net investment income 1.78 1.23 2.01 2.50 1.86
Portfolio turnover rate (%) 18.76 22.82 33.62 40.46 9.12
</TABLE>
PERIOD ENDED
CLASS B OCTOBER 31, 1999
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year
12.44
------------
Net investment income .08
Net realized and unrealized gains
1.89
------------
Total from investment operations 1.97
------------
Less distributions from net
investment income (.06)
------------
Net asset value, end of year 14.35
------------
Total return (%)/2/ 15.81
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 201
Ratios to average net assets:(%)
Expenses 1.99/3/
Net investment income .59/3/
Portfolio turnover rate (%) 18.76/3/
CLASS C YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------
1999 1998/4/
- --------------------------------------------------------------------------
PER SHARE DATA ($)
- --------------------------------------------------------------------------
Net asset value, beginning of year 12.32 14.23
Net investment income .13 .01
Net realized and unrealized gains
(losses) 2.11 (1.92)
Total from investment operations 2.24 (1.91)
Less distributions from net investment
income (.20) -
Net asset value, end of year 14.36 12.32
Total return (%)2 18.46 (13.42)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 631 450
Ratios to average net assets: (%)
Expenses 2.40 2.54/3/
Net investment income .94 1.08/3/
Portfolio turnover rate (%) 18.76 22.82
- --------------------------------------------------------------------------
1. Effective date of Class B shares was January 1, 1999. Based on average
weighted shares outstanding.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
4. For the period from July 1, 1998 (effective date) through October 31, 1998.
TEMPLETON PACIFIC
GROWTH FUND
[Insert graphic of bullseye and arrows]GOAL AND STRATEGIES
- ------------------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENT STRATEGIES The fund normally will invest 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. The fund will invest in
issuers in at least three of these countries.
[Begin callout]
The fund invests primarily in common stocks of Pacific Rim companies.
[End callout]
The fund may also invest a portion of its assets in securities of issuers
domiciled outside the Pacific Rim, rated and unrated debt, and convertible
securities. 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.
An equity security, or stock, represents a proportionate share of the ownership
of a company; its value is based on the success of the company's business, any
income paid to stockholders, the value of its assets, and general market
conditions. Common stocks and preferred stocks are examples of equity
securities. Debt securities represent the obligation of the issuer to repay a
loan of money to it, and generally pay interest to the holder. Bonds, notes and
debentures are examples of debt securities. Convertible securities have
characteristics of both debt securities (which is generally the form in which
they are first issued) and equity securities (which is what they can be
converted into).
The fund may invest more than 25% of its assets in the securities of issuers of
any one country.
The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of a company's
long-term earnings, asset value, cash flow potential, and balance sheet. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered. A stock price is a
"value" when it is less than the price at which the manager believes it would
trade if the market reflected all factors relating to the company's worth.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may be unable to pursue
its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- ------------------------------------------------------------------------------
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods. [End callout]
REGION There is a high correlation among most of the markets in the Pacific Rim.
Accordingly, the fund is subject to much greater risks of adverse events which
occur in that region and may experience greater volatility than a fund that is
more broadly diversified geographically. Political or economic disruptions in
Pacific Rim countries, including conflicts and currency devaluations, even in
countries in which the fund is not invested, may adversely affect security
values in other Pacific Rim countries and thus the fund's holdings.
STOCKS Although this may not be the case in foreign markets, in the U.S.,
stocks, as a class, have historically outperformed other types of investments
over the long term, while individual stock prices tend to go up and down more
dramatically over the short term. These price movements may result from factors
affecting regions, countries, individual companies or industries, or the
securities market as a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by the
manager if other investors fail to recognize the company's value and bid up the
price, the markets favor faster-growing companies, or the factors that the
manager believes will increase the price of the security do not occur.
FOREIGN SECURITIES Securities of companies located outside the U.S. may involve
risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund has
investments are likely to affect the value of the fund's securities that trade
in that country. These movements will affect the fund's share price and fund
performance.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of internal and external
conflicts, the imposition of exchange controls, currency devaluations, foreign
ownership limitations, expropriation, restrictions on removal of currency and
other assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks.
EMERGING MARKETS. The Pacific Rim includes several developing or emerging
markets, which are subject to all of the risks of foreign investing generally
and have additional heightened risks due to a lack of established legal,
political, business and social frameworks to support securities markets. Foreign
securities markets, including emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. Short-term volatility in these markets
is not unusual, nor are declines in excess of 50%.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies, and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and companies
generally have less government supervision and regulation than in the U.S. The
fund may have greater difficulty voting proxies, exercising shareholder rights,
pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars. Devaluation of a currency by
a country's government or banking authority also will have a significant impact
on the value of any securities denominated in that currency. Currency exchange
rates between countries in the Pacific Rim may impact many or all countries in
the region. The impact of the new European currency, the euro, on Europe and
other regions, including the Pacific Rim, is unclear at this time. Currency
markets generally are not as regulated as securities markets.
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities. Increases in interest rates may
also have a negative effect on the types of companies in which the fund normally
invests because these companies may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Increased
interest rates in the U.S. and Europe may also affect the economies of the
countries in the Pacific Rim and thus their markets and issuers.
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
the value of fund shares.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal. [End callout]
[Insert graphic of bull and bear] PERFORMANCE
- ------------------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past eight calendar years. The
table shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
3.65% 60.93% -10.68% 5.85% 11.85% -37.78% -8.25% 43.42%
92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 '98
30.78%
WORST
QUARTER:
Q1 '97
- -32.38%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (9/20/91)
- ----------------------------------------------------------------------------
Templeton Pacific Growth Fund -
Class A/2/ 35.17% -1.79% 4.24%
MSCI Pacific Index/3/ 57.96% 2.70% 4.87%
SINCE
INCEPTION
1 YEAR (1/2/97)
- ------------------------------------------------------------------------------
Templeton Pacific Growth Fund - Class C/2/ 40.29% -7.16%
MSCI Pacific Index/3/ 57.96% 6.61%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's Micropal. The unmanaged MSCI Pacific Index tracks
the performance of approximately 450 companies in Australia, Hong Kong, Japan,
New Zealand, and Singapore. It includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- ------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS C
- ------------------------------------------------------------------------------
Maximum sales charge (load) as a percentage
of offering price 5.75% 1.99%
Load imposed on purchases 5.75% 1.00%
Maximum deferred sales charge (load) None/1/ 0.99%/2/
Exchange fee None None
Please see "Choosing a Share Class" on page 24 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS C
- ------------------------------------------------------------------------------
Management fees 1.00% 1.00%
Distribution and service (12b-1) fees3 0.21% 0.99%
Other expenses 0.71% 0.71%
-----------------
Total annual fund operating expenses 1.92% 2.70%
=================
1. Except for investments of $1 million or more (see page 24) and purchases by
certain retirement plans without an initial sales charge.
2. This is equivalent to a charge of 1% based on net asset value.
3. Because of the distribution and service (12b-1) fees, over the long term you
may indirectly pay more than the equivalent of the maximum permitted initial
sales charge
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $759/1/ $1,143 $1,552 $2,689
CLASS C $469 $930 $1,516 $3,101
If you do not sell your shares:
CLASS C $370 $930 $1,516 $3,101
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
- ------------------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage over
$235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Boulevard, Ft. Lauderdale, FL 33394,
is the fund's sub-advisor. Investment Counsel provides Advisers with
investment management advice and assistance.
The team responsible for the fund's management is:
WILLIAM T. HOWARD, JR. CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Howard has been a manager of the fund since 1993. He joined the Franklin
Templeton Group in 1993.
MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Beveridge has been a manager of the fund since 1994. He joined the
Franklin Templeton Group in 1985.
PETER N. NORI CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Nori has been a manager of the fund since 1999. He joined the Franklin
Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 1.00% of its average daily net assets
to the manager.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------------
1999/1/ 1998 1997 1996 1995
- ------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of 7.83 10.88 14.50 14.11 15.40
year
Net investment income .01 .13 .14 .12 .15
Net realized and unrealized
gains
(losses) 2.42 (2.98) (3.65) 1.41 (1.01)
Total from investment 2.43 (2.85) (3.51) 1.53 (.86)
operations
Distributions from net
investment income (.06) (.13) (.11) (.21) (.16)
Distributions from net
realized gains - (.07) - (.93) (.27)
Total distributions (.06) (.20) (.11) (1.14) (.43)
Net asset value, end of year 10.20 7.83 10.88 14.50 14.11
Total return (%)2 31.23 (26.37) (24.42) 11.27 (5.54)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 73,160 42,200 40,958 59,740 50,247
1,000)
Ratios to average net assets:
(%)
Expenses 1.92 1.90 1.63 1.52 1.72
Net investment income .10 1.43 .97 1.06 1.04
Portfolio turnover rate(%) 39.33 19.61 24.79 13.48 36.21
CLASS C YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------
1999/1/ 1998 1997/3/
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 7.80 10.81 15.10
Net investment income (.07) .08 .05
Net realized and unrealized gains
(losses) 2.45 (2.92) (4.31)
Total from investment operations 2.38 (2.84) (4.26)
Distributions from net investment
income (.03) (.10) (.03)
Distributions from net realized gains - (.07) -
Total distributions (.03) (.17) (.03)
Net asset value, end of year 10.15 7.80 10.81
Total return (%)/2/ 30.61 (26.47) (28.28)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 11,925 6,183 2,307
Ratios to average net assets: (%)
Expenses 2.70 2.63 2.48/4/
Net investment income (loss) (.71) .67 .93/4/
Portfolio turnover rate (%) 39.33 19.61 24.79
1. Based on average weighted shares outstanding
2. Total return does not include sales charges, and is not annualized.
3. For the period January 2, 1997 (effective date) to October 31, 1997.
4. Annualized
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund intends to pay a dividend at
least semiannually representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that if
you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the funds' distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains a fund distributes are taxable to you as long-term capital gains no matter
how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Any foreign taxes a fund pays on
its investments may be passed through to you as a foreign tax credit. Non-U.S.
investors may be subject to U.S. withholding and estate tax. You should consult
your tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] 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. Your investment representative
can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
o Initial sales charge of o Initial sales charge of o No initial sales charge
5.75% or less 1%
o Deferred sales charge of o Deferred sales charge o Deferred sales charge 1%
on purchases of $1 of 4% on shares you of 1% on shares you million or more
sold sell within the first sell within 18 months within 12 months year,
declining to 1%
within six years and
eliminated after that
o Lower annual expenses o Higher annual expenses o Higher annual expenses
than Class B or C due than Class A (same as than Class A (same as
to lower distribution Class C) due to higher Class B) due to
fees distribution fees. higher distribution
Automatic conversion to fees. No conversion
Class A shares after to Class A shares, so
eight years, reducing annual expenses do
future annual expenses. not decrease.
TEMPLETON FOREIGN SMALLER COMPANIES FUND BEGAN OFFERING CLASS
B SHARES ON JANUARY 1, 1999.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS %OF THE WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 27), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page 26).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution fees of up
to 0.25% per year to those who sell and distribute Class A shares and provide
other services to shareholders. Because these fees are paid out of Class A's
assets on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- -------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page 26). After
8 years, your Class B shares automatically convert to Class A shares, lowering
your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
RETIREMENT PLANS Class B shares are available to certain retirement plans,
including IRAs (of any type), Franklin Templeton Trust Company 403(b) plans, and
Franklin Templeton Trust Company qualified plans with participant or earmarked
accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution and other
fees of up to 1% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS %
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING PRICE OF YOUR NET INVESTMENT
- ------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution and other
fees of up to 1% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 32
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE
SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days.
Certain investors also may buy Class C shares without an initial sales charge.
The CDSC for each class may be waived for certain redemptions and distributions.
If you would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. For
information about retirement plans, you may call Retirement Plan Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
BUYING SHARES
- -------------------------------------------------------------------------------
MINIMUM INVESTMENTS INITIAL ADDITIONAL
- -------------------------------------------------------------------------------
Regular accounts $1,000 $50
- -------------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- -------------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education IRAs or
Roth IRAs)
- -------------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
- -------------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs $250 $50
- -------------------------------------------------------------------------------
Full-time employees, officers, trustees and directors $100 $50
of Franklin Templeton entities, and their immediate
family members
- -------------------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR
SALE IN YOUR STATE OR JURISDICTION.
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will place your purchase in
Class A shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see the
next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic of hands
shaking]
Contact your investment Contact your investment
THROUGH YOUR INVESTMENT representative representative
REPRESENTATIVE
- -------------------------------------------------------------------------------
[Insert graphic of Make your check payable Make your check payable
envelope] to the fund. to the fund. Include
your account number on
BY MAIL Mail the check and your the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do not
have a slip, include a
note with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note to
Investor Services.
- -------------------------------------------------------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] control number and wire control number and wire
instructions. instructions.
BY WIRE
Wire the funds and mail To make a same day wire
1-800/632-2301 your signed application investment, please call
(or 1-650/312-2000 collect) to Investor Services. us by 1:00 p.m. Pacific
Please include the wire time and make sure your
control number or your wire arrives by 3:00 p.m.
new account number on the
application.
To make a same day wire
investment, please call
us by 1:00 p.m. Pacific
time and make sure your
wire arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic of two Call Shareholder Services Call Shareholder
arrows pointing in at the number below, or Services at the number
opposite directions] send signed written below or our automated
instructions. The TeleFACTS system, or
BY EXCHANGE TeleFACTS system cannot send signed written
be used to open a new instructions.
TeleFACTS(R) account
1-800/247-1753 (Please see page 32 for
(around-the-clock access) (Please see page 32 for information on
information on exchanges.)
exchanges.).
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, P.O. BOX 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with handset] INVESTOR SERVICES
- ------------------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class A
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class* of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
37).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of certificate] SELLING SHARES
- ------------------------------------------------------------------------------
You can sell your shares at any time. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
SELLING SHARES
- -------------------------------------------------------------------------------
To sell some or all of your shares
- -------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
THROUGH YOUR
INVESTMENT Contact your investment representative
REPRESENTATIVE
- -------------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
BY MAIL accounts may need to send additional documents.
Specify the fund, the account number and the dollar value
or number of shares you wish to sell. If you own both
Class A and B shares, also specify the class of shares,
otherwise we will sell your Class A shares first. Be sure
to include all necessary signatures and any additional
documents, as well as signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written
instructions.
- -------------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or less, you
phone] do not hold share certificates and you have not changed
your address by phone within the last 15 days, you can
BY PHONE sell your shares by phone.
1-800/632-2301 A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- -------------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption proceeds sent
three lightning bolts] to a bank account. See the policies above for selling
shares by mail or phone.
BY ELECTRONIC FUNDS
TRANSFER (ACH) Before requesting to have redemption proceeds sent
to a bank account, please make sure we have your bank
account information on file. If we do not have this
information, you will need to send written instructions
with your bank's name and address, a voided check or
savings account deposit slip, and a signature guarantee
if the ownership of the bank and fund accounts is
different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- -------------------------------------------------------------------------------
[Insert graphic of Obtain a current prospectus for the fund you are
two arrows pointing considering.
in opposite
directions] Call Shareholder Services at the number below or our
automated TeleFACTS system, or send signed written
BY EXCHANGE instructions. See the policies above for selling shares
by mail or phone.
TeleFACTS(R)
1-800/247-1753 If you hold share certificates, you will need to return
(around-the-clock them to the fund before your exchange can be processed.
access)
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, P.O. BOX 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
- ------------------------------------------------------------------------------
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged shares
out of the fund more than twice in a calendar quarter, or (iii) exchanged shares
equal to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits. Templeton Pacific Growth Fund does not
allow investments by market timers.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days' notice.
o In unusual circumstances, we may temporarily suspend redemp-tions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer would
be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and service
(12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00/1/ - -
12B-1 FEE TO DEALER 0.25 0.25/2/ 1.00/3/
A dealer commission of up to 1% may be paid on Class A NAV purchases by certain
retirement plans/1/ and on Class C NAV purchases. A dealer commission of up to
0.25% may be paid on Class A NAV purchases by certain trust companies and bank
trust departments, eligible governmental authorities, and broker-dealers or
others on behalf of clients participating in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the 13th
month.
[Insert graphic of question mark] QUESTIONS
- ------------------------------------------------------------------------------
If you have any questions about the fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditors' report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: publicinfo(R)sec.gov.
Investment Company Act file #811-6336 FTIT P 03/00
Prospectus
Franklin
Templeton
International
Trust
ADVISOR CLASS
INVESTMENT STRATEGY
GLOBAL GROWTH
Templeton Foreign Smaller Companies Fund
Templeton Pacific Growth Fund
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
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.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
2 Templeton Foreign Smaller
Companies Fund
11 Templeton Pacific Growth Fund
20 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND
SERVICES
[End callout]
21 Qualified Investors
23 Buying Shares
24 Investor Services
26 Selling Shares
28 Account Policies
30 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
TEMPLETON FOREIGN
SMALLER COMPANIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- -----------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENT STRATEGIES The fund normally will invest at least 65% of
its total assets in equity securities of smaller companies located outside the
U.S. The fund's manager considers smaller companies to be generally those with
market capitalization of less than $1.5 billion at the time of purchase. In some
emerging markets, the fund may invest in companies that qualify as smaller
companies but that still are among the largest in the market. The fund may also
invest a portion of its assets in the equity securities of larger foreign
companies.
[Begin callout]
The fund invests primarily in the common stock of smaller companies outside the
U.S.
[End callout]
An equity security, or stock, represents a proportionate share of the ownership
of a company; its value is based on the success of the company's business, any
income paid to stockholders, the value of its assets, and general market
conditions. Common stocks and preferred stocks are examples of equity
securities.
The fund may invest more than 25% of its assets in the securities of issuers of
any one country.
The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of a company's
long-term earnings, asset value, cash flow potential, and balance sheet. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered. A stock price is a
"value" when it is less than the price at which the manager believes it would
trade if the market reflected all factors relating to the company's worth.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may be unable to pursue
its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- -----------------------------------------------------------------------
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
STOCKS Although this may not be the case in foreign markets, in the U.S.,
stocks, as a class, have historically outperformed other types of investments
over the long term, while individual stock prices tend to go up and down more
dramatically over the short term. These price movements may result from factors
affecting individual countries, regions, companies or industries, or the
securities market as a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by the
manager if other investors fail to recognize the company's value and bid up the
price, the markets favor faster-growing companies, or the factors that the
manager believes will increase the price of the security do not occur.
SMALLER COMPANIES While smaller companies may offer substantial opportunities
for capital growth, they also involve substantial risks and should be considered
speculative. 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, be unable to
generate funds necessary for growth or development, or be developing or
marketing new products or services for which markets are not yet established and
may never become established.
FOREIGN SECURITIES Securities of companies located outside the U.S. may involve
risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund has
investments are likely to affect the value of the fund's securities that trade
in that country. These movements will affect the fund's share price and fund
performance.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of internal and external
conflicts, the imposition of exchange controls, currency devaluations, foreign
ownership limitations, expropriation, restrictions on removal of currency and
other assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks.
EMERGING MARKETS. The fund's investments in developing or emerging markets are
subject to all of the risks of foreign investing generally and have additional
heightened risks due to a lack of established legal, political, business and
social frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than experienced
in the U.S. Short-term volatility in these markets is not unusual, nor are
declines in excess of 50%.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices
as U.S. companies and their securities may not be as liquid as
securities of similar U.S. companies. Foreign stock exchanges,
trading systems, brokers and companies generally have less government
supervision and regulation than in the U.S. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in
U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars. Devaluation of a currency by
a country's government or banking authority also will have a significant impact
on the value of any securities denominated in that currency. Currency markets
generally are not as regulated as securities markets.
EURO. On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have fully replaced the national
currencies of the following member countries: Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro and the new European Central Bank has control over each
country's monetary policies. These countries' governments, however, continue to
have the authority to set tax and spending policies and public debt levels.
Because this change to a single currency is new and untested, it is not possible
to predict the impact of the euro on currency values or on the business or
financial condition of European issuers whose securities the fund may hold in
its portfolio and, thus, the impact, if any, this will have on the fund's
performance. To the extent the fund holds non-U.S. dollar (euro or other)
denominated securities, it will also be exposed to currency risk due to
fluctuations in those currencies versus the U.S. dollar.
LIQUIDITY The fund may have difficulty selling certain securities because there
may be a thin trading market for a particular security at any given time. In
addition, a security that is not illiquid at the time it is purchased may
temporarily become illiquid. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when necessary
to meet the fund's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of an issuer.
INTEREST RATE Increases in interest rates may have a negative effect on the
types of companies in which the fund normally invests because these companies
may find it more difficult to obtain credit to expand, or may have more
difficulty meeting interest payments. Similarly, emerging market countries may
be especially sensitive to interest rate changes.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
- -----------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past eight calendar years. The
table shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
0.89% 33.02% -0.11% 10.71% 24.18% 3.87% -6.32% 25.52%
- -----------------------------------------------------------------
92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q4 93'
16.09%
WORST
QUARTER:
Q3 98'
- -16.49%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (9/20/91)
- -----------------------------------------------------------------------
Templeton Foreign Smaller
Companies Fund - Advisor Class/1/ 25.52% 10.92% 10.78%
MSCI EAFE Index/2/ 27.30% 13.15% 11.35%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged MSCI Europe Australasia Far
East (EAFE(R)) index tracks the performance of approximately 1,000 securities in
20 countries. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- -----------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -----------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee/1/ $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)/2/
ADVISOR CLASS
- -----------------------------------------------------------------------
Management fees 0.98%
Distribution and service (12b-1) fees None
Other expenses 0.45%
Total annual fund operating expenses 1.43%
1. The fee is only for market timers (see page 29).
2. The fund began offering Advisor Class shares on January 1, 1997. Total annual
fund operating expenses are annualized.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------
$146 $452 $782 $1,713
[Insert graphic of briefcase] MANAGEMENT
- -----------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage over
$235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Boulevard, Ft. Lauderdale, FL
33394, is the fund's sub-advisor. Investment Counsel provides
Advisers with investment management advice and assistance.
The team responsible for the fund's management is:
SIMON RUDOLPH, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Rudolph has been a manager of the fund since 1997. He joined the
Franklin Templeton Group in 1997. Previously, he was an executive
director with Morgan Stanley.
PETER N. NORI CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Nori has been a manager of the fund since 1997. He joined the
Franklin Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 0.98% of its average daily net
assets.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------
This table presents the financial performance for Advisor Class for the past
three years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------
1999/1/ 1998 1997/2/
- -----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value, beginning of year 12.34 15.09 14.00
Net investment income .26 .32 .20
Net realized and unrealized gains (losses) 2.14 (2.13) .98
Total from investment operations 2.40 (1.81) 1.18
Distributions from net investment income (.29) (.27) (.09)
Distributions from net realized gains - (.67) -
--------------------
Net asset value, end of year 14.45 12.34 15.09
========================
Total return (%)/3/ 19.81 (12.55) 8.43
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 9,841 12,402 3,726
Ratios to average net assets: (%)
Expenses 1.43 1.31 1.24/4/
Expenses excluding waiver and payments
by affiliate 1.43 1.33 1.36/4/
Net investment income 1.94 1.43 2.66/4/
Portfolio turnover rate (%) 18.76 22.82 33.62
1. Based on average weighted shares outstanding.
2. For the period from January 2, 1997 (commencement of sales) through October
31, 1997.
3. Total return is not annualized.
4. Annualized.
TEMPLETON PACIFIC
GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
- -----------------------------------------------------------------------
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENT STRATEGIES The fund normally will invest 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. The fund will invest in
issuers in at least three of these countries.
[Begin callout]
The fund invests primarily in common stocks of Pacific Rim companies.
[End callout]
The fund may also invest a portion of its assets in securities of issuers
domiciled outside the Pacific Rim, rated and unrated debt, and convertible
securities. 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.
An equity security, or stock, represents a proportionate share of the ownership
of a company; its value is based on the success of the company's business, any
income paid to stockholders, the value of its assets, and general market
conditions. Common stocks and preferred stocks are examples of equity
securities. Debt securities represent the obligation of the issuer to repay a
loan of money to it, and generally pay interest to the holder. Bonds, notes and
debentures are examples of debt securities. Convertible securities have
characteristics of both debt securities (which is generally the form in which
they are first issued) and equity securities (which is what they can be
converted into).
The fund may invest more than 25% of its assets in the securities of issuers of
any one country.
The Templeton investment philosophy is "bottom-up", value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of a company's
long-term earnings, asset value, cash flow potential, and balance sheet. A
company's historical value measures, including price/earnings ratios, profit
margins and liquidation value, will also be considered. A stock price is a
"value" when it is less than the price at which the manager believes it would
trade if the market reflected all factors relating to the company's worth.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may be unable to pursue
its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
- -----------------------------------------------------------------------
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
[End callout]
REGION There is a high correlation among most of the markets in the Pacific Rim.
Accordingly, the fund is subject to much greater risks of adverse events which
occur in that region and may experience greater volatility than a fund that is
more broadly diversified geographically. Political or economic disruptions in
Pacific Rim countries, including conflicts and currency devaluations, even in
countries in which the fund is not invested, may adversely affect security
values in other Pacific Rim countries and thus the fund's holdings.
STOCKS Although this may not be the case in foreign markets, in the U.S.,
stocks, as a class, have historically outperformed other types of investments
over the long term, while individual stock prices tend to go up and down more
dramatically over the short term. These price movements may result from factors
affecting regions, countries, individual companies or industries, or the
securities market as a whole.
VALUE INVESTING A value stock may not increase in price as anticipated by the
manager if other investors fail to recognize the company's value and bid up the
price, the markets favor faster-growing companies, or the factors that the
manager believes will increase the price of the security do not occur.
FOREIGN SECURITIES Securities of companies located outside the U.S. may involve
risks that can increase the potential for losses in the fund.
COUNTRY. General securities market movements in any country where the fund has
investments are likely to affect the value of the fund's securities that trade
in that country. These movements will affect the fund's share price and fund
performance.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of internal and external
conflicts, the imposition of exchange controls, currency devaluations, foreign
ownership limitations, expropriation, restrictions on removal of currency and
other assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks.
EMERGING MARKETS. The Pacific Rim includes several developing or emerging
markets, which are subject to all of the risks of foreign investing generally
and have additional heightened risks due to a lack of established legal,
political, business and social frameworks to support securities markets. Foreign
securities markets, including emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than experienced in the U.S. Short-term volatility in these markets
is not unusual, nor are declines in excess of 50%.
COMPANY. Foreign companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices
as U.S. companies, and their securities may not be as liquid as
securities of similar U.S. companies. Foreign stock exchanges,
trading systems, brokers and companies generally have less government
supervision and regulation than in the U.S. The fund may have greater
difficulty voting proxies, exercising shareholder rights, pursuing
legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in
U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars. Devaluation of a currency by
a country's government or banking authority also will have a significant impact
on the value of any securities denominated in that currency. Currency exchange
rates between countries in the Pacific Rim may impact many or all countries in
the region. The impact of the new European currency, the euro, on Europe and
other regions, including the Pacific Rim, is unclear at this time. Currency
markets generally are not as regulated as securities markets.
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities. Increases in interest rates may
also have a negative effect on the types of companies in which the fund normally
invests because these companies may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Increased
interest rates in the U.S. and Europe may also affect the economies of the
countries in the Pacific Rim and thus their markets and issuers.
CREDIT Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
the value of fund shares.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, especially after the leap day of February 29, 2000,
the possibility remains that the fund and the companies in which it is invested
may be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies and risks can be found in
the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
- -----------------------------------------------------------------------
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past eight calendar years. The
table shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot predict
or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS/1/
[Insert bar graph]
3.65% 60.93% -10.68% 5.85% 11.85% -37.54% -7.54% 44.29%
- ---------------------------------------------------------------------
92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST
QUARTER:
Q1 98'
31.00%
WORST
QUARTER:
Q1 97'
- -32.28%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS (9/20/91)
- -----------------------------------------------------------------------
Templeton Pacific Growth Fund -
Advisor Class/1/ 44.29% -0.27% 5.21%
MSCI Pacific Index/2/ 57.96% 2.70% 4.87%
1. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect of
Class A's maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged MSCI Pacific Index tracks
the performance of approximately 450 companies in Australia, Hong Kong, Japan,
New Zealand, and Singapore. It includes reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
- -----------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -----------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)/1/
ADVISOR CLASS
- -----------------------------------------------------------------------
Management fees 1.00%
Distribution and service (12b-1) fees None
Other expenses 0.71%
Total annual fund operating expenses 1.71%
1. The fund began offering Advisor Class shares on January 1, 1997. Total annual
fund operating expenses are annualized.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------
$174 $539 $928 $2,019
[Insert graphic of briefcase] MANAGEMENT
- -----------------------------------------------------------------------
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Advisers and its affiliates manage over
$235 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Boulevard, Ft. Lauderdale, FL
33394, is the fund's sub-advisor. Investment Counsel provides
Advisers with investment management advice and assistance.
The team responsible for the fund's management is:
WILLIAM T. HOWARD, JR. CFA, SENIOR VICE PRESIDENT OF
INVESTMENT COUNSEL
Mr. Howard has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1993.
MARK R. BEVERIDGE CFA, SENIOR VICE PRESIDENT OF
INVESTMENT COUNSEL
Mr. Beveridge has been a manager of the fund since 1994. He joined
the Franklin Templeton Group in 1985.
PETER N. NORI CFA, SENIOR VICE PRESIDENT OF INVESTMENT COUNSEL
Mr. Nori has been a manager of the fund since 1999. He joined the
Franklin Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets. For the fiscal
year ended October 31, 1999, the fund paid 1.00% of its average daily net assets
to the manager.
[Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------
This table presents the financial performance for Advisor Class for the past
three years. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------
1999/1/ 1998 1997/2/
PER SHARE DATA ($)
Net asset value, beginning of year 7.88 10.88 15.10
---------------------------
Net investment income .04 .15 .12
Net realized and unrealized gains
(losses) 2.46 (2.93) (4.30)
---------------------------
Total from investment operations 2.50 (2.78) (4.18)
Distributions from net investment
income (.07) (.15) (.04)
Distributions from net realized
gains - (.07) -
Total distributions (.07) (.22) (.04)
-------------------------
Net asset value, end of year 10.31 7.88 10.88
============================
Total return (%)/3/ 32.15 (25.68) (27.74)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 7,252 1,454 1,357
Ratios to average net assets: (%)
Expenses 1.71 1.62 1.48/4/
Net investment income .40 1.78 1.55/4/
Portfolio turnover rate (%) 39.33 19.61 24.79
1. Based on average weighted shares outstanding.
2. For the period from January 2, 1997 (commencement of sales) through October
31, 1997.
3. Total return is not annualized.
4. Annualized.
[Insert graphic of dollar signs and stacks of coins]
DISTRIBUTIONS AND TAXES
- -----------------------------------------------------------------------
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund intends to pay a dividend at
least semiannually representing its net investment income. Capital gains, if
any, may be distributed annually. The amount of these distributions will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that if
you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of a
taxable distribution. If you would like information on upcoming record dates for
the funds' distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional fund shares or receive them in cash. Any capital
gains a fund distributes are taxable to you as long-term capital gains no matter
how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, or if the IRS instructs the fund to do so. [End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Any foreign taxes a fund pays on
its investments may be passed through to you as a foreign tax credit. Non-U.S.
investors may be subject to U.S. withholding and estate tax. You should consult
your tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
- -----------------------------------------------------------------------
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors with clients invested in
any series of Franklin Mutual Series Fund Inc. on October 31, 1996,
or who buy through a broker-dealer or service agent who has an
agreement with Franklin Templeton Distributors, Inc.
(Distributors). Minimum investments: $1,000 initial and $50
additional.
o Broker-dealers, registered investment advisors or certified financial planners
who have an agreement with Distributors for clients participating in
comprehensive fee programs. Minimum investments: $250,000 initial ($100,000
initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial ($50 for
accounts with an automatic investment plan) and $50 additional.
o Each series of the Franklin Templeton Fund Allocator Series.
Minimum investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton
U.S. registered mutual funds, except Franklin Templeton Variable
Insurance Products Trust, Templeton Capital Accumulator Fund, Inc.,
and Templeton Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue Code.
Minimum investments: $1 million initial investment in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds and $50 additional.
o Accounts managed by the Franklin Templeton Group. Minimum
investments: No initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum
investments: No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section 401
of the Internal Revenue Code, including salary reduction plans qualified under
section 401(k) of the Internal Revenue Code, and that are sponsored by an
employer (i) with at least 10,000 employees, or (ii) with retirement plan
assets of $100 million or more. Minimum investments: No initial or additional
minimums.
o Trust companies and bank trust departments initially investing in the Franklin
Templeton Funds at least $1 million of assets held in a fiduciary, agency,
advisory, custodial or similar capacity and over which the trust companies and
bank trust departments or other plan fiduciaries or participants, in the case
of certain retirement plans, have full or shared investment discretion.
Minimum investments: No initial or additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton Funds
for purposes of determining whether you meet the $5 million minimum, as long
as $1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added together. The
group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as $1
million is in Advisor Class or Class Z shares of any of the Franklin Templeton
Funds. There are certain other requirements and the group must have a purpose
other than buying fund shares without a sales charge.
Please note that Advisor Class shares of the fund generally are not available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may invest in
the fund's Advisor Class shares.
[Insert graphic of paper with lines and someone writing]
BUYING SHARES
- -----------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------
[Insert graphic of Contact your Contact your
hands shaking] investment investment
representative representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Make your check Make your check payable
envelope] payable to the fund. to the fund. Include
BY MAIL your account number on
Mail the check and the check.
your signed
application to Fill out the deposit
Investor Services. slip from your account
statement. If you do not have a
deposit slip, include a note with
your name, the fund name, and
your account number.
Mail the check and deposit slip
or note to Investor Services.
- -------------------------------------------------------------------------
[Insert graphic of Call to receive a Call to receive a
three lightning wire control number wire control number
bolts] and wire and wire instructions.
instructions.
BY WIRE To make a same day
Wire the funds and wire investment, please
1-800/632-2301 mail your signed call us by 1:00 p.m. Pacific
(or 1-650/312-2000 application to time and make
collect) Investor Services. sure your wire arrives
Please include the by 3:00 p.m.
wire control number
or your new account
number on the
application.
To make a same day
wire investment,
please call us by
1:00 p.m. Pacific
time and make sure
your wire arrives
by 3:00 p.m.
- -------------------------------------------------------------------------
[Insert graphic of Call Shareholder Call Shareholder
two arrows pointing Services at the Services at the number
in opposite number below, or below, or send signed
directions] send signed written written instructions.
instructions. (Please see page 25
BY EXCHANGE (Please see page 25 for information on
for information on exchanges.)
exchanges.)
- -------------------------------------------------------------------------
Franklin Templeton Investor Services, P.O. Box 997151
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
Saturday 6:30 a.m. to 2:30 p.m., Pacific time)
[Insert graphic of person with handset] INVESTOR SERVICES
- -----------------------------------------------------------------------
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class of the fund or in Advisor Class or
Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial sales
charges and contingent deferred sales charges (CDSCs) will not apply if you
reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms
may be needed to receive distributions in cash. Please call
1-800/527-2020 for information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class. You also may exchange your Advisor Class shares for Class
A shares of a fund that does not currently offer an Advisor Class (without any
sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the
purchase of another. In general, the same policies that apply to
purchases and sales apply to exchanges, including minimum investment
amounts. Exchanges also have the same tax consequences as ordinary
sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust or Templeton Foreign Fund, you also may exchange your shares for
Class A shares of those funds (without any sales charge)* or for shares of
Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
29).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares if you otherwise qualify to buy the fund's
Advisor Class shares.
[Insert graphic of certificate] SELLING SHARES
- -----------------------------------------------------------------------
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or
preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
SELLING SHARES
- ----------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ----------------------------------------------------------------------
[Insert graphic of hands
shaking]
THROUGH YOUR Contact your investment representative
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold share
certificates) to Investor Services.
BY MAIL Corporate, partnership or trust accounts may need to
send additional documents.
Specify the fund, the account number and the dollar value
or number of shares you wish to sell. Be sure to include
all necessary signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and address on the
account, or otherwise according to your written
instructions.
- ----------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000
phone] or less, you do not hold share certificates
and you have not changed your address by
By Phone phone within the last 15 days, you can
sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on the
account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- ---------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption proceeds
three lightning sent to a bank account. See the policies above
bolts] for selling shares by mail
or phone.
BY ELECTRONIC FUNDS
TRANSFER (ACH) Before requesting to have redemption
proceeds sent to a bank account, please
make sure we have your bank account
information on file. If we do not have this
information, you will need to send written
instructions with your bank's name and
address, a voided check or saving account deposit
slip, and a signature guarantee if
the ownership of the bank and fund accounts
is different.
If we receive your request in proper form
by 1:00 p.m. Pacific time, proceeds sent by
ACH generally will be available within two to three
business days.
- ----------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund
arrows pointing in you are considering.
opposite directions]
Call Shareholder Services at the number
By Exchange below, or send signed written instructions. See
the policies above for selling shares by mail or phone.
If you hold share certificates, you will need to return
them to the fund before your exchange can be processed.
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, P.O. BOX 997151,
Sacramento, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
- -----------------------------------------------------------------------
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). The NAV for Advisor Class is calculated by
dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee accounts) because you sell some of your shares, we may mail you a
notice asking you to bring the account back up to its applicable minimum
investment amount. If you choose not to do so within 30 days, we may close your
account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive quarterly account statements that show
all your account transactions during the quarter. You also will receive written
notification after each transaction affecting your account (except for
distributions and transactions made through automatic investment or withdrawal
programs, which will be reported on your quarterly statement). You also will
receive the fund's financial reports every six months. To reduce fund expenses,
we try to identify related shareholders in a household and send only one copy of
the financial reports. If you need additional copies, please call 1-800/DIAL
BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and statements
and other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the funds' transfer agent. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged shares
out of the fund more than twice in a calendar quarter, or (iii) exchanged shares
equal to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits. Templeton Pacific Growth Fund does not
allow investments by market timers.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower its
minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days' notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or postpone
the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check, wire or electronic funds transfer would
be harmful to existing shareholders.
o To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares
may receive up to 0.25% of the amount invested. This amount is paid
by Franklin Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
- -----------------------------------------------------------------------
If you have any questions about the fund or your account, you can write to us at
P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditors' report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: publicinfo(R)sec.gov.
Investment Company Act file #811-6336 FTIT PA 03/00
FRANKLIN TEMPLETON
INTERNATIONAL TRUST
TEMPLETON FOREIGN SMALLER COMPANIES FUND - CLASS A, B & C
TEMPLETON PACIFIC GROWTH FUND - CLASS A & C
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. Box 997151, Sacramento, CA 95899-9983 1-800/DIAL BEN(R)
- -------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated March 1, 2000, which we may amend from time to time, contains
the basic information you should know before investing in the funds. You should
read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies 2
Risks 12
Officers and Trustees 17
Management and Other Services 20
Portfolio Transactions 21
Distributions and Taxes 22
Organization, Voting Rights
and Principal Holders 24
Buying and Selling Shares 25
Pricing Shares 31
The Underwriter 32
Performance 34
Miscellaneous Information 36
Description of Bond Ratings 36
[Begin callout]
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.
[End callout]
GOAL AND STRATEGIES
- -------------------------------------------------------------------
The investment goal of each fund is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
EQUITY SECURITIES represent a proportionate share of the ownership of a company;
their value is based on the success of the company's business, any income paid
to stockholders, the value of its assets, and general market conditions. 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. The funds also invest in American, Global and European
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities (usually equity
but sometimes debt) issued by a foreign or domestic corporation.
The Smaller Companies Fund normally will invest at least 65% of its total assets
in equity securities of smaller companies located outside the U.S. The fund's
manager considers small companies to be generally those with market
capitalization of less than $1.5 billion at the time of purchase. The fund may
retain securities of smaller companies indefinitely, even if their market
capitalization has increased. As a result, the average market capitalization of
the fund's portfolio companies at any given time may be greater than $1.5
billion. However, the fund's manager generally will avoid equity investments in
larger companies at any time when less than 65% of the fund's total assets are
invested in equity securities of companies outside the U.S. with a current
market capitalization of less than $1.5 billion.
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, 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.
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.
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.
FOREIGN INVESTMENTS The funds invest in securities of foreign issuers. The funds
may invest up to 100% of total assets in emerging markets. The Smaller Companies
Fund may invest up to 5% of its total assets in Russian securities.
On occasion a fund may invest more than 25% of its assets in the securities of
issuers in one industrialized country that, in the view of the manager, poses no
unique investment risk. Consistent with this policy, a fund may invest up to 30%
of its assets in securities issued by Hong Kong companies. However, each fund
will not invest more than 25% of its assets in any one industry or securities
issued by any foreign government.
Each fund may also invest in U.S. companies. The Smaller
Companies Fund presently does not expect to invest more than 5%
of its assets in equity securities of U.S. companies.
CURRENCY TRANSACTIONS Although each fund has the authority to 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, they presently have no intention of entering into such transactions.
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).
Each 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. Each 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 funds'
portfolio.
Each 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 funds' total assets committed to the forward foreign
currency exchange contracts requiring the funds 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 funds' 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 funds' ability to
utilize forward foreign currency exchange contracts may be restricted.
The funds 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. Each fund may enter into currency futures contracts traded on
regulated commodity exchanges, including non-U.S. exchanges.
The funds 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.
Each fund may enter into forward currency exchange contracts and currency
futures contracts in several circumstances. For example, when a fund enters into
a contract for the purchase or sale of a security denominated in a foreign
currency (or options contracts with respect to such futures contracts), or when
a 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 a fund's portfolio securities against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
that a 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.
Each 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 funds 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 a 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 a 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 Although the funds have the
authority to enter into these transactions, they currently have no intention of
doing so.
WRITING CALL AND PUT OPTIONS ON SECURITIES. A fund may write options to generate
additional income and to hedge its investment portfolio against anticipated
adverse market and/or exchange rate movements. A fund may write covered call and
put options on any securities in which it may invest. A 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 a
fund give the holder the right to buy the underlying securities from the fund at
a stated exercise price. Put options written by a fund give the holder the right
to sell the underlying security to the fund at a stated exercise price. All
options written by a 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, a fund may forego the opportunity to profit from an increase
in the market price of the underlying security.
A call option written by a 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 a fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(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 a 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.
A 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; a 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. A 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. A 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. A fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of this security. A 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. A 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 a 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"). A 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 funds understand the current position of the staff of the U.S. Securities
and Exchange Commission ("SEC") to be that purchased OTC options and the assets
used as "cover" for written OTC options are illiquid securities. The funds and
their managers disagree with this position. Nevertheless, pending a change in
the staff's position, the funds will treat OTC options as subject to its
limitation on illiquid securities. Please see "Illiquid Investments."
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, a 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. A 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. A 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. A fund's ability to engage in spread or straddle transactions may
be further limited by state securities laws.
FUTURES TRANSACTIONS Although each fund has the authority to enter into these
transactions, it currently has no intention of doing so.
Each 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. Each 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. Each 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, each
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 a 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, a 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, a
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, a 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. Each 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. A 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 funds' futures contracts on securities or currency
will usually be liquidated in this manner, each 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 each 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, each 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. Each fund may enter into interest rate futures
contracts in order to protect its portfolio securities from fluctuations in
interest rates without necessarily buying or selling the underlying fixed-income
securities. For example, if a fund owns bonds, and interest rates are expected
to increase, it might sell futures contracts on debt 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 a fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
Each 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 a fund is not fully invested
in stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may 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. A 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, a 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 funds' portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
funds may also enter into these futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in the funds'
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
funds enter into a greater or fewer number of futures contracts or by attempting
to achieve only a partial hedge against price changes affecting the funds'
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 the funds' portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, a fund may take a "long" position by buying these futures
contracts. This would be done, for example, when a 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 funds do 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 each funds' 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 funds 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 Investment
Company Act of 1940 ("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
funds are not permitted to engage in speculative futures trading. Each 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 funds' 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, each 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 funds 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 funds to elect
to comply with a different test, under which (i) a 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.
Each 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.
Each 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 a fund's futures positions and portfolio positions
may be difficult to achieve because no futures contracts based on corporate
fixed-income securities are currently available. In addition, it is not possible
to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of 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 each 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.
Each fund may invest in synthetic convertible securities, which are derivative
positions composed of two or more different securities whose investment
characteristics, taken together, resemble those of convertible securities. For
example, a fund may purchase a non-convertible debt security or a warrant or
option, which enables the fund to have a convertible-like position with respect
to a company, group of companies, or stock index. Synthetic convertible
securities are typically offered by financial institutions and investment banks
in private placement transactions. Upon conversion, the fund generally receives
an amount in cash equal to the difference between the conversion price and the
then current value of the underlying security. Unlike a true convertible
security, a synthetic convertible security comprises two or more separate
securities, each with its own market value. Therefore, the market value of a
synthetic convertible is the sum of the values of its fixed-income component and
its convertible component. For this reason, the values of a synthetic
convertible and a true convertible security may respond differently to market
fluctuations. The Pacific Fund currently has no intention of investing more than
5% of its net assets in synthetic convertible securities, while the Smaller
Companies Fund does not currently intend to invest in synthetic convertible
securities.
Each 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.
Each 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 convertible
security may involve additional risks to the fund. A fund may have difficulty
disposing of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and 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 funds, however,
intend to acquire liquid securities, though there can be no assurances that this
will be achieved.
REPURCHASE AGREEMENTS Each fund generally will 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, each fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer 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 market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
ILLIQUID INVESTMENTS Securities that are acquired by a 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 each 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 Securities Act of 1933 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 a
fund invests in restricted securities that are deemed liquid, the general level
of illiquidity in the fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the funds
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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less. In addition, each fund's investment goal is
fundamental. See "Goal and Strategies."
Each 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 the
manager 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.
Each fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval. Each fund may not
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 Group of Funds.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
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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 a 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 a 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 a fund generally intends to acquire the securities of foreign
issuers where there are public trading markets, investments by a fund in the
securities of foreign issuers may tend to increase the risks with respect to the
liquidity of 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 funds may invest have experienced
substantial, and in some periods, extremely high rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The funds could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for
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 each fund may enter into forward contracts to reduce
currency exchange rate risks, transactions in these contracts involve certain
other risks. Thus, while a 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 Each 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 a fund's futures positions and portfolio positions
will be impossible to achieve. Accordingly, successful use by a 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 a fund's ability to effectively hedge its securities or
foreign currency exposure. Each 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, a fund may be able to realize the value of an
OTC option it has purchased only by exercising it or entering into a closing
sale transaction with the dealer that issued it. Similarly, when a fund writes
an OTC option, it generally can close out that option prior to its expiration
only by entering into a closing purchase transaction with the dealer 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 a 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, a 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 rated 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 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.
CREDIT RISK Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
the value of fund shares.
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will be implemented in stages through July 1,
2002, to replace the national currency for participating member countries. The
participating countries are Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, and Spain. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for a loan by the fund
not within the control of the fund, and therefore the realization by the fund on
the collateral may be automatically stayed. Finally, it is possible that the
fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
the manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the fund, these risks can be
controlled through careful monitoring procedures.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust and principal occupations for the
past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing) (until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman 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 Investment Advisory Services, Inc. and
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, 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).
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
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 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Ventures Management Company; Director, The California Center
for Land Reclamation (redevelopment); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, General Partner, Miller & LaHaye and Peregrine Associates, the general
partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc.
(information services), MedImmune, Inc. (biotechnology),
Overstock.com (internet services), White Mountains Insurance
Group, Ltd. (holding company) and Spacehab, Inc. (aerospace
services); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Chairman, White River Corporation (financial
services) (until 1998) and Hambrecht & Quist Group (investment
banking) (until 1992), and President, National Association of
Securities Dealers, Inc. (until 1987).
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Steven & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, Vice President, Chief
Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc.
(until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 33 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 51 of the investment companies in the Franklin Templeton Group of Funds; and
formerly, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
R. Martin Wiskemann (73)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Vice President and Director, ILA
Financial Services, Inc. (until 1998).
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $300 per quarter plus $150 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee of
$2,000 per committee meeting attended, a portion of which is allocated to the
trust. Members of a committee are not compensated for any committee meeting held
on the day of a board meeting. Noninterested board members also may serve as
directors or trustees of other funds in the Franklin Templeton Group of Funds
and may receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON GROUP
RECEIVED THE FRANKLIN OF FUNDS ON
FROM THE TEMPLETON GROUP WHICH EACH
NAME TRUST 1 ($) OF FUNDS 2 ($) SERVES 3
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Frank H. Abbott, III 1,380 156,060 27
Harris J. Ashton 1,433 363,165 47
S. Joseph Fortunato 1,335 363,238 49
Edith E. Holiday 1,800 237,265 24
Frank W.T. LaHaye 1,380 156,060 27
Gordon S. Macklin 1,433 363,165 47
1. For the fiscal year ended October 31, 1999
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The Templeton organization has been investing globally since 1940. The manager
and its affiliates have offices in Argentina, the Bahamas, Brazil, Canada,
Peoples Republic of China, Cyprus, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia, Singapore,
South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom, and
the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to each
fund, the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under each fund's code of
ethics, employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for a fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The funds' sub-advisor is Templeton Investment Counsel, Inc. The sub-advisor has
an agreement with the manager and provides the manager with investment
management advice and assistance. The sub-advisor recommends the optimal equity
allocation and provides advice regarding the fund's investments. The sub-advisor
also determines which securities will be purchased, retained or sold and
executes these transactions. The sub-advisor's activities are subject to the
board's review and control, as well as the manager's instruction and
supervision.
MANAGEMENT FEES Each fund pays the manager a fee equal to an annual rate of:
o 1% of the value of net assets up to and including $100 million;
o 0.90% of the value of net assets over $100 million and not over
$250 million;
o 0.80% of the value of net assets over $250 million and not over
$500 million; and
o 0.75% of the value of net assets in excess of $500 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of each
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
1999 1998 1997
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Smaller Companies Fund 1,166,255 657,454 866,624
Pacific Fund 629,459 229,542 571,117
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.50% of the value of the fund's average daily net assets up to
and including $100 million;
o 0.40% of the value of the fund's average daily net assets over
$100 million up to and including $250 million;
o 0.30% of the value of the fund's average daily net assets over
$250 million up to and including $500 million; and
o 0.25% of the value of the fund's average daily assets over $500 million.
The manager pays this fee from the management fees it receives from each fund.
For the last three fiscal years ended October 31, the manager paid the following
sub-advisory fees:
SUB-ADVISORY FEES PAID ($)
1999 1998 1997
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Smaller Companies Fund 573,891 659,180 451,416
Pacific Fund 314,729 229,541 284,645
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700
million;
o 0.10% of average daily net assets over $700 million up to $1.2
billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1999 1998 1997
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Smaller Companies Fund 177,664 209,389 153,165
Pacific Fund 94,263 68,924 93,491
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94403-7777. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The funds
also will 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 will not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIANS Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 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, NY 11245, and at the offices of its branches and agencies
throughout the world, acts as custodian of the Smaller Companies Fund's assets.
As foreign custody manager, the bank selects and monitors foreign sub-custodian
banks, selects and evaluates non-compulsory foreign depositories, and furnishes
information relevant to the selection of compulsory depositories.
AUDITOR PricewaterhouseCoopers LLP, 200 East Las Olas, Ft. Lauderdale, FL 33301,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
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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 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 it exercises investment discretion. The services that brokers may provide
to the managers include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the managers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the managers in carrying out its 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 allows the managers to supplement their own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the managers and their affiliates may use this
research and data in their investment advisory capacities with other clients. If
a 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, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of the fund, any portfolio
securities tendered by the fund will be tendered through Distributors if it is
legally permissible to do so. In turn, the next management fee payable to the
managers will be reduced by the amount of any fees received by Distributors in
cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the 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 may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended October 31, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
1999 1998 1997
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Smaller Companies Fund 165,837 208,436 372,889
Pacific Fund 135,371 139,234 141,188
For the fiscal year ended October 31, 1999, Templeton Foreign Smaller Companies
Fund paid brokerage commissions of $161,502 from aggregate portfolio
transactions of $49,533,234 to brokers who provided research services. For the
fiscal year ended October 31, 1999, Templeton Pacific Growth Fund paid brokerage
commissions of $134,544 from aggregate portfolio transactions of $53,071,983 to
brokers who provided research services.
As of October 31, 1999, the funds did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of a fund, constitutes a fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in a fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution to
you. This treatment could increase or decrease a fund's ordinary income
distributions to you, and may cause some or all of a fund's previously
distributed income to be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a fund's total assets at the end of the
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 the fund. If
this election is made, the year-end statement you receive from a fund 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 (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, 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 your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, 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 such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. 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 or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains on the sale
or redemption of fund shares held for more than five years may be subject to a
reduced tax rate.
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 the fund on those shares. 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 buy other shares in the 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 buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in such fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report any gain or loss on the redemption of your original shares
in a fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in a fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded 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.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that must be met
by a fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS As a corporate shareholder, you
should note that no portion of the Smaller Companies Fund's distributions will
generally be eligible for the intercorporate dividends-received deduction. None
of the dividends paid by the fund for the most recent calendar year qualified
for such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
You should also note that 10.56% of the dividends paid by the Pacific Fund for
the most recent fiscal year qualified for the dividends-received deduction. You
may be allowed 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 the fund as eligible for such treatment. All dividends (including
the deducted portion) must be included in your alternative minimum taxable
income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund (possibly causing a fund to sell securities to raise the cash for
necessary distributions) and/or defer a fund's ability to recognize losses, and,
in limited cases, subject a fund to U.S. federal income tax on income from
certain foreign securities. In turn, these rules may affect the amount, timing
or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each fund is a diversified series of Franklin Templeton International Trust, an
open-end management investment company, commonly called a mutual fund. The trust
was organized as a Delaware business trust, and is registered with the SEC.
The Smaller Companies Fund currently offers four classes of shares, Class A,
Class B, Class C and Advisor Class. The Pacific Growth Fund currently offers
three classes of shares, Class A, Class C and Advisor Class. Each fund may offer
additional classes of shares in the future. The full title of each class is:
o Templeton Foreign Smaller Companies Fund - Class A o Templeton Foreign Smaller
Companies Fund - Class B o Templeton Foreign Smaller Companies Fund - Class C o
Templeton Foreign Smaller Companies Fund - Advisor Class o Templeton Pacific
Growth Fund - Class A o Templeton Pacific Growth Fund - Class C o Templeton
Pacific Growth Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect a fund as a whole, each class has the same voting and other
rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole. Additional series may be
offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting may also be called by the board in its discretion.
As of February 1 ,2000, the principal shareholders of the funds, beneficial or
of record, were:
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
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FOREIGN SMALLER COMPANIES FUND
Stetson & Co., c/o Marshall & Ilsley Trust Co
PO Box 2977, Milwaukee, WI 53202 A 6
Raymond James Assoc., Inc.
FAO A M Hillerman Co TTEES
Elite 0099089
1632 Francisca Rd, NW
Albuquerque, NM 87107-7118 B 12
FISERV Securities, Inc.
FAO 71877642, Attn. Mutual Funds Dept
One Commerce Square, 2005 Market Street
Suite 1200
Philadelphia, PA 19103 B 7
Franklin Resources, Inc.
Attn: Michael Corcoran
555 Airport Blvd, 4th Fl
Burlingame, CA 94010 B 6
American Enterprise Investment Svcs
FBO 140403981
PO Box 9446, Minneapolis, MN 55440 B 6
Donaldson Lufkin Jenrette Securities
Corporation Inc.
PO Box 2052, Jersey City, NJ 07303-9998 B 6
FTTC Cust for the Rollover IRA of
Mary J. Albin
2377 Malibu Ct, Fairfield, CA 94533 B 6
J C Bradford Co. Cust FBO
Jacquelyn B. Balish
300 Commerce St.
Nashville, TN 37201-1809 C 7
Raymond James Assoc., Inc.
Cust Sara T Jones MD IRA
1821 Long Iron Drive, # 406
Viera, FL 32955 C 6
NFSC FEBO, Cynthia D. Troy TTEE
Howard C. Greensap 1998 Tr Agreement
23 Spring Hill Road, Annandale, NJ 08801 C 6
Raymond James Assoc., Inc.
FAO Larry A Loftin & Wanda A Loftin T-I-C
Elite 50197725
129 Hawthorne Rd., Mocksville, NC 27208 C 5
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104-4122 Advisor 81
Franklin Templeton Trust Company1
TTEE for ValuSelect
Franklin Resources PSP
Attn: Trading, P.O. Box 2438
Rancho Cordova, CA 95741-2438 Advisor 7
PACIFIC FUND
Franklin Templeton Fund Allocator
Growth Target Fund
c/o Kimberly Monasterio
1810 Gateway, 3rd Fl.
San Mateo, CA 94404-2470 Advisor 42
Franklin Templeton Fund Allocator
Moderate Target Fund
c/o Kimberly Monasterio
1810 Gateway, 3rd Fl.
San Mateo, CA 94404-2470 Advisor 27
Franklin Templeton Trust Company 1
TTEE for ValuSelect
Franklin Resources PSP
Attn: Trading, P.O. Box 2438
Rancho Cordova, CA 95741-2438 Advisor 14
Franklin Templeton Fund Allocator
Conservative Target Fund
c/o Kimberly Monasterio
1810 Gateway, 3rd Fl.
San Mateo, CA 94404-2470 Advisor 9
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
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.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
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Each fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a 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. We may deduct any applicable banking charges
imposed by the bank from you account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
a fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A and
1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
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 generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund. The
distributions generally must be reinvested in the same share class. Certain
exceptions apply, however, to Class C shareholders who chose to reinvest their
distributions in Class A 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 the fund's Class A shares. This waiver
category also applies to Class B and C shares.
o Annuity payments received under either an annuity option or from death benefit
proceeds, if the annuity contract offers as an investment option the Franklin
Templeton Variable Insurance Products Trust or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid and
the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial planners
who have entered into an agreement with Distributors for clients participating
in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their
investment accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described
under "Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares with-out an
initial 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 CDSC 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.
SALES IN TAIWAN. 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.
The funds' Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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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
DEALER COMPENSATION 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. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the funds'
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1% out of its own resources,
to securities dealers who initiate and are responsible for purchases of Class A
shares by certain retirement plans without an initial sales charge. These
payments may be made 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.
In addition to the payments above, Distributors and/or its affiliates may
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 and/or total assets with the Franklin Templeton Group of
Funds. 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 rules of the National Association of
Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
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1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived its
commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or
beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for Class
B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable)
from retirement plan accounts
o Participant initiated distributions from employee benefit plans or participant
initiated exchanges among investment choices in employee benefit plans (not
applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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
each 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,
interest-bearing 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 generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. 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. 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 also may be
subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
REDEMPTIONS IN KIND Each 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 U.S. Securities and Exchange
Commission (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.
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.
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 funds nor their
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (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, each fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each 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.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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 funds pay 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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended October 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- ----------------------------------------------------------------------
1999
Smaller Companies Fund 107,378 15,019 533
Pacific Growth Fund 368,747 49,043 10,076
1998
Smaller Companies Fund 423,903 63,831 3,023
Pacific Growth Fund 82,215 82,792 8,598
1997
Smaller Companies Fund 1,059,592 156,055 0
Pacific Growth Fund 483,600 64,068 600
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the respective fund and its
shareholders. The plans are expected to, among other things, increase
advertising of the fund, encourage sales of the fund and service to its
shareholders, and increase or maintain assets of the fund so that certain fixed
expenses may be spread over a broader asset base, resulting in lower per share
expense ratios. In addition, a positive cash flow into the fund is useful in
managing the fund because the managers has more flexibility in taking advantage
of new investment opportunities and handling shareholder redemptions.
Under each plan, the fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates who provide service or account maintenance to shareholders (service
fees); the expenses of printing prospectuses and reports used for sales
purposes, and preparing and distributing sales literature and advertisements;
and a prorated portion of Distributors' overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." The distribution and service (12b-1) fees charged to each class are
based only on the fees attributable to that particular class.
THE CLASS A PLAN. Each fund may pay up to 0.25% per year of Class A's average
daily net assets. The Class A plan is a reimbursement plan. It allows the fund
to reimburse Distributors for eligible expenses that Distributors has shown it
has incurred. The fund will not reimburse more than the maximum amount allowed
under the plan. Any unreimbursed expenses from one year may not be carried over
to or reimbursed in later years. For the fiscal year ended October 31, 1999, the
amounts paid by the funds pursuant to the plan were:
SMALLER PACIFIC
COMPANIES GROWTH
($) ($)
- -------------------------------------------------------------------
Advertising - -
Printing and mailing prospectuses
other than to current shareholders - -
Payments to underwriters - -
Payments to broker-dealers 232,069 110,336
Other - -
--------------------------
Total 232,069 110,336
==========================
THE CLASS B AND C PLANS. The fund pays Distributors up to 0.75% per year of the
class's average daily net assets, out of which 0.25% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for advancing
commission to securities dealers with respect to the initial sales of Class B
and C shares. Class B plan fees payable to Distributors are used by Distributors
to pay third party financing entities that have provided financing to
Distributors in connection with advancing commissions to securities dealers.
The Class B and C plans are compensation plans. They allow the funds to pay a
fee to Distributors that may be more than the eligible expenses Distributors has
incurred at the time of the payment. Distributors must, however, demonstrate to
the board that it has spent or has immediate plans to spend the amount received
on eligible expenses. The fund will not pay more than the maximum amount allowed
under the plans.
Under the Class B plan, the amounts paid by the Smaller Companies Fund pursuant
to the plan for the fiscal year ended October 31, 1999, were:
($)
- -------------------------------------------------------------------
Advertising -
Printing and mailing prospectuses
other than to current shareholders -
Payments to underwriters -
Payments to broker-dealers 658
Other -
-----
Total 658
=====
Under the Class C plan, the amounts paid by the funds pursuant to the plan for
the fiscal year ended October 31, 1999, were:
SMALLER PACIFIC
COMPANIES GROWTH
($) ($)
- -------------------------------------------------------------------
Advertising 5 -
Printing and mailing prospectuses
other than to current shareholders 62 -
Payments to underwriters 54 -
Payments to broker-dealers 4,870 87,886
Other 321 -
------------------------
Total 5,312 87,886
==================
THE CLASS A, B AND C 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, the manager or Distributors or other parties on behalf of the
fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, then such payments shall be deemed to have been made pursuant
to the plan.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plans because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plans for administrative
servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1.
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 a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by a fund are based on the
standardized methods of computing performance mandated by the SEC. Performance
figures reflect Rule 12b-1 fees from the date of the plan's implementation. An
explanation of these and other methods used by the funds 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.
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 initial 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 initial sales
charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial 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 indicated periods ended October
31, 1999, were:
SINCE
INCEPTION
CLASS A 1 YEAR (%) 5 YEARS (%) (9/20/91) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 12.66 6.27 9.04
Pacific Fund 23.65 -6.27 2.27
SINCE
INCEPTION
CLASS B (1/1/99) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 11.97
SINCE
INCEPTION
CLASS C 1 YEAR (%) (1/2/97) (%)
- -------------------------------------------------------------------
Pacific Fund 28.29 -12.66
SINCE
INCEPTION
CLASS C 1 YEAR (%) (7/1/98) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 16.33 1.15
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end of
each period and the deduction of all applicable charges and fees. Cumulative
total return, however, is based on the actual return for a specified period
rather than on the average return over the periods indicated above. The
cumulative total returns for the indicated periods ended October 31, 1999 were:
SINCE
INCEPTION
CLASS A 1 YEAR (%) 5 YEARS (%) (9/20/91) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 12.57 35.57 101.91
Pacific Fund 23.78 -27.58 20.11
SINCE
INCEPTION
CLASS B (1/1/99) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 11.81
SINCE
INCEPTION
CLASS C 1 YEAR (%) (1/2/97) (%)
- -------------------------------------------------------------------
Pacific Fund 28.29 -31.80
SINCE
INCEPTION
CLASS C 1 YEAR (%) (7/1/98) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 16.33 0.57
VOLATILITY Occasionally statistics may be used to show the funds' volatility or
risk. Measures of volatility or risk are generally used to compare the funds'
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 Each fund also may quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of a fund as a potential investment for
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.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 funds may
satisfy your investment goal, advertisements and other materials about each 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(R) Inc., a widely used independent research firm that ranks mutual funds
by overall performance, investment goals 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 also may refer to the following
information:
o 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.
o The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley Capital
International or a similar financial organization.
o The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance Corporation,
Morgan Stanley Capital International or a similar financial
organization.
o The geographic and industry distribution of the fund's
portfolio and the fund's top ten holdings.
o 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.
o 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 Capital International EAFE(R) - Index).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
o Allegorical stories illustrating the importance of persistent
long-term investing.
o The funds' portfolio turnover rate and its ranking relative to
industry standards as published by Lipper(R) Inc. or Morningstar,
Inc.
o 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.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
*Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the Board on
April 16, 1995. He is no longer involved with the investment
management process.
From time to time, advertisements or information for a 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 also may compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to fall. 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 a 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------
The funds 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 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.
Each 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 is one of the
oldest mutual fund organizations and now services approximately 3 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 $235 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 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 New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF BOND RATINGS
- -------------------------------------------------------------------
CORPORATE AND FOREIGN GOVERNMENT BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect
to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to
a high degree. These issues are often in default or have other
marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN TEMPLETON
INTERNATIONAL TRUST
TEMPLETON FOREIGN SMALLER COMPANIES FUND
TEMPLETON PACIFIC GROWTH FUND
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2000
[Insert Franklin Templeton Ben Head]
P.O. Box 997151, Sacramento, CA 95899-9983 1-800/DIAL BEN(R)
- -------------------------------------------------------------------
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectus. The funds'
prospectus, dated March 1, 2000 which we may amend from time to time, contains
the basic information you should know before investing in each fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies 2
Risks 12
Officers and Trustees 17
Management and Other Services 20
Portfolio Transactions 21
Distributions and Taxes 22
Organization, Voting Rights
and Principal Holders 24
Buying and Selling Shares 25
Pricing Shares 27
The Underwriter 28
Performance 28
Miscellaneous Information 30
Description of Bond Ratings 31
[Begin callout]
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.
[End callout]
GOAL AND STRATEGIES
- -------------------------------------------------------------------
The investment goal of each fund is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
EQUITY SECURITIES represent a proportionate share of the ownership of a company;
their value is based on the success of the company's business, any income paid
to stockholders, the value of its assets, and general market conditions. 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. The funds also invest in American, Global and European
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities (usually equity
but sometimes debt) issued by a foreign or domestic corporation.
The Smaller Companies Fund normally will invest at least 65% of its total assets
in equity securities of smaller companies located outside the U.S. The fund's
manager considers small companies to be generally those with market
capitalization of less than $1.5 billion at the time of purchase. The fund may
retain securities of smaller companies indefinitely, even if their market
capitalization has increased. As a result, the average market capitalization of
the fund's portfolio companies at any given time may be greater than $1.5
billion. However, the fund's manager generally will avoid equity investments in
larger companies at any time when less than 65% of the fund's total assets are
invested in equity securities of companies outside the U.S. with a current
market capitalization of less than $1.5 billion.
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, 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.
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.
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.
FOREIGN INVESTMENTS The funds invest in securities of foreign issuers. The funds
may invest up to 100% of total assets in emerging markets. The Smaller Companies
Fund may invest up to 5% of its total assets in Russian securities.
On occasion a fund may invest more than 25% of its assets in the securities of
issuers in one industrialized country that, in the view of the manager, poses no
unique investment risk. Consistent with this policy, a fund may invest up to 30%
of its assets in securities issued by Hong Kong companies. However, each fund
will not invest more than 25% of its assets in any one industry or securities
issued by any foreign government.
Each fund may also invest in U.S. companies. The Smaller
Companies Fund presently does not expect to invest more than 5%
of its assets in equity securities of U.S. companies.
CURRENCY TRANSACTIONS Although each fund has the authority to 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, they presently have no intention of entering into such transactions.
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).
Each 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. Each 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 funds'
portfolio.
Each 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 funds' total assets committed to the forward foreign
currency exchange contracts requiring the funds 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 funds' 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 funds' ability to
utilize forward foreign currency exchange contracts may be restricted.
The funds 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. Each fund may enter into currency futures contracts traded on
regulated commodity exchanges, including non-U.S. exchanges.
The funds 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.
Each fund may enter into forward currency exchange contracts and currency
futures contracts in several circumstances. For example, when a fund enters into
a contract for the purchase or sale of a security denominated in a foreign
currency (or options contracts with respect to such futures contracts), or when
a 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 a fund's portfolio securities against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
that a 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.
Each 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 funds 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 a 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 a 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 Although the funds have the
authority to enter into these transactions, they currently have no intention of
doing so.
WRITING CALL AND PUT OPTIONS ON SECURITIES. A fund may write options to generate
additional income and to hedge its investment portfolio against anticipated
adverse market and/or exchange rate movements. A fund may write covered call and
put options on any securities in which it may invest. A 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 a
fund give the holder the right to buy the underlying securities from the fund at
a stated exercise price. Put options written by a fund give the holder the right
to sell the underlying security to the fund at a stated exercise price. All
options written by a 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, a fund may forego the opportunity to profit from an increase
in the market price of the underlying security.
A call option written by a 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 a fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(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 a 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.
A 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; a 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. A 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. A 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. A fund may buy call options on securities that it intends
to buy in order to limit the risk of a substantial increase in the market price
of this security. A 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. A 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 a 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"). A 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 funds understand the current position of the staff of the U.S. Securities
and Exchange Commission ("SEC") to be that purchased OTC options and the assets
used as "cover" for written OTC options are illiquid securities. The funds and
their managers disagree with this position. Nevertheless, pending a change in
the staff's position, the funds will treat OTC options as subject to its
limitation on illiquid securities. Please see "Illiquid Investments."
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, a 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. A 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. A 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. A fund's ability to engage in spread or straddle transactions may
be further limited by state securities laws.
FUTURES TRANSACTIONS Although each fund has the authority to enter into these
transactions, it currently has no intention of doing so.
Each 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. Each 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. Each 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, each
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 a 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, a 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, a
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, a 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. Each 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. A 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 funds' futures contracts on securities or currency
will usually be liquidated in this manner, each 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 each 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, each 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. Each fund may enter into interest rate futures
contracts in order to protect its portfolio securities from fluctuations in
interest rates without necessarily buying or selling the underlying fixed-income
securities. For example, if a fund owns bonds, and interest rates are expected
to increase, it might sell futures contracts on debt 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 a fund may be obligated to provide or receive cash reflecting any
decline or increase in the contract's value. No physical delivery of the
underlying stocks in the index is made in the future.
Each 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 a fund is not fully invested
in stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may 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. A 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, a 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 funds' portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
funds may also enter into these futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in the funds'
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
funds enter into a greater or fewer number of futures contracts or by attempting
to achieve only a partial hedge against price changes affecting the funds'
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 the funds' portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, a fund may take a "long" position by buying these futures
contracts. This would be done, for example, when a 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 funds do 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 each funds' 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 funds 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 Investment
Company Act of 1940 ("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
funds are not permitted to engage in speculative futures trading. Each 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 funds' 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, each 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 funds 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 funds to elect
to comply with a different test, under which (i) a 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.
Each 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.
Each 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 a fund's futures positions and portfolio positions
may be difficult to achieve because no futures contracts based on corporate
fixed-income securities are currently available. In addition, it is not possible
to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of 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 each 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.
Each fund may invest in synthetic convertible securities, which are derivative
positions composed of two or more different securities whose investment
characteristics, taken together, resemble those of convertible securities. For
example, a fund may purchase a non-convertible debt security or a warrant or
option, which enables the fund to have a convertible-like position with respect
to a company, group of companies, or stock index. Synthetic convertible
securities are typically offered by financial institutions and investment banks
in private placement transactions. Upon conversion, the fund generally receives
an amount in cash equal to the difference between the conversion price and the
then current value of the underlying security. Unlike a true convertible
security, a synthetic convertible security comprises two or more separate
securities, each with its own market value. Therefore, the market value of a
synthetic convertible is the sum of the values of its fixed-income component and
its convertible component. For this reason, the values of a synthetic
convertible and a true convertible security may respond differently to market
fluctuations. The Pacific Fund currently has no intention of investing more than
5% of its net assets in synthetic convertible securities, while the Smaller
Companies Fund does not currently intend to invest in synthetic convertible
securities.
Each 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.
Each 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 convertible
security may involve additional risks to the fund. A fund may have difficulty
disposing of such securities because there may be a thin trading market for a
particular security at any given time. Reduced liquidity may have an adverse
impact on market price and 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 funds, however,
intend to acquire liquid securities, though there can be no assurances that this
will be achieved.
REPURCHASE AGREEMENTS Each fund generally will 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, each fund may enter into repurchase agreements.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer 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 market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
ILLIQUID INVESTMENTS Securities that are acquired by a 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 each 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 Securities Act of 1933 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 a
fund invests in restricted securities that are deemed liquid, the general level
of illiquidity in the fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the funds
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.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less. In addition, each fund's investment goal is
fundamental. See "Goal and Strategies."
Each 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 the
manager 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.
Each fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval. Each fund may not
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 Group of Funds.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation 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 will not be considered a violation of the restriction or
limitation.
RISKS
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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 a 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 a 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 a fund generally intends to acquire the securities of foreign
issuers where there are public trading markets, investments by a fund in the
securities of foreign issuers may tend to increase the risks with respect to the
liquidity of 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 funds may invest have experienced
substantial, and in some periods, extremely high rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries.
Repatriation of investment income, capital and proceeds of sales by foreign
investors may require governmental registration and/or approval in some
developing countries. The funds could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for
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 each fund may enter into forward contracts to reduce
currency exchange rate risks, transactions in these contracts involve certain
other risks. Thus, while a 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 Each 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 a fund's futures positions and portfolio positions
will be impossible to achieve. Accordingly, successful use by a 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 a fund's ability to effectively hedge its securities or
foreign currency exposure. Each 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, a fund may be able to realize the value of an
OTC option it has purchased only by exercising it or entering into a closing
sale transaction with the dealer that issued it. Similarly, when a fund writes
an OTC option, it generally can close out that option prior to its expiration
only by entering into a closing purchase transaction with the dealer 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 a 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, a 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 rated 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 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.
CREDIT RISK Credit risk is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
the value of fund shares.
INTEREST RATE When interest rates rise, debt security prices fall. The opposite
is also true: debt security prices rise when interest rates fall. In general,
securities with longer maturities usually are more sensitive to interest rate
changes than securities with shorter maturities.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will be implemented in stages through July 1,
2002, to replace the national currency for participating member countries. The
participating countries are Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, and Spain. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
REPURCHASE AGREEMENT RISK The use of repurchase agreements involves certain
risks. For example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the value of the
security has declined, the fund may incur a loss upon disposition of the
security. If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or other laws, a court
may determine that the underlying security is collateral for a loan by the fund
not within the control of the fund, and therefore the realization by the fund on
the collateral may be automatically stayed. Finally, it is possible that the
fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
the manager acknowledges these risks, it is expected that if repurchase
agreements are otherwise deemed useful to the fund, these risks can be
controlled through careful monitoring procedures.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing) (until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 47 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) (until 1998).
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman 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 Investment Advisory Services, Inc. and
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 51 of the investment companies in the Franklin Templeton
Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 49 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 24 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, 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).
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member-Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
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 51 of the investment companies in the Franklin
Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Ventures Management Company; Director, The California Center
for Land Reclamation (redevelopment); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, General Partner, Miller & LaHaye and Peregrine Associates, the general
partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc.
(information services), MedImmune, Inc. (biotechnology)
Overstock.com (internet services), White Mountains Insurance
Group, Ltd. (holding company) and Spacehab, Inc. (aerospace
services); director or trustee, as the case may be, of 47 of the
investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Chairman, White River Corporation (financial
services) (until 1998) and Hambrecht & Quist Group (investment
banking) (until 1992), and President, National Association of
Securities Dealers, Inc. (until 1987).
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer
and Director, Templeton Worldwide, Inc.; Executive Vice President, Chief
Operating Officer and Director, Templeton Investment Counsel, Inc.; Executive
Vice President and Chief Financial Officer, Franklin Advisers, Inc.; Chief
Financial Officer, Franklin Advisory Services, LLC and Franklin Investment
Advisory Services, Inc.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 51 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 33 of the investment
companies in the Franklin Templeton Group of Funds; and formerly, Senior Vice
President and General Counsel, Franklin Resources, Inc., Senior Vice President,
Franklin Templeton Services, Inc. and Franklin Templeton Distributors, Inc.,
Executive Vice President, Franklin Advisers, Inc., Vice President, Franklin
Advisory Services, LLC and Franklin Mutual Advisers, LLC, Vice President, Chief
Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 51 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and Franklin
Investment Advisory Services, Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 33 of the investment companies in the Franklin
Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 32 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 51 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
R. Martin Wiskemann (73)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President, Portfolio Manager and Director, Franklin Advisers, Inc.;
Senior Vice President, Franklin Management, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Vice President and Director, ILA
Financial Services, Inc. (until 1998).
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson
The trust pays noninterested board members $300 per quarter plus $150 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee of
$2,000 per committee meeting attended, a portion of which is allocated to the
trust. Members of a committee are not compensated for any committee meeting held
on the day of a board meeting. Noninterested board members also may serve as
directors or trustees of other funds in the Franklin Templeton Group of Funds
and may receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON GROUP
RECEIVED THE FRANKLIN OF FUNDS ON
FROM THE TEMPLETON GROUP WHICH EACH
NAME TRUST 1 ($) OF FUNDS 2 ($) SERVES 3
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Frank H. Abbott, III 1,380 156,060 27
Harris J. Ashton 1,433 363,165 47
S. Joseph Fortunato 1,335 363,238 49
Edith E. Holiday 1,800 237,265 24
Frank W.T. LaHaye 1,380 156,060 27
Gordon S. Macklin 1,433 363,165 47
1. For the fiscal year ended October 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Advisers, Inc. The
manager is a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The Templeton organization has been investing globally since 1940. The manager
and its affiliates have offices in Argentina, the Bahamas, Brazil, Canada,
Peoples Republic of China, Cyprus, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia, Singapore,
South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom, and
the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to each
fund, the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under each fund's code of
ethics, employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for a fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
The funds' sub-advisor is Templeton Investment Counsel, Inc. The sub-advisor has
an agreement with the manager and provides the manager with investment
management advice and assistance. The sub-advisor recommends the optimal equity
allocation and provides advice regarding the fund's investments. The sub-advisor
also determines which securities will be purchased, retained or sold and
executes these transactions. The sub-advisor's activities are subject to the
board's review and control, as well as the manager's instruction and
supervision.
MANAGEMENT FEES Each fund pays the manager a fee equal to an annual rate of:
o 1% of the value of net assets up to and including $100 million;
o 0.90% of the value of net assets over $100 million and not over
$250 million;
o 0.80% of the value of net assets over $250 million and not over
$500 million; and
o 0.75% of the value of net assets in excess of $500 million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of each
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, each fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
1999 1998 1997
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Smaller Companies Fund 1,166,255 657,454 866,624
Pacific Fund 629,459 229,542 571,117
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.50% of the value of the fund's average daily net assets up to
and including $100 million;
o 0.40% of the value of the fund's average daily net assets over
$100 million up to and including $250 million;
o 0.30% of the value of the fund's average daily net assets over
$250 million up to and including $500 million; and
o 0.25% of the value of the fund's average daily assets over $500 million.
The manager pays this fee from the management fees it receives from each fund.
For the last three fiscal years ended October 31, the manager paid the following
sub-advisory fees:
SUB-ADVISORY FEES PAID ($)
1999 1998 1997
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Smaller Companies Fund 573,891 659,180 451,416
Pacific Fund 314,729 229,541 284,645
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700
million;
o 0.10% of average daily net assets over $700 million up to $1.2
billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended October 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1999 1998 1997
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Smaller Companies Fund 177,664 209,389 153,165
Pacific Fund 94,263 68,924 93,491
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The funds
also will 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 will not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 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, NY 11245, and at the offices of its branches and agencies
throughout the world, acts as custodian of the Smaller Companies Fund's assets.
As foreign custody manager, the bank selects and monitors foreign sub-custodian
banks, selects and evaluates non-compulsory foreign depositories, and furnishes
information relevant to the selection of compulsory depositories.
AUDITOR PricewaterhouseCoopers LLP, 200 East Las Olas, Ft. Lauderdale, FL 33301,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
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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 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 it exercises investment discretion. The services that brokers may provide
to the managers include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the managers in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the managers in carrying out its 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 receives from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the managers to supplement their own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the managers and their affiliates may use this research
and data in their investment advisory capacities with other clients. If a 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, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of the fund, any portfolio
securities tendered by the fund will be tendered through Distributors if it is
legally permissible to do so. In turn, the next management fee payable to the
managers will be reduced by the amount of any fees received by Distributors in
cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the 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 may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended October 31, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
1999 1998 1997
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Smaller Companies Fund 165,837 208,436 372,889
Pacific Fund 135,371 139,234 141,188
For the fiscal year ended October 31, 1999, Templeton Foreign Smaller Companies
Fund paid brokerage commissions of $161,502 from aggregate portfolio
transactions of $49,533,234 to brokers who provided research services. For the
fiscal year ended October 31, 1999, Templeton Pacific Growth Fund paid brokerage
commissions of $134,544 from aggregate portfolio transactions of $53,071,983 to
brokers who provided research services.
As of October 31 1999, the fund, did not own securities of their regular
broker-dealers.
DISTRIBUTIONS AND TAXES
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The fund calculates dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in any distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The fund does not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on their investments. This income, less expenses
incurred in the operation of a fund, constitutes the fund's 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 from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the funds. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution to
you. This treatment could increase or decrease a fund's ordinary income
distributions to you, and may cause some or all of a fund's previously
distributed income to be classified as a return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities. If more than 50% of a fund's total assets at the end of the
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 the fund. If
this election is made, the year-end statement you receive from a fund 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 (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. A fund will provide you with the
information necessary to complete your individual income tax return if it makes
this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, a fund may designate and distribute to
you, 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 your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As regulated investment companies,
the funds generally pay no federal income tax on the income and gains they
distribute to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, 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 such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these distributions in
December (or to pay them in January, in which case you must treat them as
received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) and
exchanges of fund shares are taxable transactions for federal and state income
tax purposes. If you redeem your fund shares, or exchange your fund shares for
shares of a different Franklin Templeton Fund, the IRS will require that you
report any gain or loss on your redemption or exchange. 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 or short-term, generally depending on how long you
hold your shares.
Beginning after the year 2005 (2000 for certain shareholders), gains on the sale
or redemption of fund shares held for more than five years may be subject to a
reduced tax rate.
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 the fund on those shares. 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 buy other shares in the 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 buy.
U.S. GOVERNMENT OBLIGATIONS 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 or reporting requirements that must be met
by a fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS As a corporate shareholder, you
should note that no portion of the Smaller Companies Fund's distributions will
generally be eligible for the intercorporate dividends-received deduction. None
of the dividends paid by the fund for the most recent calendar year qualified
for such deduction, and it is anticipated that none of the current year's
dividends will so qualify.
You should also note that 10.56% of the dividends paid by the Pacific Fund for
the most recent fiscal year qualified for the dividends-received deduction. You
may be allowed 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 the fund as eligible for such treatment. All dividends (including
the deducted portion) must be included in your alternative minimum taxable
income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to a fund (possibly causing the fund to sell securities to raise the cash for
necessary distributions) and/or defer a fund's ability to recognize losses, and,
in limited cases, subject a fund to U.S. federal income tax on income from
certain foreign securities. In turn, these rules may affect the amount, timing
or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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Each fund is a diversified series of Franklin Templeton International Trust, an
open-end management investment company, commonly called a mutual fund. The trust
was organized as a Delaware business trust, and is registered with the SEC.
The Smaller Companies Fund currently offers four classes of shares, Class A,
Class B, Class C and Advisor Class. The Pacific Growth Fund currently offers
three classes of shares, Class A, Class C and Advisor Class. The Smaller
Companies Fund began offering Class B shares on January 1, 1999. Each fund may
offer additional classes of shares in the future. The full title of each class
is:
o Templeton Foreign Smaller Companies Fund - Class A
o Templeton Foreign Smaller Companies Fund - Class B
o Templeton Foreign Smaller Companies Fund - Class C
o Templeton Foreign Smaller Companies Fund - Advisor Class
o Templeton Pacific Growth Fund - Class A
o Templeton Pacific Growth Fund - Class C
o Templeton Pacific Growth Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect a fund as a whole, each class has the same voting and other
rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole. Additional series may be
offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting also may be called by the board in its discretion.
As of February 1, 2000, the principal shareholders of the fund, beneficial or of
record, were:
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
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FOREIGN SMALLER COMPANIES FUND
Stetson & Co., c/o Marshall & Ilsley Trust Co A 6
PO Box 2977, Milwaukee, WI 53202
Raymond James Assoc., Inc. B 12
FAO A M Hillerman Co TTEES
Elite 0099089
1632 Francisca Rd, NW
Albuquerque, NM 87107-7118
FISERV Securities, Inc. B 7
FAO 71877642, Attn. Mutual Funds Dept
One Commerce Square
2005 Market Street Suite 1200
Philadelphia, PA 19103
Franklin Resources, Inc. B 6
Attn: Michael Corcoran
555 Airport Blvd, 4th Fl
Burlingame, CA 94010
American Enterprise Investment Svcs B 6
FBO 140403981
PO Box 9446, Minneapolis, MN 55440
Donaldson Lufkin Jenrette B 6
Securities Corporation Inc.
PO Box 2052, Jersey City, NJ 07303-9998
FTTC Cust for the Rollover IRA of B 6
Mary J. Albin
2377 Malibu Ct, Fairfield, CA 94533
J C Bradford Co. Cust FBO C 7
Jacquelyn B. Balish
300 Commerce St., Nashville, TN 37201-1809
Raymond James Assoc., Inc. C 6
Cust Sara T Jones MD IRA
1821 Long Iron Drive, # 406, Viera, FL 32955
NFSC FEBO, Cynthia D. Troy TTEE C 6
Howard C. Greensap 1998 Tr Agreement
23 Spring Hill Road, Annandale, NJ 08801
Raymond James Assoc., Inc. C 5
FAO Larry A Loftin & Wanda A Loftin T-I-C
Elite 50197725
129 Hawthorne Rd., Mocksville, NC 27208
Charles Schwab & Co., Inc. Advisor 81
101 Montgomery Street,
San Francisco, CA 94104-4122
Franklin Templeton Trust Company 1 Advisor 7
TEE for ValuSelect
Franklin Resources PSP
Attn: Trading
P.O. Box 2438
Rancho Cordova, CA 95741-2438
PACIFIC FUND
Franklin Templeton Fund Allocator Advisor 42
Growth Target Fund
c/o Kimberly Monasterio
1810 Gateway , 3rd Fl.
San Mateo, CA 94404-2470
Franklin Templeton Fund Allocator Advisor 27
Moderate Target Fund
c/o Kimberly Monasterio
1810 Gateway , 3rd Fl.
San Mateo, CA 94404-2470
Franklin Templeton Trust Company 1 Advisor 14
TTEE for ValuSelect
Franklin Resources PSP
Attn: Trading, P.O. Box 2438
Rancho Cordova, CA 95741-2438
Franklin Templeton Fund Allocator Advisor 9
Conservative Target Fund
c/o Kimberly Monasterio
1810 Gateway, 3rd Fl.
San Mateo, CA 94404-2470
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
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.
As of February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
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Each fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a 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. We may deduct any applicable banking charges
imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to
a fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group may
add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION Distributors and/or its affiliates may provide financial
support to 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
and/or total assets with the Franklin Templeton Group of Funds. 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 rules of the National Association of Securities Dealers,
Inc.
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. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the funds might have to sell
portfolio securities they 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
each 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,
interest-bearing 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 generally are not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh 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.
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. 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. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. 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.
REDEMPTIONS IN KIND Each 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 U.S. Securities and Exchange
Commission (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.
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.
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 funds 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a
special service that we make available whenever possible. By offering this
service to you, the funds are not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the funds nor their agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire or ACH is not processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (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, each fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions also may
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. 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. 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. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each 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.
PRICING SHARES
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When you buy and sell shares, you pay the net asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The fund does not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the fund's NAV is not calculated. Thus, the calculation of the fund's NAV
does not take place contemporaneously with the determination of the prices of
many of the portfolio securities used in the calculation and, if events
materially affecting the values of these foreign securities occur, the
securities will be valued at fair value as determined by management and approved
in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
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 a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by a fund are based on the
standardized methods of computing performance mandated by the SEC.
For periods before January 1, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the relevant
time period, excluding the effect of Class A's maximum initial sales charge, and
including the effect of the distribution and service (Rule 12b-1) fees
applicable to the fund's Class A shares. For periods after January 1, 1997,
Advisor Class standardized performance quotations are calculated as described
below.
An explanation of these and other methods used by the funds 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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
The average annual total returns for the indicated periods ended October 31,
1999 were:
SINCE
INCEPTION
ADVISOR CLASS 1 YEAR (%) 5 YEARS (%) (9/20/91) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 19.81 7.67 9.92
Pacific Fund 32.15 -4.83 3.23
The following SEC formula was used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
net asset value, the account was completely redeemed at the end of each period
and the deduction of all applicable charges and fees. Cumulative total return,
however, is based on the actual return for a specified period rather than on the
average return over the periods indicated above. The cumulative total returns
for the indicated periods ended October 31, 1999, were:
SINCE
INCEPTION
ADVISOR CLASS 1 YEAR (%) 5 YEARS (%) (9/20/91) (%)
- -------------------------------------------------------------------
Smaller Companies Fund 19.71 45.72 117.07
Pacific Fund 32.02 -21.87 29.58
VOLATILITY Occasionally statistics may be used to show the funds' volatility or
risk. Measures of volatility or risk are generally used to compare the funds'
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of a fund as
a potential investment for 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.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. 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 funds may
satisfy your investment goal, advertisements and other materials about each fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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(R) Inc., a widely used independent research firm that ranks mutual funds
by overall performance, investment goals 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 manager also may refer to the following
information:
o 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.
o The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley Capital
International or a similar financial organization.
o The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance Corporation,
Morgan Stanley Capital International or a similar financial
organization.
o The geographic and industry distribution of the fund's
portfolio and the fund's top ten holdings.
o 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.
o 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 Capital International EAFE(R) - Index).
o The major industries located in various jurisdictions as published by the
Morgan Stanley Index.
o Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
o Allegorical stories illustrating the importance of persistent
long-term investing.
o The fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper(R) Inc. or Morningstar,
Inc.
o 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.
o Comparison of the characteristics of various emerging markets, including
population, financial and economic conditions.
o Quotations from the Templeton organization's founder, Sir John Templeton,*
advocating the virtues of diversification and long-term investing.
*Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the board on
April 16, 1995. He is no longer involved with the investment
management process.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to fall. 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 a 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------
The funds 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 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.
Each 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 is one of the
oldest mutual fund organizations and now services approximately 3 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 $235 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 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 New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
DESCRIPTION OF BOND RATINGS
- -------------------------------------------------------------------
CORPORATE AND FOREIGN GOVERNMENT BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect
to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to
a high degree. These issues are often in default or have other
marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
AAA: This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may 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 for commercial
paper, all judged to be investment grade, to indicate the relative repayment
capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
FILE NOS. 33-41340 &
811-6336
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference to the previously
filed documents indicated below, except as noted:
(a) Agreement and Declaration of Trust
(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
(b) By-laws
(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
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between Registrant and
Franklin Advisers, Inc. dated September 20, 1991
Filing: Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Franklin Pacific Growth Fund Subadvisory
Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. dated January
1, 1993
Filing: Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(iii) Franklin International Equity Fund Subadvisory
Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. dated January
1, 1993
Filing: Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(e) Underwriting Contracts
(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
Filing: Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1998
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Custody Agreement between Registrant and Chase
Manhattan Bank, NT & SA dated July 28, 1995
Filing: Post-Effective Amendment No. 6 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1995
(ii) Amendment to Custody Agreement between Franklin
Templeton International Trust on behalf of
Templeton Foreign Smaller Companies Fund and
Chase Manhattan Bank, N.A. dated July 24, 1996
Filing: Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 31, 1997
(iii) Master Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 31, 1997
(iv) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 31, 1997
(v) Amendment dated May 7, 1997 to the Master Custody Agreement
dated February 16, 1996 between the Registrant and Bank of New
York Filing: Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A
File No. 33-41340
Filing Date: December 31, 1997
(vi) Amendment dated February 27, 1998 to Exhibit A of the Master
Custody Agreement between the Registrant and Bank of New York
dated February
16, 1996
Filing: Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1998
(vii) Foreign Custody Manager Agreement between the Registrant and
Bank of New York made as of July 30, 1998, effective as of
February 27, 1998 Filing: Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1998
(viii)Amendment dated September 16, 1999, to Exhibit A of the Master
Custody Agreement between Registrant and bank of New York dated
February 16, 1996
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services
dated October 1, 1996 and Amendment thereto dated
April 30, 1998 between Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 29, 1998
(i) Legal Opinion
(i) Opinion and Consent of Counsel dated December 14,
1998
Filing: Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 30, 1998
(j) Other Opinions
(i) Consent of Independent Auditors
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(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
(m) Rule 12b-1 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
Filing: Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: February 26, 1998
(iii) Distribution Plan pursuant to Rule 12b-1 between
the Registrant, on behalf of Templeton Foreign
Smaller Companies Fund - Class II and
Franklin/Templeton Distributors, Inc. dated April
16, 1998
Filing: Post-Effective Amendment No. 12 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: June 22, 1998
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Templeton Foreign Smaller Companies
Fund - Class B and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
(o) Rule 18f-3 Plan
(i) Multiple Class Plan for Templeton Pacific Growth
Fund dated June 18, 1996
Filing: Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
File No. 33-41340
Filing Date: December 31, 1997
(ii) Multiple Class Plan for Templeton Foreign Smaller
Companies Fund dated April 16, 1998
(p) Power of Attorney
(i) Power of Attorney dated January 20, 2000
(ii) Certificate of Secretary dated January 27, 2000
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
FUND
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
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 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
The officers and trustees of the Registrant's manager also serve as officers
and/or directors or trustees for (1) the advisor's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Templeton
Group of Funds. In addition, Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of the Funds' Investment Manager (SEC File
801-26292), incorporated herein by reference, which sets forth the officers and
directors of the investment manager and information as to any business,
profession, vocation or employment of a substantial nature engaged in by those
officers and trustees during the past two years.
a) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Franklin Resources, Inc., serves as each Fund's Sub-adviser,
furnishing to Franklin Advisers, Inc. in that capacity, portfolio management
services and investment research. For additional information please see Part B
and Schedules A and D of Form ADV of the Fund's Sub-adviser (SEC File
801-15125), incorporated herein by reference, which sets forth the officers and
directors of the Sub-adviser and information as to any business, profession,
vocation or employment of a substantial nature engages in by those officers and
directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as principal
underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc. Franklin Equity Fund Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund Franklin Floating Rate Trust Franklin Gold
Fund Franklin High Income Trust Franklin Investors Securities Trust Franklin
Managed Trust Franklin Money Fund Franklin Mutual Series Fund Inc. Franklin
Municipal Securities Trust Franklin New York Tax-Free Income Fund Franklin New
York Tax-Free Trust Franklin Real Estate Securities Trust Franklin Strategic
Mortgage Portfolio Franklin Strategic Series Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
(formerly Franklin Valuemark Funds)
Institutional Fiduciary Trust
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 28. 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 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
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 25TH
day of February, 2000.
FRANKLIN TEMPLETON INTERNATIONAL TRUST
(Registrant)
By: RUPERT H. JOHNSON, JR.*
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
RUPERT H. JOHNSON, JR.* Principal Executive Officer
Rupert H. Johnson, Jr. and Trustee
Dated: February 25, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 25, 2000
KIMBERLY MONASTERIO * Principal Accounting Officer
Kimberly Monasterio Dated: February 25, 2000
FRANK H. ABBOTT, III* Trustee
- --------------------
Frank H. Abbott, III Dated: February 25, 2000
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 25, 2000
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: February 25, 2000
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 25, 2000
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: February 25, 2000
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 25, 2000
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 25, 2000
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 25, 2000
*By /S/ DAVID P. GOSS
David P. Goss, Attorney-in-Fact
(pursuant to Power of Attorney filed herewith)
FRANKLIN TEMPLETON INTERNATIONAL TRUST
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Certificate of Trust for Franklin *
International Trust dated March 19,
1991
EX-99.(a)(ii) Agreement and Declaration of Trust *
of Franklin International Trust
dated March 19, 1991
EX-99.(a)(iii) Certificate of Amendment to the *
Certificate of Trust of Franklin
International Trust dated August 20,
1991
EX-99.(a)(iv) Certificate of Amendment to the *
Certificate of Trust of Franklin
International Trust dated May 14,
1992
EX-99.(a)(v) Certificate of Amendment of *
Agreement and Declaration of Trust
of Franklin International Trust
dated December 14, 1995
EX-99.(b)(i) By-Laws of Franklin International *
Trust
EX-99.(b)(ii) Amendment to By-Laws of Franklin *
International Trust dated April 19,
1994
EX-99.(d)(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated September 20, 1991
EX-99.(d)(ii) Franklin Pacific Growth Fund *
Subadvisory Agreement between
Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc.
dated January 1, 1993
EX-99.(d)(iii) Franklin International Equity Fund *
Subadvisory Agreement between
Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc.
dated January 1, 1993
EX-99.(e)(i) Amended and Restated Distribution *
Agreement between Registrant and
Franklin/Templeton Distributors,
Inc. dated April 23, 1995
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distrubutors,
Inc. and Securities Dealers
EX-99.(g)(i) Custody Agreement between Franklin *
International Trust and Chase
Manhattan Bank, NT & SA dated July
28, 1995
EX-99.(g)(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.(g)(iii) Master Custody Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(iv) Terminal Link Agreement between *
Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(v) Amendment dated May 7, 1997 to the *
Master Custody Agreement
dated February 16, 1996 between
Registrant and Bank of New York
EX-99.(g)(vi) Amendment dated February 27, 1998 to *
Exhibit A of the Master Custody
Agreement between the Registrant
and Bank of New York dated
February 16, 1996
EX-99.(g)(vii) Foreign Custody Manager Agreement *
between the Registrant and Bank
of New York made as of July 30, 1998,
effective as of February 27, 1998
EX-99.(g)(viii) Amendment dated September 16, 1999, Attached
to Exhibit A of the Master Custody
Agreement between Registrant and bank
of New York dated February 16, 1996
EX-99.(h)(i) Subcontract for Fund Administrative *
Services dated October 1, 1996 and
Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc.
and Franklin Templeton Services, Inc.
EX-99.(i)(i) Opinion and Consent of Counsel dated *
December 14, 1998
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(L)(i) Letter of Understanding dated *
September 10, 1991
EX-99.(l)(i) Amended and Restated Distribution *
Plan Pursuant to Rule 12b-1 between
the Registrant and Franklin/Templeton
Distributors, Inc. dated July 1, 1993
EX-99.(m)(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.(m)(iii) Distribution Plan pursuant to Rule *
12b-1 between the Registrant, on behalf
of Templeton Foreign Smaller Companies
Fund - Class II and Franklin/Templeton
Distributors, Inc. dated April 16, 1998
EX-99.(m)(iv) Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant, on
behalf of Templeton Foreign Smaller
Companies Fund - Class B and
Franklin/Templeton Distributors,
Inc. dated October 16, 1998
EX-99.(o)(i) Multiple Class Plan for Templeton *
Pacific Growth Fund dated June 18,
1996
EX-99.(O)(ii) Multiple Class Plan for Templeton Attached
Foreign Smaller Companies Fund
EX-99.(P)(i) Power of Attorney dated January 20, Attached
2000
EX-99.(P)(ii) Certificate of Secretary dated Attached
January 27, 2000
*Incorporated by Reference
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Adjustable Rate Securities Delaware Business U.S. Government Adjustable Rate Mortgage
Portfolios Trust Portfolio
Franklin Asset Allocation Fund Delaware Business
Trust
Franklin California Tax-Free Maryland Corporation
Income
Fund, Inc.
Franklin California Tax-Free Massachusetts Franklin California Insured Tax-Free
Trust Business Trust Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term
Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California
Corporation
Franklin Federal Money Fund California
Corporation
Franklin Federal Tax- Free California
Income Fund Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
Franklin Gold Fund California
Corporation
Franklin High Income Trust Delaware Business AGE High Income Fund
Trust
Franklin Investors Securities Massachusetts Franklin Global Government Income Fund
Trust Business Trust Franklin Short-Intermediate U.S. Govt
Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government
Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Franklin Rising Dividends Fund
Trust
Franklin Money Fund California
Corporation
Franklin Municipal Securities Delaware Business Franklin California High Yield Municipal
Trust Trust Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Maryland Corporation Mutual Shares Fund
Inc. Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin New York Tax-Free Delaware Business
Income Fund Trust
Franklin New York Tax-Free Massachusetts Franklin New York Tax-Exempt Money Fund
Trust Business Trust Franklin New York Intermediate-Term
Tax-Free
Income Fund
Franklin New York Insured Tax-Free
Income Fund
Franklin Real Estate Delaware Business Franklin Real Estate Securities Fund
Securities Trust Trust
Franklin Strategic Mortgage Delaware Business
Portfolio Trust
Franklin Strategic Series Delaware Business Franklin California Growth Fund
Trust Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Tax-Exempt Money Fund California
Corporation
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
Franklin Tax-Free Trust Massachusetts Franklin Massachusetts Insured Tax-Free
Business Trust Income Fund
Franklin Michigan Insured
Tax-Free Income Fund
Franklin Minnesota Insured
Tax-Free Income Fund
Franklin Insured Tax-Free
Income Fund Franklin Ohio
Insured Tax-Free Income
Fund Franklin Puerto Rico
Tax-Free Income Fund
Franklin Arizona Tax-Free
Income Fund Franklin
Colorado Tax-Free Income
Fund Franklin Georgia
Tax-Free Income Fund
Franklin Pennsylvania
Tax-Free Income Fund
Franklin High Yield
Tax-Free Income Fund
Franklin Missouri Tax-Free
Income Fund Franklin Oregon
Tax-Free Income Fund
Franklin Texas Tax-Free
Income Fund Franklin
Virginia Tax-Free Income
Fund Franklin Alabama
Tax-Free Income Fund
Franklin Florida Tax-Free
Income Fund Franklin
Connecticut Tax-Free Income
Fund Franklin Louisiana
Tax-Free Income Fund
Franklin Maryland Tax-Free
Income Fund Franklin North
Carolina Tax-Free Income
Fund Franklin New Jersey
Tax-Free Income Fund
Franklin Kentucky Tax-Free
Income Fund Franklin
Federal Intermediate-Term
Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income
Fund
Franklin Florida Insured Tax-Free Income
fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Fund Delaware Business Franklin Templeton Conservative Target
Allocator Series Trust Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Franklin Templeton Global Currency Fund
Trust Franklin Templeton Hard Currency Fund
Franklin Templeton Delaware Business Templeton Pacific Growth Fund
International Trust Trust Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Delaware Business Franklin Templeton Money Fund
Trust Trust
Franklin Value Investors Trust Massachusetts Franklin Balance Sheet Investment Fund
Business Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Massachusetts Franklin Money Market Fund
Insurance Products Trust Business Trust Franklin Growth and Income Fund
Franklin Natural Resources
Securities Fund Franklin
Real Estate Fund Franklin
Global Communications
Securities Fund Franklin
High Income Fund Templeton
Global Income Securities
Fund Franklin Income
Securities Fund Franklin
U.S. Government Fund Zero
Coupon Fund - 2000 Zero
Coupon Fund - 2005 Zero
Coupon Fund - 2010 Franklin
Rising Dividends Securities
Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
Franklin Templeton Variable Massachusetts Templeton Pacific Growth Fund
Insurance Products Trust Business Trust Templeton International Equity Fund
(cont.) Templeton Developing Markets Equity Fund
Templeton Global Growth
Fund Templeton Global Asset
Allocation Fund Franklin
Small Cap Fund Franklin
Large Cap Growth Securities
Fund Templeton
International Smaller
Companies Fund Mutual
Discovery Securities Fund
Mutual Shares Securities
Fund Franklin Global Health
Care Securities Fund
Franklin Value Securities
Fund Franklin Aggressive
Growth Securities Fund
- -----------------------------------------------------------------------------------------------
Institutional Fiduciary Trust Massachusetts Money Market Portfolio
Business Trust Franklin U.S. Government Securities
Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business The Money Market Portfolio
Trust The U.S. Government Securities Money
Market Portfolio
Templeton Variable Products Franklin Growth Investments Fund
Series Fund Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -----------------------------------------------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -----------------------------------------------------------------------------------------------
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts
Business Trust
Franklin Universal Trust Massachusetts
Business Trust
Franklin Floating Rate Trust Delaware Business
Trust
- -----------------------------------------------------------------------------------------------
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 15 to the registration statement on Form N-1A ("Registration Statement") of
our report dated November 23, 1999 relating to the financial statements and
financial highlights which appear in the October 31, 1999 Annual Report to
Shareholders of Franklin Templeton International Trust, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and "Auditors" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 24, 2000
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON INTERNATIONAL
TRUST
II. Fund: TEMPLETON FOREIGN SMALLER COMPANIES
FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B 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 B 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 B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Trustees of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement
with a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
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 Investment Company'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) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred 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, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(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. None of such
payments are the legal obligation of Distributors or its designee.
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 Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid 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. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each
such Transfer by providing the Fund with the name and address of each such
Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1
Portion directly to each Assignee. In such event, Distributors shall provide the
Fund with a monthly calculation of the amount to which each Assignee is entitled
(the "Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may
direct the Fund to pay all or a portion of the fees to which Distributors is
entitled from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. 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. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. 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 outstanding
voting securities of the Class of the Fund.
9. 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.
10. 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: October 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
MULTIPLE CLASS PLAN
ON BEHALF OF
TEMPLETON FOREIGN SMALLER COMPANIES FUND
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 (the "Fund"). The
Board has determined that the Plan, including the expense allocation, 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 any Plan previously adopted for
the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Advisor Class Shares shall not be subject to any front-end sales
charges.
3. Class A 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 B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall be
assessed a CDSC of 4% on the lesser of the then-current net asset value or the
original net asset value at the time of purchase; (b) Class B Shares redeemed
within the third and fourth years of their purchase shall be assessed a CDSC of
3% on the lesser of the then-current net asset value or the original net asset
value at the time of purchase; (c) Class B Shares redeemed within 5 years of
their purchase shall be assessed a CDSC of 2% on the lesser of the then-current
net asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% 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
described in the Fund's prospectus.
Class C 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 A 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 A 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 A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who maintain shareholder
accounts or 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 C Shares, in a manner similar to
that described above for Class A 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 A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B, Class C,
and Advisor Class Shares shall relate to differences in Rule 12b-1 plan
expenses, as described in the applicable Rule 12b-1 Plans; however, to the
extent that the Rule 12b-1 Plan expenses of one Class are the same as the Rule
12b-1 Plan expenses of another Class, such classes shall be subject to the same
expenses.
6. There shall be no conversion features associated with the Class A,
Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Templeton International Trust's Board of Trustees and as described, in
each fund's prospectus relating to the Class B Shares, as such prospectus may be
amended from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor Class 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.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the Investment Company Act of 1940 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
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, LEIANN NUZUM, Murray L. Simpson, Barbara
J. Green and David P. Goss (with full power to each of them to act alone) his
attorney-in-fact and agent, in all capacities, to execute, deliver and file in
the names of the undersigned, any and all instruments that said attorneys and
agents may deem necessary or advisable to enable the Registrant to comply with
or register any security issued by the Registrant under the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and the
rules, regulations and interpretations thereunder, including but not limited to,
any registration statement, including any and all pre- and post-effective
amendments thereto, any other document to be filed with the U.S. Securities and
Exchange Commission and any and all documents required to be filed with respect
thereto with any other 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.
This Power of Attorney may be executed in one or more counterparts, each
of which shall be deemed to be an original, and all of which shall be deemed to
be a single document.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 20th day of January , 2000.
/S/RUPERT H. JOHNSON, JR. /S/FRANK H. ABBOTT, III
Rupert H. Johnson, Jr., Frank H. Abbott, III,
Principal Executive Officer and Trustee Trustee
/S/HARRIS J. ASHTON /S/HARMON E. BURNS
Harris J. Ashton, Harmon E. Burns,
Trustee Trustee
/S/S. JOSEPH FORTUNATO /S/EDITH E. HOLIDAY
S. Joseph Fortunato, Edith E. Holiday,
Trustee Trustee
/S/CHARLES B. JOHNSON /S/FRANK W.T LAHAYE
Charles B. Johnson, Frank W.T. LaHaye,
Trustee Trustee
/S/GORDON S. MACKLIN /S/MARTIN L. FLANAGAN
Gordon S. Macklin, Martin L. Flanagan,
Trustee Principal Financial
Officer
/S/KIMBERLEY H. MONASTERIO
Kimberley H. Monasterio,
Principal Accounting Officer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of FRANKLIN TEMPLETON
INTERNATIONAL TRUST (the "Trust").
As Assistant 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 94404, on
January 20, 2000.
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,
Mark H. Plafker, Karen L. Skidmore, Leiann Nuzum,
Murray L. Simpson, Barbara J. Green and David P. Goss
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.
/S/DAVID P. GOSS
Dated: JANUARY 27, 2000 David P. Goss
Assistant Secretary
