TEMPLETON FUNDS, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED
JANUARY 1, 1995, IS NOT A PROSPECTUS. IT SHOULD
BE READ IN CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON WORLD FUND DATED JANUARY 1, 1995, AND
THE PROSPECTUS OF TEMPLETON FOREIGN FUND DATED
JANUARY 1, 1995, WHICH MAY BE OBTAINED WITHOUT
CHARGE UPON REQUEST TO THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 237-0738
TABLE OF CONTENTS
General Information and History -The Investment Manager 21
. . . . . . . . . . . . 1 -Business Manager . . 22
Investment Objectives and Policies -Custodian and Transfer Agent
. . . . . . . . . . . . 2 . . . . . . . . . . . . 23
-Investment Policies . 2 -Legal Counsel . . . . 24
-Repurchase Agreements 2 -Independent Accountants 24
-Loans of Portfolio Securities -Reports to Shareholders 24
. . . . . . . . . . . 2 Brokerage Allocation . 24
-Debt Securities . . 3 Purchase, Redemption and
-Stock Index Futures Contracts Pricing of Shares . . 27
. . . . . . . . . . . . 4 -Ownership and Authority
-Stock Index Options . 6 Disputes . . . . . . 28
-Investment Restrictions 7 -Tax Deferred Retirement Plans
-Risk Factors . . . . . . . . . . . . . . . . . . . . 28
. . . . . . . . . . . 9 -Letter of Intent . . 30
-Trading Policies . 12 Tax Status . . . . . . 31
-Personal Securities Transactions Principal Underwriter . 37
. . . . . . . . . . . 13 Description of Shares . 39
Management of the Company 13 Performance Information 40
Principal Shareholders 19 Financial Statements . 43
Investment Management and Other
Services . . . . . 19
-Investment Management
Agreements . . . . 19
-Management Fees . . 21
GENERAL INFORMATION AND HISTORY
After incorporating under the laws of Maryland as Templeton
World Fund, Inc. and registering under the Investment Company Act
of 1940 (the "1940 Act"), the Company commenced business as an
investment company on January 17, 1978. On October 1, 1982 the
Company's name was changed to Templeton Funds, Inc. (the
"Company") and it became a series investment company with two
separate classes of Shares constituting, respectively, Templeton
World Fund ("World Fund") and Templeton Foreign Fund ("Foreign
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Fund") (collectively, the "Funds"). As such, the holder of the
Shares issued for one Fund has an interest only in the portfolio,
assets and liabilities of that Fund.
INVESTMENT OBJECTIVES AND POLICIES
Investment Policies. The investment objective and policies
of each Fund are described in each Fund's Prospectus under the
heading "General Description--Investment Objective and Policies."
Each Fund may invest for defensive purposes in commercial paper
which, at the date of investment, must be rated A-1 by Standard &
Poor's Corporation ("S&P") or Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or, if not rated, be issued by a
company which at the date of investment has an outstanding debt
issue rated AAA or AA by S&P or Aaa or Aa by Moody's.
Repurchase Agreements. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price and
date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Templeton,
Galbraith & Hansberger Ltd. (the "Investment 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 seller, including possible delays or
restrictions upon a Fund's ability to dispose of the underlying
securities. A Fund will enter into repurchase agreements only
with parties who meet creditworthiness standards approved by the
Board of Directors, i.e., banks or broker-dealers which have been
determined by the Investment Manager to present no serious risk
of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
Loans of Portfolio Securities. World Fund may lend to banks
and broker-dealers portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be
secured by collateral (consisting of any combination of cash,
U.S. Government securities or irrevocable letters of credit) in
an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. World Fund
retains all or a portion of the interest received on investment
of the cash collateral or receives a fee from the borrower.
World Fund may terminate the loans at any time and obtain the
return of the securities loaned within five business days. World
Fund will continue to receive any interest or dividends paid on
the loaned securities and will continue to have voting rights
with respect to the securities. However, as with other
extensions of credit, there are risks of delay in recovery or
even loss of rights in collateral should the borrower fail.
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Debt Securities. The Funds may invest in debt securities
which are rated at least Caa by Moody's or CCC by S&P or deemed
to be of comparable quality by the Investment Manager. As an
operating policy, neither Fund will invest more than 5% of its
assets in debt securities rated Baa or lower by Moody's or BBB or
lower by S&P. 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 a Fund's net asset value.
Although they may offer higher yields than do higher rated
securities, low rated and unrated debt securities generally
involve greater volatility of price and risk of principal and
income, including the possibility of default by, or bankruptcy
of, the issuers of the securities. In addition, the markets in
which low rated and unrated debt securities are traded are more
limited than those in which higher rated securities are traded.
The existence of limited markets for particular securities may
diminish a Fund's ability to sell the securities at fair value
either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of
the issuer. Reduced secondary market liquidity for certain low
rated or unrated debt securities may also make it more difficult
for each Fund to obtain accurate market quotations for the
purposes of valuing the Fund's portfolio. Market quotations are
generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and
liquidity of low rated debt securities, especially in a thinly
traded market. Analysis of the creditworthiness of issuers of
low rated debt securities may be more complex than for issuers of
higher rated securities, and the ability of a Fund to achieve its
investment objective may, to the extent of investment in low
rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if a Fund were
investing in higher rated securities.
Low rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments.
A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated
debt securities prices because the advent of a recession could
lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the
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issuer of low rated debt securities defaults, a Fund may incur
additional expenses to seek recovery.
A Fund may accrue and report interest on high yield bonds
structured as zero coupon bonds or pay-in-kind securities as
income even though it receives no cash interest until the
security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies,
a Fund must distribute substantially all of its net income to
Shareholders (see "Tax Status"). Thus, a Fund may have to
dispose of its portfolio securities under disadvantageous
circumstances to generate cash in order to satisfy the
distribution requirement.
Recent legislation, which requires federally-insured savings
and loan associations to divest their investments in low rated
debt securities, may have a material adverse effect on the Funds'
net asset values and investment practices.
Stock Index Futures Contracts. World Fund's investment
policies permit it to buy and sell stock index futures contracts
with respect to any stock index traded on a recognized stock
exchange or board of trade, to an aggregate amount not exceeding
20% of World Fund's total assets as of the time when such
contracts are entered into. Successful use of stock index
futures is subject to the Investment Manager's ability to predict
correctly movements in the direction of the stock markets. No
assurance can be given that the Investment Manager's judgment in
this respect will be correct.
A stock index futures contract is a contract to buy or sell
units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is
the current value of the stock index. For example, the Standard
& Poor's 500 Stock Index (the "S&P 500 Index") is composed of 500
selected common stocks, most of which are listed on the New York
Stock Exchange. The S&P 500 Index assigns relative weightings to
the value of one share of each of these 500 common stocks
included in the Index, and the Index fluctuates with changes in
the market values of the shares of those common stocks. In the
case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock
index futures contract specifies that no delivery of the actual
stocks making up the Index will take place. Instead, settlement
in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and
the actual level of the stock index at the expiration of the
contract. For example, if World Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified
future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, World Fund will gain $2,000 (500
units x gain of $4). If World Fund enters into a futures
contract to sell 500 units of the stock index at a specified
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future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, World Fund will lose $2,000 (500
units x loss of $4).
During or in anticipation of a period of market
appreciation, World Fund may enter into a "long hedge" of common
stock which it proposes to add to its portfolio by purchasing
stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the
securities which World Fund proposes to buy change in value in
correlation with the stock index contracted for, the purchase of
futures contracts on that index would result in gains to World
Fund which could be offset against rising prices of such common
stock.
During or in anticipation of a period of market decline,
World Fund may "hedge" common stock in its portfolio by selling
stock index futures for the purpose of limiting the exposure of
its portfolio to such decline. To the extent that World Fund's
portfolio of securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index
could substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to the
liquidation of securities positions in the portfolio with
resultant transaction costs.
Parties to an index futures contract must make initial
margin deposits to secure performance of the contract, which
currently range from 1 % to 5% of the contract amount. Initial
margin requirements are determined by the respective exchanges on
which the futures contracts are traded. There also are
requirements to make variation margin deposits as the value of
the futures contract fluctuates.
At the time World Fund purchases a stock index futures
contract, an amount of cash, U.S. Government securities, or other
highly liquid debt securities equal to the market value of the
contract will be deposited in a segregated account with World
Fund's Custodian. When selling a stock index futures contract,
World Fund will maintain with its Custodian liquid assets that,
when added to the amounts deposited with a futures commission
merchant or broker as margin, are equal to the market value of
the instruments underlying the contract. Alternatively, World
Fund may "cover" its position by owning a portfolio with a
volatility substantially similar to that of the index on which
the futures contract is based, or holding a call option
permitting World Fund to purchase the same futures contract at a
price no higher than the price of the contract written by World
Fund (or at a higher price if the difference is maintained in
liquid assets with World Fund's Custodian).
Stock Index Options. World Fund may purchase and sell put
and call options on securities indices in standardized contracts
traded on national securities exchanges, boards of trade, or
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similar entities, or quoted on NASDAQ. An option on a securities
index is a contract that gives the purchaser of the option, in
return for the premium paid, the right to receive from the writer
of the option, cash equal to the difference between the closing
price of the index and the exercise price of the option,
expressed in dollars, times a specified multiplier for the index
option. (An index is designed to reflect specified facets of a
particular financial or securities market, a specific group of
financial instruments or securities, or certain economic
indicators.)
World Fund may write call options and put options only if
they are "covered." A call option on an index is covered if
World Fund maintains with its custodian cash or cash equivalents
equal to the contract value. A call option is also covered if
World Fund holds a call on the same index as the call written
where the exercise price of the call held is (i) equal to or less
than the exercise price of the call written, or (ii) greater than
the exercise price of the call written, provided the difference
is maintained by World Fund in cash or cash equivalents in a
segregated account with its Custodian. A put option is also
covered if World Fund holds a put on the same index as the put
written where the exercise price of the put held is (i) equal to
or greater than the exercise price of the put written, or (ii)
less than the exercise price of the put written, provided the
difference is maintained by World Fund in cash or cash
equivalents in a segregated account with its Custodian.
If an option written by World Fund expires, World Fund will
realize a capital gain equal to the premium received at the time
the option was written. If an option purchased by World Fund
expires unexercised, World Fund will realize a capital loss equal
to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, index, exercise price, and
expiration). There can be no assurance, however, that a closing
purchase or sale transaction can be effected when World Fund
desires.
Investment Restrictions. Each of the Funds has imposed upon
itself certain investment restrictions which, together with its
investment objective and policies, are fundamental policies
except as otherwise indicated. No changes in either Fund's
investment objective and policies or investment restrictions
(except those which are not fundamental policies) can be made
without the approval of that Fund's Shareholders. For this
purpose, the provisions of the 1940 Act require, with respect to
either Fund, the affirmative vote of the lesser of either (1) 67%
or more of the Shares of a Fund present at a Shareholders'
meeting at which more than 50% of the outstanding Shares of such
Fund are present or represented by proxy or (2) more than 50% of
the outstanding Shares of a Fund.
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In accordance with these restrictions, neither of the Funds
will:
1. Invest in real estate or mortgages on real estate
(although each Fund may invest in marketable securities
secured by real estate or interests therein or issued
by companies or investment trusts which invest in real
estate or interests therein); invest in other open-end
investment companies; invest in interests (other than
debentures or equity stock interests) in oil, gas or
other mineral exploration or development programs; or
purchase or sell commodity contracts except that World
Fund may purchase or sell stock index futures
contracts.
2. Purchase or retain securities of any company in which
Directors or officers of the Company or of its
Investment Manager, individually owning more than of
1% of the securities of such company, in the aggregate
own more than 5% of the securities of such company.
3. Purchase more than 10% of any class of securities of
any one company, including more than 10% of its
outstanding voting securities, or invest in any company
for the purpose of exercising control or management.
4. Act as an underwriter; issue senior securities;
purchase on margin or sell short; write, buy or sell
puts, calls, straddles or spreads (but World Fund may
make margin payments in connection with, and purchase
and sell, stock index futures contracts and options on
securities indices).
5. Loan money apart from the purchase of a portion of an
issue of publicly distributed bonds, debentures, notes
and other evidences of indebtedness, although the Funds
may buy from a bank or broker-dealer United States and
Canadian government obligations with a simultaneous
agreement by the seller to repurchase them within no
more than seven days at the original purchase price
plus accrued interest.
6. Borrow money for any purpose other than redeeming its
Shares or purchasing its Shares for cancellation, and
then only as a temporary measure up to an amount not
exceeding 5% of the value of its total assets; or
pledge, mortgage or hypothecate its assets for any
purpose other than to secure such borrowings, and then
only up to such extent not exceeding 10% of the value
of its total assets as the Company's Board of Directors
may by resolution approve. As an operating policy
approved by the Board of Directors of the Company,
neither Fund will pledge, mortgage or hypothecate its
<PAGE>
assets to the extent that at any time the percentage of
pledged assets plus the sales commission will exceed
10% of the Offering Price of the Shares of a Fund.
(For purposes of this restriction, collateral
arrangements by World Fund with respect to margin for a
stock index futures contract are not deemed to be a
pledge of assets.)
7. Invest more than 5% of the value of a Fund's total
assets in securities of issuers which have been in
continuous operation less than three years.
8. Invest more than 5% of a Fund's total assets in
warrants, whether or not listed on the New York or
American Stock Exchange, including no more than 2% of
its total assets which may be invested in warrants that
are not listed on those exchanges. Warrants acquired
by a Fund in units or attached to securities are not
included in this restriction. This restriction does
not apply to options on securities indices.
9. Invest more than 15% of a Fund's total assets in
securities of foreign issuers which are not listed on a
recognized United States or foreign securities
exchange, including no more than 10% of its total
assets (including warrants) which may be invested in
securities with a limited trading market. A Fund's
position in the latter type of securities may be of
such size as to affect adversely their liquidity and
marketability and a Fund may not be able to dispose of
its holdings in these securities at the current market
price.
10. Invest more than 25% of a Fund's total assets in a
single industry.
11. Invest in "letter stocks" or securities on which there
are any sales restrictions under a purchase agreement.
12. Participate on a joint or a joint and several basis in
any trading account in securities. (See "Investment
Objectives and Policies--Trading Policies" as to
transactions in the same securities for World Fund,
Foreign Fund, and/or other mutual funds with the same
or affiliated advisers.)
Whenever any investment policy or investment restriction
states a maximum percentage of either Fund's assets which may be
invested in any security or other property, it is intended that
such maximum percentage limitation be determined immediately
after and as a result of that Fund's acquisition of such security
or property. The value of a Fund's assets is calculated as
described in its Prospectus under the heading "How to Buy Shares
of the Fund." Nothing in the investment policy or investment
<PAGE>
restrictions (except restrictions 9 and 10) shall be deemed to
prohibit either Fund from purchasing securities pursuant to
subscription rights distributed to either Fund by any issuer of
securities held at the time in its portfolio (as long as such
purchase is not contrary to either Fund's status as a diversified
investment company under the 1940 Act).
Risk Factors. Each Fund has an unlimited right to purchase
securities in any foreign country, developed or underdeveloped,
if they are listed on a stock exchange, as well as a limited
right to purchase such securities if they are unlisted.
Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign
nations, which are in addition to the usual risks inherent in
domestic investments.
There may be less publicly available information about
foreign companies comparable to the reports and ratings published
about companies in the United States. Foreign companies are not
generally subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements may
not be comparable to those applicable to United States companies.
Foreign markets have substantially less volume than the New York
Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable United
States companies. Although neither Fund may invest more than 15%
of its total assets in unlisted foreign securities, including not
more than 10% of its total assets in securities with a limited
trading market, in the opinion of management such securities with
a limited trading market do not present a significant liquidity
problem. Commission rates in foreign countries, which are
generally fixed rather than subject to negotiation as in the
United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of
stock exchanges, brokers and listed companies than in the United
States.
Investments in companies domiciled in developing countries
may be subject to potentially higher risks than investments in
developed countries. These risks include (i) less social,
political and economic stability; (ii) the small current size of
the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) certain national
policies which may restrict a Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation;
(v) the absence of developed legal structures governing private
or foreign investment or allowing for judicial redress for injury
to private property; (vi) the absence, until recently in certain
Eastern European countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed
<PAGE>
or reversed by unanticipated political or social events in such
countries.
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 such expropriation will not occur in the future.
In the event of such expropriation, a 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 United States
dollars, the conversion rates may be artificial to the actual
market values and may be adverse to a Fund's Shareholders.
Each Fund endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread in currency
exchange (to cover service charges) will be incurred,
particularly when a Fund changes investments from one country to
another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent a
Fund from transferring cash out of the country or withhold
portions of interest and dividends at the source. There is the
possibility of expropriation, nationalization or confiscatory
taxation, withholding and other foreign taxes on income or other
amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country),
default in foreign government securities, political or social
instability, or diplomatic developments which could affect
investments in securities of issuers in foreign nations.
Either Fund may be affected either unfavorably or favorably
by fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations
and by indigenous economic and political developments. Through
the flexible policy of the Funds, the Investment Manager
endeavors to avoid unfavorable consequences and to take advantage
of favorable developments in particular nations where from time
to time it places the investments of either Fund.
The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.
The Directors consider at least annually the likelihood of
the imposition by any foreign government of exchange control
restrictions which would affect the liquidity of either Fund's
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assets maintained with custodians in foreign countries, as well
as the degree of risk from political acts of foreign governments
to which such assets may be exposed. They also consider the
degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories (see
"Investment Management and Other Services--Custodian and Transfer
Agent"). However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager,
any losses resulting from the holding of either Fund's portfolio
securities in foreign countries and/or with securities
depositories will be at the risk of the Shareholders. No
assurance can be given that the Directors' appraisal of the risks
will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
There are additional risks involved in stock index futures
transactions. These risks relate to World Fund's ability to
reduce or eliminate its futures positions, which will depend upon
the liquidity of the secondary markets for such futures. World
Fund intends to purchase or sell futures only on exchanges or
boards of trade where there appears to be an active secondary
market, but there is no assurance that a liquid secondary market
will exist for any particular contract at any particular time.
Use of stock index futures for hedging may involve risks because
of imperfect correlations between movements in the prices of the
stock index futures on the one hand and movements in the prices
of the securities being hedged or of the underlying stock index
on the other. Successful use of stock index futures by World
Fund for hedging purposes also depends upon the Investment
Manager's ability to predict correctly movements in the direction
of the market, as to which no assurance can be given.
There are several risks associated with transactions in
options on securities indices. For example, there are
significant differences between the securities and options
markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use
options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when World Fund seeks
to close out an option position. If World Fund were unable to
close out an option that it had purchased on a securities index,
it would have to exercise the option in order to realize any
profit or the option may expire worthless. If trading were
suspended in an option purchased by World Fund, it would not be
able to close out the option. If restrictions on exercise were
imposed, World Fund might be unable to exercise an option it has
purchased. Except to the extent that a call option on an index
written by World Fund is covered by an option on the same index
purchased by World Fund, movements in the index may result in a
loss to World Fund; however, such losses may be mitigated by
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changes in the value of World Fund's securities during the period
the option was outstanding.
Trading Policies. The Investment Manager and its affiliated
companies serve as investment adviser to other investment
companies and private clients. Accordingly, the respective
portfolios of these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions are placed for execution in a
manner designed to be equitable to each party. The larger size
of the transaction may affect the price of the security and/or
the quantity which may be bought or sold for each party. If the
transaction is large enough, brokerage commissions in certain
countries may be negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other
remuneration in connection therewith, may be effected between any
of these funds, or between funds and private clients, under
procedures adopted pursuant to Rule 17a-7 under the 1940 Act.
Personal Securities Transactions. Access persons of the
Franklin Templeton Group, as defined in SEC Rule 17(j) under the
1940 Act, who are employees of Franklin Resources, Inc. or their
subsidiaries, are permitted to engage in personal securities
transactions subject to the following general restrictions and
procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be
sent to the Compliance Officer and within 10 days after the end
of each calendar quarter, a report of all securities transactions
must be provided to the Compliance Officer; (3) In addition to
items (1) and (2), access persons involved in preparing and
making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance
Officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction
or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other
client.
MANAGEMENT OF THE COMPANY
The name, address, principal occupation during the past five
years and other information with respect to each of the Directors
and Executive Officers of the Company are as follows:
Name, Address and Principal Occupation
Offices with Company During Past Five Years
JOHN M. TEMPLETON* Chairman of the Board of other
Lyford Cay
Nassau, Bahamas
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Name, Address and Principal Occupation
Offices with Company During Past Five Years
Chairman of the Board Templeton Funds; president of First
Trust Bank, Ltd., Nassau, Bahamas;
and previously chairman of the
board and employee of Templeton,
Galbraith & Hansberger Ltd. (prior
to October 30, 1992).
F. BRUCE CLARKE Retired; former credit advisor,
19 Vista View Blvd. National Bank of Canada; a director
Thornhill, Ontario or trustee of other Templeton
Director Funds.
JOHN G. BENNETT, JR. A director or trustee of other
3 Radnor Corporate Center Templeton Funds; founder, chairman
Suite 150 of the board, and president of the
100 Matsonford Road Foundation for New Era
Radnor, Pennsylvania Philanthropy; president and
Director chairman of the boards of the
Evelyn M. Bennett Memorial
Foundation and NEP International
Trust; chairman of the board and
chief executive officer of The
Bennett Group International, LTD;
chairman of the boards of Human
Service Systems, Inc. and Multi-
Media Communicators, Inc.; a
director or trustee of many
national and international
organizations, universities, and
grant-making foundations serving in
various executive board capacities;
member of the Public Policy
Committee of the Advertising
Council.
FRED R. MILLSAPS A director or trustee of other
2665 NE 37th Drive Templeton Funds; manager of
Fort Lauderdale, Florida personal investments (1978-
Director present); chairman and chief
executive officer of Landmark
Banking Corporation (1969-1978);
financial vice president of Florida
Power and Light (1965-1969); vice
president of Federal Reserve Bank
of Atlanta (1958-1965); director of
various business and nonprofit
organizations.
BETTY P. KRAHMER A director or trustee of other
2201 Kentmere Parkway Templeton Funds; director or
Wilmington, Delaware trustee of various civic
<PAGE>
Name, Address and Principal Occupation
Offices with Company During Past Five Years
Director associations; former economic
analyst, U.S. Government.
HASSO-G VON DIERGARDT-NAGLO Farmer; president of Clairhaven
R.R. 3 Investments, Ltd. and other private
Stouffville, Ontario investment companies; a director or
Director trustee of other Templeton Funds.
ANDREW H. HINES, JR. Consultant, Triangle Consulting
150 2nd Avenue N. Group; chairman of the board and
St. Petersburg, Florida chief executive officer of Florida
Director Progress Corporation (1982-February
1990) and director of various of
its subsidiaries; chairman and
director of Precise Power
Corporation; Executive-in-Residence
of Eckerd College (1991-present);
director of Checkers Drive-In
Restaurants, Inc.; a director or
trustee of other Templeton Funds.
RUPERT H. JOHNSON, JR.* Executive vice president and
777 Mariners Island Blvd. director of Franklin Resources,
San Mateo, California Inc.; president and director,
Director Franklin Advisers, Inc.; executive
vice president and director,
Franklin Templeton Distributors,
Inc.; director, Franklin
Administrative Services, Inc.;
director or trustee of other
Templeton Funds; and officer and/or
director, trustee or managing
general partner, as the case may
be, of most other subsidiaries of
Franklin, and of most of the
investment companies in the
Franklin Group of Funds.
HARRIS J. ASHTON Chairman of the board, president
Metro Center, 1 Station and chief executive officer of
Place General Host Corporation (nursery
Stamford, Connecticut and craft centers); director of RBC
Director Holdings Inc. (a bank holding
company) and Bar-S Foods; director
or trustee of other Templeton
Funds; and director, trustee or
managing general partner, as the
case may be, for most of the
investment companies in the
Franklin Group of Funds.
<PAGE>
Name, Address and Principal Occupation
Offices with Company During Past Five Years
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; director of
Florham Park, New Jersey General Host Corporation; director
Director or trustee of other Templeton
Funds; and director, trustee or
managing general partner, as the
case may be, for most of the
investment companies in the
Franklin Group of Funds.
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of
Bethesda, Maryland Infovest Corporation, Fund America
Director Enterprise Holdings, Inc., Martin
Marietta Corporation, MCI
Communications Corporation and
Medimmune, Inc.; director or
trustee of other Templeton Funds;
director, trustee, or managing
general partner, as the case may
be, of most of the investment
companies in the Franklin Group of
Funds; formerly: chairman,
Hambrecht and Quist Group;
director, H&Q Healthcare Investors;
and president, National Association
of Securities Dealers, Inc.
NICHOLAS F. BRADY* A director or trustee of other
The Bullitt House Templeton Funds; chairman of
102 East Dover Street Templeton Emerging Markets
Easton, Maryland Investment Trust PLC; chairman and
Director president of Darby Advisors, Inc.
(an investment firm) since January,
1993; director of the H. J. Heinz
Company, Capital Cities/ABC, Inc.
and the Christiana Companies;
Secretary of the United States
Department of the Treasury from
1988 to January, 1993; chairman of
the board of Dillon, Read & Co.
Inc. (investment banking) prior
thereto.
<PAGE>
Name, Address and Principal Occupation
Offices with Company During Past Five Years
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith & Hansberger
Nassau, Bahamas Ltd.; director of global equity
President research for Templeton Worldwide,
Inc.; president or vice president
of the Templeton Funds; investment
administrator with Roy West Trust
Corporation (Bahamas) Limited
(1984-1985).
CHARLES B. JOHNSON President, chief executive officer,
777 Mariners Island Blvd. and director of Franklin Resources,
San Mateo, California Inc.; chairman of the board,
Vice President Franklin Templeton Distributors,
Inc.; chairman of the board and
director, Franklin Advisers, Inc.;
director, Franklin Administrative
Services, Inc. and General Host
Corporation; director of Templeton
Global Investors, Inc.; director or
trustee of other Templeton Funds;
and officer and director, trustee
or managing general partner, as the
case may be, of most other
subsidiaries of Franklin and of
most of the investment companies in
the Franklin Group of Funds.
MARTIN L. FLANAGAN Senior vice president, treasurer
777 Mariners Island Blvd. and chief financial officer of
San Mateo, California Franklin Resources, Inc.; director,
Vice President executive vice president, and chief
operating officer of Templeton
Investment Counsel, Inc. and
Templeton Global Investors, Inc.;
president or vice president of the
Templeton Funds; accountant, Arthur
Andersen & Company (1982-1983);
member of the International Society
of Financial Analysts and the
American Institute of Certified
Public Accountants.
<PAGE>
Name, Address and Principal Occupation
Offices with Company During Past Five Years
THOMAS M. MISTELE Senior vice president of Templeton
700 Central Avenue Global Investors, Inc.; vice
St. Petersburg, Florida president of Franklin Templeton
Secretary Distributors, Inc.; secretary of
the Templeton Funds; attorney,
Dechert Price & Rhoads (1985-1988)
and Freehill, Hollingdale & Page
(1988); judicial clerk, U.S.
District Court (Eastern District of
Virginia) (1984-1985).
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and treasurer
Fort Lauderdale, Florida of Templeton Global Investors, Inc.
Vice President and Templeton Worldwide, Inc.;
assistant vice president of
Franklin Templeton Distributors,
Inc.; formerly, vice president and
controller of the Keystone Group,
Inc.
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton Funds;
Fort Lauderdale, Florida senior vice president of Templeton
Treasurer Worldwide, Inc., Templeton Global
Investors, Inc., and Templeton
Funds Trust Company; formerly,
senior tax manager of Ernst & Young
(certified public accountants)
(1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant vice
St. Petersburg, Florida president of Franklin Templeton
Assistant Treasurer Investor Services, Inc.; former
partner of Grant Thornton,
independent public accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
____________________
* Messrs. Templeton, Johnson and Brady are "interested
persons" of the Company as that term is defined in the 1940
Act. Mr. Brady and Franklin Resources, Inc. are limited
partners of Darby Overseas Partners, L.P. ("Darby
Overseas"). Mr. Brady established Darby Overseas in
February, 1994, and is Chairman and a shareholder of the
corporate general partner of Darby Overseas. In addition,
Darby Overseas and Templeton, Galbraith & Hansberger, Ltd.
are limited partners of Darby Emerging Markets Fund, L.P.
Messrs. Clarke, von Diergardt, Millsaps, Hines, Bennett,
<PAGE>
Ashton, Macklin and Fortunato and Mrs. Krahmer are not
"interested persons" of the Company.
There are no family relationships between any of the
Directors.
PRINCIPAL SHAREHOLDERS
As of December 2, 1994, there were 350,553,802 World Fund
Shares outstanding, of which 2,267,702 Shares (or 0.65% of the
total outstanding World Fund Shares) were owned beneficially by
all the Directors and officers of the Company as a group. As of
December 2, 1994, no person owned of record or, to the knowledge
of management, owned beneficially, 5% or more of the outstanding
World Fund Shares. As of December 2, 1994, there were
580,436,486 Foreign Fund Shares outstanding, of which 80,156
Shares (or .015% of the total outstanding Foreign Fund Shares)
were owned beneficially by all the Directors and officers of the
Company as a group. As of December 2, 1994, to the knowledge of
management, no person owned beneficially 5% or more of the
outstanding Foreign Fund Shares, except Merrill Lynch, Pierce,
Fenner & Smith, Inc., 4800 Deer Lake Drive East, P.O. Box 45286,
Jacksonville, Florida 32232-5286 owned 37,432,283 Shares
(representing 6.4% of the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreements. The Investment Manager of
each Fund is Templeton, Galbraith & Hansberger Ltd., a Bahamian
corporation with offices in Nassau, Bahamas. On October 30,
1992, the Investment Manager assumed the investment management
duties of Templeton, Galbraith & Hansberger Ltd. ("Old TGH"), a
Cayman Islands corporation, with respect to the Funds in
connection with the merger of the business of Old TGH with that
of Franklin Resources, Inc. ("Franklin"). The Investment
Management Agreements between the Investment Manager and the
Company on behalf of World Fund and Foreign Fund, dated October
30, 1992, were approved by the Shareholders of each Fund on
October 30, 1992, and were last approved by the Board of
Directors, including approval by a majority of the Directors who
were not parties to the Investment Management Agreements or
interested persons of any such party, at a meeting on December 6,
1994 and will continue through December 31, 1995.
The Investment Management Agreements will continue from year
to year thereafter, subject to approval annually by the Board of
Directors or by vote of a majority of the outstanding Shares of
each Fund (as defined in the 1940 Act) and also, in either event,
with the approval of a majority of those Directors who are not
parties to the Agreements or interested persons of any such party
in person at a meeting called for the purpose of voting on such
approval.
<PAGE>
Each Investment Management Agreement requires the Investment
Manager to manage the investment and reinvestment of each Fund's
assets. The Investment Manager is not required to furnish any
personnel, overhead items or facilities for the Funds, including
daily pricing or trading desk facilities, although such expenses
are paid by investment advisers of some other investment
companies. These expenses have been and may continue to be borne
by the Funds.
Each Investment Management Agreement provides that the
Investment Manager will select brokers and dealers for execution
of each Fund's portfolio transactions consistent with the
Company's brokerage policies (see "Brokerage Allocation").
Although the services provided by broker-dealers in accordance
with the brokerage policies incidentally may help reduce the
expenses of or otherwise benefit the Investment Manager and other
investment advisory clients of the Investment Manager and of its
affiliates, as well as the Funds, the value of such services is
indeterminable and the Investment Manager's fee is not reduced by
any offset arrangement by reason thereof.
The Investment Manager renders its services to the Funds
from outside the United States. When the Investment Manager
determines to buy or sell the same securities for a Fund that the
Investment Manager or one or more of its affiliates has selected
for one or more of its other clients or for clients of its
affiliates, the orders for all such securities transactions are
placed for execution by methods determined by the Investment
Manager, with approval by the Company's Board of Directors, to be
impartial and fair, in order to seek good results for all parties
(see "Investment Objectives and Policies--Trading Policies").
Records of securities transactions of persons who know when
orders are placed by a Fund are available for inspection at least
four times annually by the Compliance Officer of the Company so
that the non-interested Directors (as defined in the 1940 Act)
can be satisfied that the procedures are generally fair and
equitable for all parties.
Each Investment Management Agreement further provides that
the Investment Manager shall have no liability to the Company, a
Fund or any Shareholder of a Fund for any error of judgment,
mistake of law, or any loss arising out of any investment or
other act or omission in the performance by the Investment
Manager of its duties under the Agreement or for any loss or
damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of
a Fund's assets, or from acts or omissions of custodians or
securities depositories, or from any wars or political acts of
any foreign governments to which such assets might be exposed,
except for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment
Manager's part or reckless disregard of its duties under the
Investment Management Agreement. Each Investment Management
<PAGE>
Agreement will terminate automatically in the event of its
assignment, and may be terminated by the Company on behalf of a
Fund at any time without payment of any penalty on 60 days'
written notice, with the approval of a majority of the Directors
of the Company in office at the time or by vote of a majority of
the outstanding Shares of a Fund (as defined by the 1940 Act).
Management Fees. For its services, each Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.75% of the average daily net assets of the Fund up to the first
$200,000,000, reduced to a fee of 0.675% of such average daily
net assets in excess of $200,000,000 up to $1,300,000,000, and
further reduced to a fee of 0.60% of such average daily net
assets in excess of $1,300,000,000. During the fiscal years
ended August 31, 1994, 1993 and 1992, the Investment Manager
(and, prior to October 30, 1992, Old TGH, the Fund's previous
investment manager) received fees from World Fund of $31,051,062,
$25,931,668, and $23,260,890, respectively, and from Foreign Fund
of $23,889,119, $12,676,159, and $8,710,263, respectively,
pursuant to the Agreement and Agreements in effect prior to
October 30, 1992.
The amount of such fee would be reduced by the amount by
which a Fund's annual expenses for all purposes (including the
investment management fee) except taxes, brokerage fees and
commissions, and extraordinary expenses such as litigation,
exceed any applicable state regulations. The strictest rule
currently applicable to a Fund is 2.5% of the first $30,000,000
of net assets, 2.0% of the next $70,000,000 of net assets and
1.5% of the remainder.
The Investment Manager. The Investment Manager is an
indirect wholly owned subsidiary of Franklin, a publicly traded
company whose shares are listed on the New York Stock Exchange.
Charles B. Johnson (an officer of the Fund), Rupert H. Johnson,
Jr. (a director of the Fund), and R. Martin Wiskemann are
principal shareholders of Franklin and own, respectively,
approximately 20%, 16% and 9.2% of its outstanding shares.
Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
Business Manager. Templeton Global Investors, Inc. performs
certain administrative functions for the Company including:
providing office space, telephone, office equipment and
supplies for the Company;
paying all compensation of the Company's officers;
authorizing expenditures and approving bills for
payment on behalf of the Company;
supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
<PAGE>
gain distributions and tax credits, and attending to
correspondence and other communications with individual
Shareholders;
daily pricing of each Fund's investment portfolio and
preparing and supervising publication of daily
quotations of the bid and asked prices of each Fund's
Shares, earnings reports and other financial data;
monitoring relationships with organizations serving the
Company, including the custodian and printers;
providing trading desk facilities to the Company;
supervising compliance by the Company and each Fund
with recordkeeping requirements under the 1940 Act and
regulations thereunder, and with state regulatory
requirements; maintaining books and records for the
Company and each Fund (other than those maintained by
the Custodian and Transfer Agent); and preparing and
filing tax reports other than the Funds' income tax
returns;
monitoring the qualifications of the Templeton Tax
Deferred Retirement Plans offered by the Company; and
providing executive, clerical and secretarial help
needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly
fee equal on an annual basis to 0.15% of the first $200,000,000
of the Company's aggregate average daily net assets (i.e., total
of World Fund and Foreign Fund), reduced to 0.135% annually of
the Company's aggregate net assets in excess of $200,000,000,
further reduced to 0.1% annually of such net assets in excess of
$700,000,000, and further reduced to a fee of 0.075% annually of
such net assets in excess of $1,200,000,000. The fee is
allocated between World Fund and Foreign Fund according to their
respective average daily net assets. Since the Business
Manager's fee covers services often provided by investment
advisers to other funds, each Fund's combined expenses for
advisory and administrative services may be higher than those of
other investment companies. During the fiscal years ended
August 31, 1994, 1993, and 1992, the Business Manager (and, prior
to April 1, 1993, Templeton Funds Management, Inc., the previous
business manager) received business management fees of
$7,161,271, $5,119,730, and $4,767,286, respectively.
The Business Manager is relieved of liability to the Company
for any act or omission in the course of its performance under
the Business Management Agreement in the absence of willful
misfeasance, bad faith or gross negligence. The Business
Management Agreement may be terminated by the Company at any time
on 60 days' written notice without payment of penalty, provided
<PAGE>
that such termination by the Company shall be directed or
approved by vote of a majority of the Directors of the Company in
office at the time or by vote of a majority of the outstanding
voting securities of the Company (as defined by the 1940 Act),
and shall terminate automatically and immediately in the event of
its assignment.
Templeton Global Investors, Inc. is an indirect wholly owned
subsidiary of Franklin.
Custodian and Transfer Agent. The Chase Manhattan Bank,
N.A. serves as Custodian of the Funds' assets, which are
maintained at the Custodian's principal office, MetroTech Center,
Brooklyn, New York 11245, and at the offices of its branches and
agencies throughout the world. The Custodian has entered into
agreements with foreign sub-custodians approved by the Directors
pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its
branches and sub-custodians generally do not hold certificates
for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which
in turn have book records with the transfer agents of the issuers
of the securities. Compensation for the services of the
Custodian is based on a schedule of charges agreed on from time
to time.
Franklin Templeton Investor Services, Inc. serves as the
Company's Transfer Agent. Services performed by the Transfer
Agent include processing purchase, transfer and redemption
orders, making dividend payments, capital gain distributions and
reinvestments, and handling all routine communications with
Shareholders. The Transfer Agent receives from the Company an
annual fee of $13.42 per Shareholder account plus out-of-pocket
expenses, such fee to be adjusted each year to reflect changes in
the Department of Labor Consumer Price Index.
Legal Counsel. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Company.
Independent Accountants. The firm of McGladrey & Pullen,
555 Fifth Avenue, New York, New York 10017, serves as independent
accountants for the Company. Its audit services comprise
examination of the Funds' financial statements and review of the
Funds' filings with the Securities and Exchange Commission and
the Internal Revenue Service.
Reports to Shareholders. The Company's fiscal year ends on
August 31. Shareholders will be provided at least semiannually
with reports showing the portfolio of each Fund and other
information, including an annual report with financial statements
audited by the independent accountants.
<PAGE>
BROKERAGE ALLOCATION
The Investment Management Agreements provide that the
Investment Manager is responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the
execution of the Company's portfolio transactions and, when
applicable, the negotiation of commissions in connection
therewith. All decisions and placements are made in accordance
with the following principles:
1. Purchase and sale orders will usually be placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" means prompt and reliable execution at the
most favorable securities price, taking into account
the other provisions hereinafter set forth. The
determination of what may constitute best execution and
price in the execution of a securities transaction by a
broker involves a number of considerations, including
without limitation, the overall direct net economic
result to a Fund (involving both price paid or received
and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
ability to effect the transaction at all where a large
block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the
broker. Such considerations are judgmental and are
weighed by the Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager takes into account its past
experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any
foreign securities held by a Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Company and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions as to
which fixed minimum commission rates are not
applicable, to cause a Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager determines
in good faith that such amount of commission is
reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed
<PAGE>
in terms of either that particular transaction or the
Investment Manager's overall responsibilities with
respect to the Company and the other accounts, if any,
as to which it exercises investment discretion. In
reaching such determination, the Investment Manager is
not required to place or attempt to place a specific
dollar value on the research or execution services of a
broker or on the portion of any commission reflecting
either of said services. In demonstrating that such
determinations were made in good faith, the Investment
Manager shall be prepared to show that all commissions
were allocated and paid for purposes contemplated by
the Company's brokerage policy; that commissions were
paid only for products or services which provide lawful
and appropriate assistance to the Investment Manager in
the performance of its investment decision-making
responsibilities; and that the commissions paid were
within a reasonable range. The determination that
commissions were within a reasonable range shall be
based on any available information as to the level of
commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into
account the Company's policies that (i) obtaining a low
commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually
it is more beneficial to a Fund to obtain a favorable
price than to pay the lowest commission; and (ii) the
quality, comprehensiveness and frequency of research
studies which are provided for the Company and the
Investment Manager are useful to the Investment Manager
in performing its advisory services under its
Investment Management Agreements with the Company.
Research services provided by brokers to the Investment
Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the
Investment Manager under its Investment Management
Agreements. Research furnished by brokers through whom
the Company effects securities transactions may be used
by the Investment Manager for any of its accounts, and
not all such research may be used by the Investment
Manager for the Company. When execution of portfolio
transactions is allocated to brokers trading on
exchanges with fixed brokerage commission rates,
account may be taken of various services provided by
the broker, including quotations outside the United
States for daily pricing of foreign securities held in
a Fund's portfolio.
4. Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall
be executed with primary market makers acting as
principal except where, in the judgment of the
Investment Manager, better prices and execution may be
obtained on a commission basis or from other sources.
<PAGE>
5. Sales of the Funds' Shares (which shall be deemed to
include also shares of other investment companies
registered under the 1940 Act which have either the
same investment adviser or an investment adviser
affiliated with the Funds' Investment Manager) made by
a broker are one factor among others to be taken into
account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions,
purchases in underwritings or tenders in response to
tender offers) for the account of a Fund to that
broker; provided that the broker shall furnish "best
execution" as defined in paragraph 1 above, and that
such allocation shall be within the scope of a Funds
policies as stated above; and provided further, that in
every allocation made to a broker in which the sale of
Shares is taken into account there shall be no increase
in the amount of the commissions or other compensation
paid to such broker beyond a reasonable commission or
other compensation determined, as set forth in
paragraph 3 above, on the basis of best execution alone
or best execution plus research services, without
taking account of or placing any value upon such sale
of Shares.
Insofar as known to management, no Director or officer of
the Company, nor the Investment Manager or the Principal
Underwriter or any person affiliated with any of them, has any
material direct or indirect interest in any broker employed by or
on behalf of the Company for either World Fund or Foreign Fund.
Franklin Templeton Distributors, Inc., the Principal Underwriter
for the Company, is a registered broker-dealer but has never
executed any purchase or sale transactions for either Fund's
portfolio or participated in commissions on any such
transactions, and has no intention of doing so in the future.
The total brokerage commissions on World Fund's portfolio
transactions during the fiscal years ended August 31, 1994, 1993,
and 1992 (not including any spreads or concessions on principal
transactions) were $6,895,789, $4,751,804, and $4,070,608. The
total brokerage commissions on Foreign Fund's portfolio
transactions during the fiscal years ended August 31, 1994, 1993,
and 1992 (not including any spreads or concessions on principal
transactions) were $7,329,697, $3,185,372, and $2,445,188. All
portfolio transactions are allocated to broker-dealers only when
their prices and execution, in the good faith judgment of the
Investment Manager, are equal to the best available within the
scope of the Company's policies. There is no fixed method used
in determining which broker-dealers receive which order or how
many orders.
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectuses describe the manner in which the Funds'
Shares may be purchased and redeemed. See "How to Buy Shares of
the Fund" and "How to Sell Shares of the Fund."
Net asset value is determined separately for each Fund. Net
asset value per Share is determined as of the close of business
on the New York Stock Exchange, every Monday through Friday
(exclusive of national business holidays). The Company's offices
will be closed, and net asset value will not be calculated, on
those days on which the New York Stock Exchange is closed, which
currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed well
before the close of business in New York on each day on which the
New York Stock Exchange is open. Trading of European or Far
Eastern securities generally, or in a particular country or
countries, may not take place on every New York business day.
Furthermore, trading takes place in various foreign markets on
days which are not business days in New York and on which a
Fund's net asset value is not calculated. Each Fund calculates
net asset value per Share, and therefore effects sales,
redemptions and repurchases of its Shares, as of the close of the
New York Stock Exchange once on each day on which that Exchange
is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio
securities used in such calculation and if events occur which
materially affect the value of those foreign securities, they
will be valued at fair market value as determined by the
management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which
a Fund may suspend the determination of net asset value for the
whole or any part of any period during which (1) the New York
Stock Exchange is closed other than for customary weekend and
holiday closings, (2) trading on the New York Stock Exchange is
restricted, (3) an emergency exists as a result of which disposal
of securities owned by either Fund is not reasonably practicable
or it is not reasonably practicable for either Fund fairly to
determine the value of its net assets, or (4) for such other
period as the Securities and Exchange Commission may by order
permit for the protection of the holders of either Fund's Shares.
Ownership and Authority Disputes. In the event of disputes
involving multiple claims of ownership or authority to control a
shareholder's 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, prior to executing instructions
regarding the account; or (b) interplead disputed funds or
<PAGE>
accounts with a court of competent jurisdiction. Moreover, the
Funds may surrender ownership of all or a portion of an account
to the Internal Revenue Service in response to a Notice of Levy.
In addition to the special purchase plans described in the
Prospectuses, other special purchase plans also are available:
Tax Deferred Retirement Plans. Each Fund offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
For individuals whether or not covered by other
qualified plans;
For simplified employee pensions;
For employees of tax-exempt organizations; and
For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans
generally are exempt from taxation until distribution from the
plans. Investors considering participation in any such plan
should review specific tax laws relating thereto and should
consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional
information, including the fees and charges with respect to all
of these plans, is available upon request to the Principal
Underwriter. No distribution under a retirement plan will be
made until Templeton Funds Trust Company receives the
participant's election on IRS Form W-4P (available on request
from Templeton Funds Trust Company) and such other documentation
as it deems necessary, as to whether or not U.S. income tax is to
be withheld from such distribution.
Individual Retirement Account (IRA). All individuals
(whether or not covered by qualified private or governmental
retirement plans) may purchase Shares of either Fund pursuant to
an Individual Retirement Account. However, contributions to an
IRA by an individual who is covered by a qualified private or
governmental plan may not be tax-deductible depending on the
individual's income. Custodial services for Individual
Retirement Accounts are available through Templeton Funds Trust
Company. Disclosure statements summarizing certain aspects of
Individual Retirement Accounts are furnished to all persons
investing in such accounts, in accordance with Internal Revenue
Service regulations.
Simplified Employee Pensions (SEP-IRA). For employers who
wish to establish a simplified form of employee retirement
program investing in Shares of either Fund, there are available
Simplified Employee Pensions invested in IRA Plans. Details and
<PAGE>
materials relating to these Plans will be furnished upon request
to the Principal Underwriter.
Retirement Plan for Employees of Tax-Exempt Organizations
(403(b)). Employees of public school systems and certain types
of charitable organizations may enter into a deferred
compensation arrangement for the purchase of Shares of either
Fund without being taxed currently on the investment.
Contributions which are made by the employer through salary
reduction are excludable from the gross income of the employee.
Such deferred compensation plans, which are intended to qualify
under Section 403(b) of the Internal Revenue Code, are available
through the Principal Underwriter. Custodian services are
provided by Templeton Funds Trust Company.
Qualified Plan for Corporations, Self-Employed Individuals
and Partnerships. For employers who wish to purchase Shares of
either Fund in conjunction with employee retirement plans, there
is a prototype master plan which has been approved by the
Internal Revenue Service. A "Section 401(k) plan" is also
available. Templeton Funds Trust Company furnishes custodial
services for these plans. For further details, including
custodian fees and plan administration services, see the master
plan and related material which is available from the Principal
Underwriter.
Letter of Intent. Purchasers who intend to invest $50,000
or more in Shares of the Funds or any other fund in the Franklin
Templeton Group within 13 months (whether in one lump sum or in
installments, the first of which may not be less than 5% of the
total intended amount and each subsequent installment not less
than $25, including automatic investment and payroll deduction
plans), and to beneficially hold the total amount of such Shares
fully paid for and outstanding simultaneously for at least one
full business day before the expiration of that period, should
execute a Letter of Intent ("LOI") on the form provided in the
Application in the Prospectuses. Payment for not less than 5% of
the total intended amount must accompany the executed LOI. Those
Shares purchased with the first 5% of the intended amount stated
in the LOI will be held as "Escrowed Shares" for as long as the
LOI remains unfulfilled. Although the Escrowed Shares are
registered in the investor's name, his full ownership of them is
conditional upon fulfillment of the LOI. No Escrowed Shares can
be redeemed by the investor for any purpose until the LOI is
fulfilled or terminated. If the LOI is terminated for any reason
other than fulfillment, the Transfer Agent will redeem that
portion of the Escrowed Shares required and apply the proceeds to
pay any adjustment that may be appropriate to the sales
commission on all Shares (including the Escrowed Shares) already
purchased under the LOI and apply any unused balance to the
investor's account. The LOI is not a binding obligation to
purchase any amount of Shares, but its execution will result in
the purchaser paying a lower sales charge at the appropriate
quantity purchase level. A purchase not originally made pursuant
<PAGE>
to any LOI may be included subsequently under an LOI executed
within 90 days of such purchase (with sales charge adjustment to
be made at the end of 13 months from the effective date of such
subsequent LOI at the net asset value per Share then in effect,
unless the investor makes an earlier written request to the
Principal Underwriter upon fulfilling the purchase of Shares
under the LOI). In addition, the aggregate value of any Shares
purchased prior to the 90-day period referred to above may be
applied to purchases under a current LOI in fulfilling the total
intended purchases under the LOI. However, no adjustment of
sales charges previously paid on purchases prior to the 90-day
period will be made.
TAX STATUS
Each of the Funds intends normally to pay a dividend at
least once annually representing substantially all of its net
investment income (which includes, among other items, dividends
and interest) and to distribute at least annually any realized
capital gains. By so doing and meeting certain diversification
of assets and other requirements of the Internal Revenue Code of
1986, as amended (the "Code"), each Fund intends to qualify
annually as a regulated investment company under the Code. The
status of the Funds as regulated investment companies does not
involve government supervision of management or of their
investment practices or policies. As a regulated investment
company, a Fund generally will be relieved of liability for U.S.
Federal income tax on that portion of its net investment income
and net realized capital gains which it distributes to its
Shareholders. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement also are
subject to a nondeductible 4% excise tax. To prevent application
of the excise tax, each Fund intends to make distributions in
accordance with the calendar year distribution requirement.
Dividends of net investment income and net short-term
capital gains are taxable to Shareholders as ordinary income.
Distributions of net investment income may be eligible for the
corporate dividends-received deduction to the extent attributable
to a Fund's qualifying dividend income. However, the alternative
minimum tax applicable to corporations may reduce the benefit of
the dividends-received deduction. Distributions of net capital
gains (the excess of net long-term capital gains over net short-
term capital losses) designated by a Fund as capital gain
dividends are taxable to Shareholders as long-term capital gains,
regardless of the length of time the Fund's Shares have been held
by a Shareholder, and are not eligible for the dividends-received
deduction. All dividends and distributions are taxable to
Shareholders, whether or not reinvested in Shares of a Fund.
Shareholders will be notified annually as to the Federal tax
status of dividends and distributions they receive and any tax
withheld thereon.
<PAGE>
Distributions by a Fund reduce the net asset value of the
Fund Shares. Should a distribution reduce the net asset value
below a Shareholder's cost basis, the distribution nevertheless
would be taxable to the Shareholder as ordinary income or capital
gain as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax
implication of buying Shares just prior to a distribution by a
Fund. The price of Shares purchased at that time includes the
amount of the forthcoming distribution, but the distribution will
generally be taxable to them.
Certain of the debt securities acquired by the Funds may be
treated as debt securities that were originally issued at a
discount. Original issue discount can generally be defined as
the difference between the price at which a security was issued
and its stated redemption price at maturity. Although no cash
income is actually received by the Funds, original issue discount
on a taxable debt security earned in a given year generally is
treated for Federal income tax purposes as interest and,
therefore, such income would be subject to the distribution
requirements of the Code.
Some of the debt securities may be purchased by the Funds at
a discount which exceeds the original issue discount on such debt
securities, if any. This additional discount represents market
discount for Federal income tax purposes. The gain realized on
the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does
not exceed the accrued market discount on such debt security.
Generally, market discount accrues on a daily basis for each day
the debt security is held by a Fund at a constant rate over the
time remaining to the debt security's maturity or, at the
election of a Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
A Fund may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign company is classified as a PFIC
if at least one-half of its assets constitute investment-type
assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized
ratably over the period during which a Fund held the PFIC stock.
A Fund itself will be subject to tax on the portion, if any, of
the excess distribution that is allocated to that Fund's holding
period in prior taxable years (and an interest factor will be
added to the tax, as if the tax had actually been payable in such
prior taxable years) even though the Fund distributes the
corresponding income to Shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain
distributions from a PFIC. All excess distributions are taxable
as ordinary income.
<PAGE>
A Fund may be able to elect alternative tax treatment with
respect to PFIC stock. Under an election that currently may be
available, a Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current
basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed
above, relating to the taxation of excess distributions, would
not apply. In addition, another election may be available that
would involve marking to market the Funds' PFIC shares at the end
of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as
though they were realized. If this election were made, tax at
the fund level under the PFIC rules would generally be
eliminated, but the Funds could, in limited circumstances, incur
nondeductible interest charges. Each Fund's intention to qualify
annually as a regulated investment company may limit its
elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among
other things, the character of gains, the amount of gain or loss
and the timing of the recognition of income with respect to PFIC
stock, as well as subject a Fund itself to tax on certain income
from PFIC stock, the amount that must be distributed to Share-
holders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC
stock.
Income received by a Fund from sources within foreign
countries may be subject to withholding and other income or
similar taxes imposed by such countries. If more than 50% of the
value of a Fund's total assets at the close of its taxable year
consists of securities of foreign corporations, that Fund will be
eligible and intends to elect to "pass through" to the Fund's
Shareholders the amount of foreign taxes paid by that Fund.
Pursuant to this election, a Shareholder will be required to
include in gross income (in addition to taxable dividends
actually received) his pro rata share of the foreign taxes paid
by a Fund, and will be entitled either to deduct (as an itemized
deduction) his pro rata share of foreign income and similar taxes
in computing his taxable income or to use it as a foreign tax
credit against his U.S. Federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a
Shareholder who does not itemize deductions, but such a
Shareholder may be eligible to claim the foreign tax credit (see
below). Each Shareholder will be notified within 60 days after
the close of the Funds' taxable year whether the foreign taxes
paid by a Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the
limitation that it may not exceed the Shareholder's U.S. tax
attributable to his foreign source taxable income. For this
purpose, if the pass-through election is made, the source of a
Fund's income flows through to its Shareholders. With respect to
<PAGE>
a Fund, gains from the sale of securities will be treated as
derived from U.S. sources and certain currency fluctuation gains,
including fluctuation gains from foreign currency denominated
debt securities, receivables and payables, will be treated as
ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax
credit), including the foreign source passive income passed
through by a Fund. Shareholders may be unable to claim a credit
for the full amount of their proportionate share of the foreign
taxes paid by a Fund. Foreign taxes may not be deducted in
computing alternative minimum taxable income and the foreign tax
credit can be used to offset only 90% of the alternative minimum
tax (as computed under the Code for purposes of this limitation)
imposed on corporations and individuals. If a Fund is not
eligible to make the election to "pass through" to its
Shareholders its foreign taxes, the foreign income taxes it pays
generally will reduce investment company taxable income and the
distributions by a Fund will be treated as United States source
income.
Certain options and futures contracts in which World Fund
may invest are "section 1256 contracts." Gains or losses on
section 1256 contracts generally are considered 60% long-term and
40% short-term capital gains or losses ("60/40"); however,
foreign currency gains or losses (as discussed below) arising
from certain section 1256 contracts may be treated as ordinary
income or loss. Also, section 1256 contracts held by World Fund
at the end of each taxable year (and on certain other dates as
prescribed under the Code) are "marked-to-market" with the result
that unrealized gains or losses are treated as though they were
realized.
Generally, the hedging transactions undertaken by World Fund
may result in "straddles" for U.S. Federal income tax purposes.
The straddle rules may affect the character of gains (or losses)
realized by World Fund. In addition, losses realized by World
Fund on positions that are part of the straddle may be deferred
under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to
World Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term
capital gain realized by World Fund which is taxed as ordinary
income when distributed to Shareholders.
World Fund may make one or more of the elections available
under the Code which are applicable to straddles. If World Fund
makes any of the elections, the amount, character, and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the
<PAGE>
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders
and which will be taxed to Shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
Requirements relating to the World Fund's tax status as a
regulated investment company may limit the extent to which World
Fund will be able to engage in transactions in options and
futures contracts.
Under the Code, gains or losses attributable to fluctuations
in foreign currency exchange rates which occur between the time a
Fund accrues income or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time
a Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated
in a foreign currency and on disposition of certain futures
contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of
acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988"
gains and losses, may increase or decrease the amount of a Fund's
net investment income to be distributed to its Shareholders as
ordinary income. For example, fluctuations in exchange rates may
increase the amount of income that a Fund must distribute in
order to qualify for treatment as a regulated investment company
and to prevent application of an excise tax on undistributed
income. Alternatively, fluctuations in exchange rates may
decrease or eliminate income available for distribution. If
section 988 losses exceed other net investment income during a
taxable year, a Fund would not be able to make ordinary dividend
distributions, or distributions made before the losses were
realized would be recharacterized as return of capital to
Shareholders for Federal income tax purposes, rather than as an
ordinary dividend, reducing each Shareholder's basis in his Fund
Shares.
Upon the sale or exchange of his Shares, a Shareholder will
realize a taxable gain or loss depending upon his basis in the
Shares. Such gain or loss will be treated as capital gain or
loss if the Shares are capital assets in the Shareholder's hands,
and generally will be long-term if the Shareholder's holding
period for the Shares is more than one year and generally
otherwise will be short-term. Any loss realized on a sale or
exchange will be disallowed to the extent that the Shares
disposed of are replaced (including replacement through the
<PAGE>
reinvesting of dividends and capital gain distributions in a
Fund) within a period of 61 days beginning 30 days before and
ending 30 days after the disposition of the Shares. In such a
case, the basis of the Shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of a Fund's Shares held by the Shareholder for six
months or less will be treated for Federal income tax purposes as
a long-term capital loss to the extent of any distributions of
long-term capital gains received by the Shareholder with respect
to such Shares.
In some cases, Shareholders will not be permitted to take
sales charges into account for purposes of determining the amount
of gain or loss realized on the disposition of their Shares.
This prohibition generally applies where (1) the Shareholder
incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st
day after the date on which it was acquired, and (3) the
Shareholder subsequently acquires shares of the same or another
regulated investment company and the otherwise applicable sales
charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that
case, the gain or loss recognized will be determined by excluding
from the tax basis of the Shares exchanged all or a portion of
the sales charge incurred in acquiring those Shares. This
exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired Shares is reduced
as a result of having incurred a sales charge initially. Sales
charges affected by this rule are treated as if they were
incurred with respect to the stock acquired under the
reinvestment right. This provision may be applied to successive
acquisitions of stock.
Each Fund generally will be required to withhold Federal
income tax at a rate of 31% ("backup withholding") from dividends
paid, capital gain distributions, and redemption proceeds to
Shareholders if (1) the Shareholder fails to furnish a Fund with
the Shareholder's correct taxpayer identification number or
social security number and to make such certifications as a Fund
may require, (2) the Internal Revenue Service notifies the
Shareholder or a Fund that the Shareholder has failed to report
properly certain interest and dividend income to the Internal
Revenue Service and to respond to notices to that effect, or (3)
when required to do so, the Shareholder fails to certify that he
is not subject to backup withholding. Any amounts withheld may
be credited against the Shareholder's Federal income tax
liability.
Ordinary dividends and taxable capital gain distributions
declared in October, November, or December with a record date in
such month and paid during the following January will be treated
as having been paid by a Fund and received by Shareholders on
December 31 of the calendar year in which declared, rather than
the calendar year in which the dividends are actually received.
<PAGE>
Distributions also may be subject to state, local and
foreign taxes. U.S. tax rules applicable to foreign investors
may differ significantly from those outlined above. Shareholders
are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an
investment in either Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), 700 Central Avenue, P.O. Box 33030, St.
Petersburg, Florida 33733-8030, toll free telephone (800) 237-
0738, is the Principal Underwriter of each Fund's Shares. FTD is
a wholly owned subsidiary of Franklin.
The Company, pursuant to Rule 12b-1 under the 1940 Act, has
adopted a Distribution Plan ("Plan") on behalf of each Fund.
Under each Plan, a Fund may reimburse the Principal Underwriter
monthly (subject to a limit of 0.25% per annum of each Fund's
average daily net assets) for FTD's costs and expenses in
connection with any activity which is primarily intended to
result in the sale of a Fund's Shares. Payments to FTD could be
for various types of activities, including (1) payments to
broker-dealers who provide certain services of value to each
Fund's Shareholders (sometimes referred to as a "trail fee"); (2)
reimbursement of expenses relating to selling and servicing
efforts or of organizing and conducting sales seminars; (3)
payments to employees or agents of the Principal Underwriter who
engage in or support distribution of Shares; (4) payments of the
costs of preparing, printing and distributing Prospectuses and
reports to prospective investors and of printing and advertising
expenses; (5) payment of dealer commissions and wholesaler
compensation in connection with sales of a Fund's Shares
exceeding $1 million (on which the Company imposes no initial
sales charge) and interest or carrying charges in connection
therewith; and (6) such other similar services as the Company's
Board of Directors determines to be reasonably calculated to
result in the sale of Shares. Under each Plan, the costs and
expenses not reimbursed in any one given month (including costs
and expenses not reimbursed because they exceed the limit of
0.25% per annum of each Fund's average daily net assets) may be
reimbursed in subsequent months or years.
During the fiscal year ended August 31, 1994, FTD incurred
costs and expenses of $9,002,860 in connection with distribution
of World Fund's Shares and $9,561,351 in connection with the
distribution of Foreign Fund's Shares. During the same period,
the Company made reimbursements pursuant to the Plans in the
amount of $9,002,860 on behalf of World Fund and $9,215,946 on
behalf of Foreign Fund. As indicated above, unreimbursed
expenses, which amount to $345,405 for Foreign Fund, may be
reimbursed by the Company during the fiscal year ending August
31, 1995 or in subsequent years. In the event that either Plan
<PAGE>
is terminated, the Company will not be liable to FTD for any
unreimbursed expenses that had been carried forward from previous
months or years. During the fiscal year ended August 31, 1994,
FTD spent, with respect to World Fund, the following amounts on:
compensation to dealers, $7,628,837; sales promotion, $157,063;
printing, $149,210; advertising, $1,025,787; and wholesale costs
and expenses, $41,963; and, with respect to Foreign Fund, the
following amounts on: compensation to dealers, $7,155,215; sales
promotion, $133,278; printing, $420,157; advertising, $1,496,754;
and wholesale costs and expenses, $355,947.
The Underwriting Agreement provides that the Principal
Underwriter will use its best efforts to maintain a broad and
continuous distribution of each Fund's Shares among bona fide
investors and may sign selling contracts with responsible
dealers, as well as sell to individual investors. The Shares are
sold only at the Offering Price in effect at the time of sale,
and each Fund receives not less than the full net asset value of
the Shares sold. The discount between the Offering Price and the
net asset value may be retained by the Principal Underwriter or
it may reallow all or any part of such discount to dealers. In
the three fiscal years ended August 31, 1994, 1993, and 1992, FTD
(and, prior to June 1, 1993, Templeton Funds Distributor, Inc.)
retained of such discount $1,931,397, $1,208,991, and $1,371,030,
respectively, or approximately 17.97%, 19.87%, and 16.46% of the
gross sales commissions for those years with respect to World
Fund, and retained $9,452,983, $3,975,783, and $2,883,923,
respectively, or approximately 15.79%, 15.81%, and 17.5% of the
gross sales commissions for those years with respect to Foreign
Fund. The Principal Underwriter in all cases buys Shares from a
Fund acting as principal for its own account. Dealers generally
act as principal for their own account in buying Shares from the
Principal Underwriter. No agency relationship exists between any
dealer and a Fund or the Principal Underwriter.
The Underwriting Agreement provides that the Company shall
pay the costs and expenses incident to registering and qualifying
each Fund's Shares for sale under the Securities Act of 1933 and
under the applicable Blue Sky laws of the jurisdictions in which
the Principal Underwriter desires to distribute such Shares, and
for preparing, printing and distributing reports to Shareholders.
The Principal Underwriter pays the cost of printing additional
copies of Prospectuses and reports to Shareholders used for
selling purposes. (The Company pays costs of preparation, set-
up and initial supply of the Funds' Prospectuses for existing
Shareholders.)
The Underwriting Agreement is subject to renewal from year
to year in accordance with the provisions of the 1940 Act and
terminates automatically in the event of its assignment. The
Underwriting Agreement may be terminated without penalty by
either party upon 60 days' written notice to the other, provided
termination by the Company shall be approved by the Board of
Directors or a majority (as defined in the 1940 Act) of the
<PAGE>
Shareholders. The Principal Underwriter is relieved of liability
for any act or omission in the course of its performance of the
Underwriting Agreement, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the principal underwriter for the other Templeton
Funds.
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences,
conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications and terms and
conditions of redemption, except as follows: all consideration
received from the sale of Shares of either Fund, together with
all income, earnings, profits and proceeds thereof, belongs to
that Fund and is charged with liabilities in respect of that Fund
and of that Fund's part of general liabilities of the Company in
the proportion that the total net assets of the Fund bear to the
total net assets of both Funds. The net asset value of a Share
of either Fund is based on the assets belonging to that Fund less
the liabilities charged to that Fund, and dividends are paid on
Shares of either Fund only out of lawfully available assets
belonging to that Fund. In the event of liquidation or
dissolution of the Company, the Shareholders of each Fund will be
entitled, out of assets of the Company available for
distribution, to the assets belonging to that particular Fund.
The Shares have non-cumulative voting rights so that the
holders of a plurality of the Shares voting for the election of
Directors at a meeting at which 50% of the outstanding Shares are
present can elect all the Directors and in such event, the
holders of the remaining Shares voting for the election of
Directors will not be able to elect any person or persons to the
Board of Directors.
PERFORMANCE INFORMATION
Each Fund may, from time to time, include its total return
in advertisements or reports to Shareholders or prospective
investors. Quotations of average annual total return for each
Fund will be expressed in terms of the average annual compounded
rate of return for periods in excess of one year or the total
return for periods less than one year of a hypothetical
investment in the Fund over periods of one, five, or ten years
(up to the life of the Fund) calculated pursuant to the following
formula: P(1 + T)n = ERV (where P = a hypothetical initial
payment of $1,000, T = the average annual total return for
periods of one year or more or the total return for periods of
less than one year, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures reflect the
deduction of the maximum initial sales charge and deduction of a
<PAGE>
proportional share of a Fund's expenses on an annual basis, and
assume that all dividends and distributions are reinvested when
paid. World Fund's average annual total return for the one-,
five- and ten-year periods ended August 31, 1994 was 12.05%,
9.10% and 13.90%, respectively. Foreign Fund's average annual
total return for the one-, five- and ten-year periods ended
August 31, 1994, was 11.19%, 11.65% and 17.84%, respectively.
Performance information for each Fund may be compared, in
reports and promotional literature, to: (i) the Standard & Poor's
500 Stock Index, Dow Jones Industrial Average, or other unmanaged
indices so that investors may compare each Fund's results with
those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general;
(ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which
ranks mutual funds by overall performance, investment objectives
and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an
investment in a Fund. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for each Fund reflects only the
performance of a hypothetical investment in each Fund during the
particular time period on which the calculations are based.
Performance information should be considered in light of each
Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the
given time period, and should not be considered as a
representation of what may be achieved in the future.
From time to time, each Fund and the Investment Manager may
also refer to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or
published by Strategic Insight or a similar statistical
organization.
(2) 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.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance Corp.,
Morgan Stanley Capital International or a similar financial
organization.
(4) The geographic distribution of the Fund's portfolio.
<PAGE>
(5) The gross national product and populations, including age
characteristics, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different returns
and risk characteristics of various investments, the Fund
may show historical returns of various investments and
published indices (e.g., Ibbotson Associates, Inc. Charts
and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) 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.
(12) Quotations from the Templeton organization's founder, Sir
John Templeton*, advocating the virtues of diversification
and long-term investing, including the following:
"Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
"Diversify by company, by industry and by
country."
"Always maintain a long-term perspective."
"Invest for maximum total real return."
"Invest - don't trade or speculate."
"Remain flexible and open-minded about types of
investment."
* Sir John Templeton, who currently serves as Chairman of the
Company's Board, is not involved in investment decisions,
which are made by each Fund's Investment Manager.
<PAGE>
"Buy low."
"When buying stocks, search for bargains among
quality stocks."
"Buy value, not market trends or the economic
outlook."
"Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
"Do your homework or hire wise experts to help
you."
"Aggressively monitor your investments."
"Don't panic."
"Learn from your mistakes."
"Outperforming the market is a difficult task."
"An investor who has all the answers doesn't even
understand all the questions."
"There's no free lunch."
And now the last principle: Do not be fearful or
negative too often."
In addition, each Fund and the Investment Manager may also
refer to the number of Shareholders in the Fund or the aggregate
number of shareholders in the Franklin Templeton Group or the
dollar amount of fund and private account assets under management
in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the 1994 Annual
Reports to Shareholders of Templeton World Fund and Templeton
Foreign Fund are incorporated herein by reference.
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