<PAGE> 1
- ---------
TEMPLETON
FOREIGN
FUND
- ---------
ANNUAL REPORT
AUGUST 31, 1996
[FRANKLIN TEMPLETON LOGO]
<PAGE> 2
Mark G. Holowesko is the president and portfolio manager of Templeton Foreign
Fund, as well as several other Templeton funds. He joined the Templeton
organization in 1985 in Nassau, Bahamas, and serves as chief investment officer
of global equity research, as well as an officer and director of Templeton
Worldwide, Inc.
Mr. Holowesko received a B.A. in economics from Holy Cross College and an
M.B.A. from Babson College. He is a Chartered Financial Analyst, Chartered
Investment Counselor, and a former director of the International Society of
Financial Analysts.
[PHOTOGRAPH]
Mark Holowesko
Chief Investment Officer
Global Equity Research
<PAGE> 3
- ---------------------
MANAGEMENT DISCUSSION
- ---------------------
Your Fund's Objective:
The Templeton Foreign Fund seeks long-term capital growth through a flexible
policy of investing in stocks and debt obligations of companies and governments
outside the United States.
OCTOBER 15, 1996
Dear Shareholder:
We are pleased to bring you the 14th annual report of the Templeton Foreign
Fund, which covers the period ended August 31, 1996.
During the past fiscal year, global economic growth strengthened as many
governments kept interest rates relatively low and allowed money supplies to
grow. This combination of stronger growth and more liberal monetary policies
led to mixed results worldwide. For Latin American countries saddled by high
foreign debt, economic growth worldwide has enabled them to restructure fragile
economies and banking systems overburdened by problem loans. In the more
developed nations, however, particularly the United States, lower interest
rates and ease of credit drove personal debt to historically high levels.
This liquidity has also ignited inflation in financial assets. During the last
twelve months, strong corporate-profit growth benefited the stocks of many
companies, and equity market returns have been strong with large upswings in
emerging markets and above average returns in developed countries. One
exception has been Asia. Although companies are benefiting from a resumption of
economic growth in Japan and consumer spending in Asian emerging markets, where
standards of living continue to increase, the Japanese market has been flat
over the reporting period and Asian emerging markets have declined.
Consistent with our history of low portfolio turnover, we made no significant
changes to the Fund's weightings over the course of the fiscal year. On a
regional basis, most changes made to the Fund were subtle. For example, our
exposure to Europe increased from 42.5% to 43.4% of total net assets, and Asia
from 12.1% to 12.9%, while our Latin American exposure decreased from 7.7% to
7.3%. Shifts in industry exposure were also relatively minor, with the most
significant increases occurring in the telecommunications, real estate, and
forest products industries. Financial exposure declined slightly as we reduced
the Fund's exposure to the banking, financial services, and insurance
industries.
1
<PAGE> 4
TEMPLETON FOREIGN FUND
<TABLE>
<CAPTION>
Geographic Distribution on 8/31/96
Based on Total Net Assets
- ----------------------------------
<S> <C>
European Stocks . . . . . . . . . . . . . . . . . . . . . . . 43.4%
Asian Stocks . . . . . . . . . . . . . . . . . . . . . . . . 12.9%
Australian & New Zealand Stocks . . . . . . . . . . . . . . . . 5.5%
Latin American Stocks . . . . . . . . . . . . . . . . . . . . . 7.3%
Other Stocks . . . . . . . . . . . . . . . . . . . . . . . . . 2.7%
Fixed-Income Securities . . . . . . . . . . . . . . . . . . . 14.3%
Short-Term Obligations & Other Net Assets . . . . . . . . . . 13.9%
</TABLE>
Although the overall country and industry weightings remained relatively stable,
we made substantial changes to the Fund's individual holdings. Within the
transportation sector, we sold a long-standing position in British Aerospace. In
the electronics sector, we more than doubled our position in Sony Corporation
because we believe that it may be among the greatest beneficiaries of a trend in
the consumer electronics field to merge multiple products and software. In our
opinion, the Digital Versatile Disc being introduced over the next several
months should help boost Sony's profits in the future.
On the telecommunications front, we added hardware suppliers like Nokia in
Finland and increased the Fund's exposure to telecommunication providers by
adding to positions in Europe and Latin America. We also increased our exposure
to the forest products industry by adding to some of our Nordic holdings such as
Assidomaen AB, Enso OY, and Metsa Serla OY. In our opinion, these stocks were
selling at very low valuations relative to the companies' future earnings and
the replacement value of their plants and equipment.
TEMPLETON FOREIGN FUND
TOP 10 COUNTRIES REPRESENTED IN
THE FUND ON 8/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
COUNTRY % OF TOTAL NET ASSETS
------- ---------------------
<S> <C>
Hong Kong 7.0%
Spain 6.3%
United Kingdom 6.2%
France 5.6%
Sweden 5.4%
Netherlands 4.8%
Australia 4.6%
Finland 3.5%
Mexico 2.5%
Germany 2.4%
</TABLE>
- -----------------------------------------------------
As in all reporting periods, we held some positions that helped and some that
hindered the Fund's performance. In general, the rebound in emerging markets had
a positive effect. The stock of Gold Peak Industries Ltd., a Hong Kong-based
manufacturer of batteries and electronic products, appreciated by 31%. And
Telecomunicacoes Brasileiras SA (Telebras), Brazil's largest telephone company,
rose more than 70%. Financial stocks in general have performed well. Our
positions in HSBC Holdings PLC (Hong Kong), ABN Amro NV (Netherlands), and
Westpac Banking Corp. (Australia) appreciated considerably during the fiscal
year. Typically one third of our stock selections do not
2
<PAGE> 5
perform as planned. Holdings that did not meet our expectations included Burns
Philp & Co. Ltd., an Australian food processor; Pacific Dunlop Ltd., an
Australian conglomerate; and Ceramco Corp. Ltd., a New Zealand garment
manufacturer.
TEMPLETON FOREIGN FUND
Asset Allocation on 8/31/96
Based on Total Net Assets
<TABLE>
<S> <C>
Stocks . . . . . . . . . . . . . . . . . . . . 72%
Fixed Income Securities . . . . . . . . . . . . 14%
Short-Term Obligations &
Other Net Assets . . . . . . . . . . . . . . 14%
</TABLE>
This discussion reflects the strategies we employed for the Fund during the
fiscal year, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies and our
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the Fund.
TEMPLETON FOREIGN FUND
TOP 10 EQUITY HOLDINGS
ON 8/31/96
Based on Total Net Assets
<TABLE>
<CAPTION>
COMPANY,
INDUSTRY, % OF TOTAL
COUNTRY NET ASSETS
- ------- ----------
<S> <C>
Telebras-Telecomunicacoes
Brasileiras SA
Telecommunications, Brazil 1.2%
Sony Corp.
Appliances & Household
Durables, Japan 1.2%
HSBC Holdings PLC
Banking, Hong Kong 1.2%
Telefonica de Espana SA
Telecommunications, Spain 1.1%
Telefonos de Mexico SA, L
Telecommunications, Mexico 1.1%
Volvo AB
Automobiles, Sweden 1.1%
National Australia Bank Ltd.
Banking, Australia 1.0%
Alcatel Alsthom SA
Electrical & Electronics, France 1.0%
Societe Elf Aquitane SA
Energy Sources, France 0.9%
Iberdrola SA
Utilities -- Electrical
& Gas, Spain 0.9%
</TABLE>
For a complete list of portfolio holdings, please see page 14 of this report.
- ------------------------------------------------------------------------------
There are, of course, special risks involved with foreign investing related to
market, currency, economic, social, political, and other factors. Developing
markets involve similar but heightened risks, in addition to risks associated
with the relatively small size and lesser liquidity of these markets. While
short-term volatility can be disconcerting, declines of as much as 40% to 50%
are not unusual in emerging markets. For example, the Hong Kong market has
increased 535% in the last 15 years, but has suffered six declines of more than
20% during that time.* These risks are discussed in the Fund's prospectus.
- -------------------------------------------------------------------------------
*Source: Bloomberg. Based on quarterly percentage change over 15 years ended
June 30, 1996.
3
<PAGE> 6
In closing, we would like to mention the importance of our global research
staff to the performance of your portfolio. Over 30 analysts in our four global
equity offices in the Bahamas, the United States, Canada and the United Kingdom
work diligently to provide the Fund with stock ideas. We are proud of their
contribution. Our additions to their ranks over the past twelve months give us
greater confidence in our ability to serve you in the future.
As always, we thank you for your participation in the Fund and look forward to
serving your investment needs in the years to come.
Sincerely,
/s/ MARK HOLOWESKO
Mark Holowesko, CFA
President
Templeton Foreign Fund
4
<PAGE> 7
- --------------------------------------------------
THE FOLLOWING IS AN INTERVIEW WITH MARK HOLOWESKO,
PORTFOLIO MANAGER OF TEMPLETON FOREIGN FUND:
- --------------------------------------------------
[PHOTOGRAPH]
Q. IT SEEMS THAT THE FUND'S INVESTMENT OBJECTIVE ALLOWS AN UNUSUAL AMOUNT
OF FLEXIBILITY REGARDING THE MARKETS AND TYPES OF SECURITIES IN WHICH YOU CAN
INVEST. WHAT EFFECTS, IF ANY, HAS THIS HAD ON YOUR INVESTMENT STRATEGY?
A. One of the key elements of the Fund's success historically has been
the low volatility in its share price relative to other international funds. I
believe this is partly the result of diversification, a fundamental investment
principle and an integral part of our investment strategy. Diversification
allows us to spread risk over a large number of countries and industries, and
helps to expand the areas for discovering undervalued assets. Today, the Fund
has investments in more than two dozen countries and industries.
Q. ALTHOUGH YOU USE PRIMARILY A BOTTOM-UP INVESTMENT APPROACH, ARE THERE
ANY SPECIFIC INDUSTRIES OR SECTORS THAT YOU FIND APPEALING?
A. Our investment style occasionally results in a concentration of stocks
in certain industries or countries. Today, it would be fair to say that we have
been finding a concentration of value in Europe and certain emerging markets,
as well as in forest products, real estate, and companies that are benefiting
from the growth in consumer spending throughout many emerging markets. Although
we do not attempt to identify cheap sectors, it is important to keep in mind
that we do evaluate certain industry dynamics in order to properly evaluate
specific companies. For example, in the forest products group, we need to
evaluate supply and demand trends to gain an understanding of how pricing may
develop for specific companies. We also benefit from knowing the costs involved
in expanding production capacity in an industry, which helps us estimate the
asset values of specific companies.
5
<PAGE> 8
Q. MUCH HAS BEEN WRITTEN ABOUT "VALUE" INVESTING VS. "GROWTH" INVESTING.
WHAT EXACTLY IS THE DIFFERENCE BETWEEN THESE TWO STYLES, AND WHICH DO YOU
FAVOR?
A. Value investing is normally associated with low current valuations,
such as price to book values, price to cash flow, price to earnings, or high
dividend yields. Growth investing, on the other hand, normally involves
companies with the potential for high future growth earnings. Our investment
style actually encompasses both approaches. We are generally known as value
investors, but for us, value over time is what matters. When we look at
companies with low price-to-earnings ratios, we are concerned with the current
price relative to future earnings. For example, a company may have a
price-to-current-earnings ratio of 20, but the current price may be only 8-10
times what we believe those earnings could be in the future. Our investment
philosophy tries to uncover stocks that are inexpensive relative to assets or
future earnings.
Q. YOU HAVE STATED BEFORE THAT THE BARGAIN LIST OF STOCKS IS A KEY
ELEMENT OF THE TEMPLETON INVESTMENT PROCESS. WHAT EXACTLY IS THIS "BARGAIN
LIST" AND HOW IS IT CONSTRUCTED?
A. The bargain list is a collection of what we consider the most
undervalued securities in the world. Templeton portfolio managers share
responsibility for covering certain sectors and countries around the world, and
individual analysts contribute to the process by recommending specific stocks
for this list. Only stocks that have been approved for the bargain list may be
purchased for the Templeton Foreign Fund. Although the list is a key element
of the Templeton investment process, our research doesn't end there. Templeton
portfolio managers ultimately make the decision to invest in certain stocks on
the list based on the Fund's investment criteria and their own individual
research.
6
<PAGE> 9
- -------------------
PERFORMANCE SUMMARY
Class I Shares
- -------------------
The Templeton Foreign Fund Class I shares reported a total return of 10.68% for
the one-year period ended August 31, 1996. Total return measures the change in
value of an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include the initial sales charge. We have always
maintained a long-term perspective when managing the Fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 8, the Fund delivered a cumulative total return of more than
299% for the 10-year period ended August 31, 1996.
As measured by net asset value, the Fund's share price increased 35 cents, from
$9.62 on August 31, 1995 to $9.97 on August 31, 1996. During this time,
shareholders received distributions of 25 cents ($0.25) per share in dividend
income and 36 cents ($0.36) per share in capital gains, of which 28.5 cents
($0.285) represented long-term gains and 7.5 cents ($0.075) represented
short-term gains. Of course, past performance is not predictive of future
results, and distributions will vary depending on income earned by the Fund, as
well as any profits realized from the sale of securities in the portfolio.
The graph on page 8 shows how a $10,000 investment in the Fund over the past
ten years has significantly outperformed the unmanaged Morgan Stanley Capital
International Europe, Australia, Far East (EAFE) Index. It also shows how an
investment in the Fund over the same period has kept your purchasing power well
ahead of inflation, as measured by the Consumer Price Index (CPI). Please
remember that the Fund's performance differs from that of the index because,
among other things, the index is not managed acccording to any investment
strategy, includes no sales charges or management expenses, and does not
contain cash (the Fund generally carries a certain percentage of cash at any
given time). Of course, one cannot invest directly in an index.
7
<PAGE> 10
TEMPLETON FOREIGN FUND - CLASS I
Periods Ended 8/31/96
<TABLE>
<CAPTION>
Since
Inception
One-Year Five-Year Ten-Year (10/5/82)
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 10.68% 73.58% 299.77% 768.39%
Average Annual Total Return(2) 4.28% 10.34% 14.18% 16.32%
Value of $10,000 Investment(3) $10,428 $16,357 $37,671 $81,827
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods, and does not include the maximum 5.75% initial sales
charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods, and includes the initial sales
charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the specified periods and include the initial sales charge.
All calculations assume reinvestment of dividends and capital gains when paid.
Prior to July 1, 1992, Class I shares were offered at a higher sales charge.
Thus, actual total return to purchasers of shares during that period would have
been somewhat lower than noted above. Investment return and principal value
will fluctuate with market conditions, currencies and the economic and
political climates where investments are made, so that your shares, when
redeemed, may be worth more or less than their initial cost. Past performance
is not predictive of future results.
<TABLE>
<CAPTION>
Date T Foreign MS EAFE GD CPI
<S> <C> <C> <C>
9/1/86 $ 9,423 $10,000 $10,000
9/30/86 9,270 9,900 10,046
10/31/86 9,423 9,241 10,055
11/30/86 9,643 9,776 10,064
12/31/86 9,966 10,296 10,073
1/31/87 10,639 11,391 10,137
2/28/87 11,228 11,735 10,173
3/31/87 11,848 12,700 10,219
4/30/87 12,094 14,046 10,274
5/31/87 12,689 14,049 10,310
6/30/87 13,472 13,604 10,346
7/31/87 14,300 13,582 10,373
8/31/87 15,005 14,603 10,428
9/30/87 14,940 14,375 10,482
10/31/87 11,952 12,364 10,509
11/30/87 11,661 12,489 10,519
12/31/87 12,433 12,863 10,519
1/31/88 12,548 13,095 10,546
2/29/88 13,078 13,971 10,574
3/31/88 13,658 14,833 10,619
4/30/88 13,787 15,051 10,674
5/31/88 13,938 14,573 10,711
6/30/88 13,988 14,191 10,757
7/31/88 14,009 14,639 10,802
8/31/88 13,687 13,691 10,847
9/30/88 14,275 14,292 10,920
10/31/88 14,916 15,518 10,956
11/30/88 15,135 16,446 10,965
12/31/88 15,167 16,541 10,983
1/31/89 16,056 16,836 11,038
2/28/89 15,852 16,925 11,084
3/31/89 16,072 16,597 11,148
4/30/89 16,513 16,754 11,220
5/31/89 16,174 15,846 11,284
6/30/89 16,363 15,583 11,311
7/31/89 17,685 17,544 11,338
8/31/89 17,929 16,758 11,357
9/30/89 18,542 17,524 11,393
10/31/89 17,990 16,823 11,448
11/30/89 18,535 17,672 11,475
12/31/89 19,799 18,328 11,493
1/31/90 19,841 17,650 11,612
2/28/90 19,884 16,421 11,666
3/31/90 20,172 14,713 11,731
4/30/90 19,722 14,596 11,749
5/31/90 21,378 16,260 11,776
6/30/90 21,573 16,113 11,840
7/31/90 22,473 16,339 11,885
8/31/90 20,860 14,754 11,994
9/30/90 19,060 12,703 12,095
10/31/90 19,374 14,685 12,168
11/30/90 19,229 13,819 12,194
12/31/90 19,203 14,053 12,194
1/31/91 19,789 14,517 12,268
2/28/91 21,144 16,071 12,286
3/31/91 20,705 15,106 12,304
4/30/91 21,053 15,257 12,323
5/31/91 21,392 15,425 12,360
6/30/91 20,448 14,296 12,396
7/31/91 21,694 15,002 12,414
8/31/91 21,703 14,701 12,450
9/30/91 22,152 15,534 12,505
10/31/91 22,091 15,758 12,524
11/30/91 21,759 15,027 12,560
12/31/91 22,708 15,808 12,569
1/31/92 22,986 15,475 12,588
2/29/92 23,363 14,925 12,633
3/31/92 22,966 13,945 12,698
4/30/92 23,820 14,014 12,715
5/31/92 25,159 14,956 12,733
6/30/92 24,703 14,252 12,779
7/31/92 24,058 13,891 12,806
8/31/92 23,581 14,768 12,842
9/30/92 23,095 14,481 12,878
10/31/92 22,291 13,725 12,923
11/30/92 22,386 13,858 12,941
12/31/92 22,730 13,935 12,932
1/31/93 23,124 13,937 12,995
2/28/93 23,658 14,363 13,041
3/31/93 24,597 15,619 13,086
4/30/93 25,397 17,106 13,123
5/31/93 25,995 17,472 13,141
6/30/93 25,675 17,203 13,160
7/31/93 26,272 17,809 13,160
8/31/93 27,969 18,774 13,196
9/30/93 27,745 18,355 13,224
10/31/93 29,258 18,924 13,278
11/30/93 28,766 17,274 13,288
12/31/93 31,098 18,525 13,288
1/31/94 32,537 20,096 13,324
2/28/94 31,977 20,043 13,369
3/31/94 31,087 19,184 13,414
4/30/94 31,614 20,003 13,433
5/31/94 31,614 19,893 13,443
6/30/94 30,988 20,177 13,488
7/31/94 32,142 20,377 13,525
8/31/94 32,999 20,864 13,579
9/30/94 32,471 20,211 13,615
10/31/94 32,922 20,888 13,625
11/30/94 31,732 19,890 13,643
12/31/94 31,206 20,019 13,643
1/31/95 30,675 19,254 13,697
2/28/95 31,099 19,204 13,752
3/31/95 31,347 20,408 13,797
4/30/95 32,409 21,182 13,843
5/31/95 33,152 20,936 13,871
6/30/95 33,293 20,574 13,898
7/31/95 34,814 21,860 13,898
8/31/95 34,036 21,031 13,934
9/30/95 34,602 21,447 13,962
10/31/95 33,725 20,877 14,008
11/30/95 34,096 21,464 13,999
12/31/95 34,686 22,333 13,989
1/31/96 35,820 22,429 14,071
2/29/96 36,122 22,510 14,116
3/31/96 36,311 22,994 14,190
4/30/96 37,255 23,667 14,245
5/31/96 37,633 23,237 14,272
6/30/96 37,822 23,374 14,281
7/31/96 36,802 22,696 14,308
8/31/96 37,671 22,750 14,335
</TABLE>
8
<PAGE> 11
- -------------------
PERFORMANCE SUMMARY
Class II Shares
- -------------------
The Templeton Foreign Fund Class II shares reported a total return of 9.78% for
the one-year period ended August 31, 1996. Total return measures the change in
value of an investment, assuming reinvestment of dividends and capital gains
distributions, and does not include sales charges.
As measured by net asset value, the Fund's share price increased 28 cents, from
$9.59 on August 31, 1995 to $9.87 on August 31, 1996. During this time,
shareholders received distributions of 23.61 cents ($0.2361) per share in
dividend income and 36 cents ($0.36) per share in capital gains, of which 28.5
cents ($0.285) represented long-term gains and 7.5 cents ($0.075) represented
short-term gains. Of course, past performance is not predictive of future
results, and distributions will vary depending on income earned by the Fund, as
well as any profits realized from the sale of securities in the portfolio.
The graph on page 10 shows how a $10,000 investment in the Fund since inception
has outperformed the unmanaged Morgan Stanley Capital International Europe,
Australia, Far East (EAFE) Index. It also shows how an investment in the Fund
over the same period has kept your purchasing power well ahead of inflation, as
measured by the Consumer Price Index (CPI). Please remember that the Fund's
performance differs from that of the index because, among other things, the
index is not managed according to any investment strategy, includes no sales
charges or management expenses, and does not contain cash (the Fund generally
carries a certain percentage of cash at any given time). Of course, one cannot
invest directly in an index.
9
<PAGE> 12
TEMPLETON FOREIGN FUND - CLASS II
Periods Ended 8/31/96
<TABLE>
<CAPTION>
Since
Inception
One-Year (5/1/95)
-------- ---------
<S> <C> <C>
Cumulative Total Return(1) 9.78% 15.05%
Average Annual Total Return(2) 7.65% 9.51%
Value of $10,000 Investment(3) $10,765 $11,294
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the 1.0% initial sales charge and
the 1.0% Contingent Deferred Sales Charge, applicable to shares redeemed within
the first 18 months of investment.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes all sales charges.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the specified periods and include all sales charges.
All calculations assume reinvestment of dividends and capital gains when paid.
Investment return and principal value will fluctuate with market conditions,
currencies and the economic and political climates where investments are made,
so that your shares, when redeemed, may be worth more or less than their
initial cost. Past performance is not predictive of future results.
<TABLE>
<CAPTION>
Date T Foreign 2 MSCI EAFE CPI
<S> <C> <C> <C>
5/1/95 $ 9,903 $10,000 $10,000
5/31/95 10,119 9,884 10,020
6/30/95 10,162 9,713 10,040
7/31/95 10,617 10,320 10,040
8/31/95 10,379 9,929 10,066
9/30/95 10,541 10,126 10,086
10/31/95 10,261 9,856 10,120
11/30/95 10,386 10,133 10,112
12/31/95 10,551 10,544 10,105
1/31/96 10,897 10,589 10,165
2/29/96 10,978 10,627 10,198
3/31/96 11,024 10,855 10,251
4/30/96 11,313 11,174 10,291
5/31/96 11,416 10,970 10,310
6/30/96 11,463 11,035 10,316
7/31/96 11,139 10,715 10,336
8/31/96 11,294 10,741 10,356
</TABLE>
10
<PAGE> 13
- ----------------------
TEMPLETON FOREIGN FUND
Class I Shares
- ----------------------
If you had invested $10,000 in the Templeton Foreign Fund at inception, it
would be worth more than $81,000 today. The chart below illustrates the
cumulative total return of an assumed $10,000 investment in the Fund on October
5, 1982, with income dividends and capital gains distributions reinvested
through August 31, 1996.*
<TABLE>
<CAPTION>
Initial + Initial +
Cumulative Dividends Capital Total
Date Reinvested Gains Value
<S> <C> <C> <C>
10/5/82 $ 9,423 $ 9,423 $ 9,423
12/31/82 9,823 9,823 9,823
12/31/83 13,361 13,217 13,410
12/31/84 13,094 12,759 13,250
12/31/85 16,566 15,735 16,812
12/31/86 19,903 19,896 21,648
12/31/87 23,252 24,190 27,006
12/31/88 26,865 28,790 32,946
12/31/89 33,855 36,619 43,006
12/31/90 31,870 34,541 41,712
12/31/91 36,198 40,077 49,325
12/31/92 34,964 39,496 49,372
12/31/93 47,393 53,489 67,549
12/31/94 45,397 53,552 67,783
12/31/95 49,210 58,571 75,343
8/31/96 53,446 63,611 81,827
</TABLE>
<TABLE>
<CAPTION>
Cost of Total value of
investment Initial net investment
10/5/82 asset value 8/31/96
---------- ----------- --------------
<S> <C> <C>
$10,000 $9,425 $81,827
</TABLE>
*The amount of capital gains distributions accepted in shares was $28,381. The
total amount of dividends reinvested was $18,216. The performance information
shown represents past performance and is not an indication of future results.
For standardized performance figures, please refer to the Performance Summary
on page 8. Class II shares, which the Fund began offering on May 1, 1995, are
subject to different fees and expenses, which affect their performance. Please
see the prospectus for more details regarding Class I and Class II shares.
11
<PAGE> 14
TEMPLETON FOREIGN FUND
Financial Highlights
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE -- CLASS I+
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.62 $ 10.01 $ 8.74 $ 7.92 $ 7.91
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income .27 .23 .14 .14 .20
Net realized and unrealized gain .69 .05 1.39 1.21 .43
---------- ---------- ---------- ---------- ----------
Total from investment operations .96 .28 1.53 1.35 .63
---------- ---------- ---------- ---------- ----------
Distributions:
Dividends from net investment income (.25) (.16) (.13) (.19) (.23)
Distributions from net realized gains (.36) (.51) (.13) (.34) (.39)
---------- ---------- ---------- ---------- ----------
Total distributions (.61) (.67) (.26) (.53) (.62)
---------- ---------- ---------- ---------- ----------
Change in net asset value .35 (.39) 1.27 .82 .01
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 9.97 $ 9.62 $ 10.01 $ 8.74 $ 7.92
========== ========== ========== ========== ==========
TOTAL RETURN* 10.68% 3.14% 17.94% 18.65% 8.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $9,602,209 $6,941,238 $5,014,438 $2,667,771 $1,672,161
Ratio of expenses to average net assets 1.12% 1.15% 1.14% 1.12% .94%
Ratio of net investment income to average net assets 3.09% 2.81% 1.84% 2.11% 2.92%
Portfolio turnover rate 15.91% 21.78% 36.75% 21.29% 22.00%
Average commission rate paid (per share) $ .0075
</TABLE>
* TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS.
+ PER SHARE AMOUNTS FOR YEARS ENDED PRIOR TO AUGUST 31, 1994 HAVE BEEN RESTATED
TO REFLECT A 3-FOR-1 STOCK SPLIT EFFECTIVE FEBRUARY 25, 1994.
12
<PAGE> 15
TEMPLETON FOREIGN FUND
Financial Highlights (cont.)
- --------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE -- CLASS II
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 1, 1995+
THROUGH
1996 AUGUST 31, 1995
--------- ---------------
<S> <C> <C>
Net asset value, beginning of period $ 9.59 $ 9.16
-------- --------
Income from investment operations:
Net investment income .30 .03
Net realized and unrealized gain .58 .40
-------- --------
Total from investment operations .88 .43
-------- --------
Distributions:
Dividends from net investment income (.24) --
Distributions from net realized gains (.36) --
-------- --------
Total distributions (.60) --
-------- --------
Change in net asset value .28 .43
-------- --------
Net asset value, end of period $ 9.87 $ 9.59
======== ========
TOTAL RETURN* 9.78% 4.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $527,443 $ 63,428
Ratio of expenses to average net assets 1.87% 1.90%**
Ratio of net investment income to average net assets 2.63% 1.86%**
Portfolio turnover rate 15.91% 21.78%
Average commission rate paid (per share) $ .0075
</TABLE>
* TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE DEFERRED CONTINGENT
SALES CHARGE. NOT ANNUALIZED FOR PERIODS OF LESS THAN A YEAR.
** ANNUALIZED.
+ COMMENCEMENT OF SALES.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 16
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS: 69.6%
- ----------------------------------------------------------------------------------------------------------------
APPLIANCES & HOUSEHOLD DURABLES: 2.1%
Chofu Seisaku Co. Ltd. Jpn. 411,000 $ 9,835,251
Electrolux AB, B Swe. 900,000 52,322,816
Email Ltd. Aus. 6,091,100 15,322,431
Fisher & Paykel Ltd. N.Z. 4,392,500 14,741,561
* Luks Industrial Co. Ltd. H.K. 25,880,000 2,510,184
Sony Corp. Jpn. 1,953,800 122,640,736
---------------
217,372,979
- ----------------------------------------------------------------------------------------------------------------
AUTOMOBILES: 3.3%
Bayerische Motorenwerke (BMW) Ger. 93,375 54,011,555
* Ciadea SA Arg. 3,911,070 17,414,186
* Consorcio G Grupo Dina SA de CV Mex. 4,139,100 3,002,315
* Consorcio G Grupo Dina SA de CV, ADR Mex. 556,500 1,599,938
Peugeot SA Fr. 408,100 46,739,004
Regie Nationale des Usines Renault SA Fr. 1,169,400 25,931,504
* Tofas Turk Otomobil Fabrikasi AS, GDR Tur. 33,950,000 6,280,750
Volkswagen AG Ger. 177,000 65,664,088
Volvo AB, B Swe. 5,141,000 109,459,784
---------------
330,103,124
- ----------------------------------------------------------------------------------------------------------------
BANKING: 9.7%
ABN AMRO NV Neth. 1,335,676 72,957,430
Argentaria Corporacion Bancaria de Espana SA Sp. 1,700,000 70,213,701
Australia & New Zealand Banking Group Ltd. Aus. 17,483,755 91,419,954
Banco Bilbao Vizcaya Sp. 2,100,000 88,244,458
Banco Central Hispano Sp. 1,200,000 24,397,843
Banco Popular Espanol SA Sp. 280,154 48,566,741
Banco Santander SA Sp. 400,000 20,515,279
Bank of Ireland Irl. 1,219,000 8,954,699
Bank Slaski SA W Katowicach Pol. 462,881 42,156,893
Bankinter SA Sp. 72,591 8,205,813
Canadian Imperial Bank of Commerce Can. 700,000 23,352,943
Daegu Bank Co. Ltd. Kor. 161,870 2,387,595
Den Norske Bank Nor. 12,702,700 40,822,711
* Grupo Financiero Banamex Accival SA, L Mex. 154,500 317,048
* Grupo Financiero Serfin SA de CV, rts. Mex. 997,228 --
* Grupo Financiero Serfin SA, B Mex. 2,793,900 1,473,867
HSBC Holdings PLC H.K. 6,850,712 118,276,114
National Australia Bank Ltd. Aus. 10,843,988 105,768,643
National Bank of Canada Can. 2,784,000 23,499,251
National Westminster Bank PLC U.K. 8,038,888 83,151,389
Shinhan Bank Co. Ltd. Kor. 767,527 18,129,283
Svenska Handelsbanken, A Swe. 1,250,000 25,576,268
Union Bank of Norway Nor. 400,000 10,639,543
Westpac Banking Corp. Aus. 11,470,950 56,350,246
---------------
985,377,712
- ----------------------------------------------------------------------------------------------------------------
BEVERAGES & TOBACCO: 0.1%
Buenos Aires Embotelladora SA, ADR Arg. 1,200,000 5,700,000
- ----------------------------------------------------------------------------------------------------------------
BROADCASTING & PUBLISHING: 1.2%
Marieberg Tidnings AB, A Swe. 500,000 10,872,273
News Corp. Ltd. Aus. 7,072,100 31,888,058
News International PLC Aus. 3,640,000 21,595,966
NV Holdingsmij de Telegraaf Neth. 105,400 18,915,507
Sing Tao Holdings Ltd. H.K. 16,702,500 8,424,151
South China Morning Post Holdings Ltd. H.K. 50,137,000 35,337,426
---------------
127,033,381
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996 (cont.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS: 0.7%
Anglian Group PLC U.K. 4,100,000 $ 12,354,604
* Corcemar Corp. Arg. 1,117,900 4,697,858
Cristaleria Espanola SA Sp. 191,241 11,687,587
Keumkang Co. Ltd. Kor. 226,530 14,148,413
Pioneer International Ltd. Aus. 8,187,028 23,638,721
Uralita SA Sp. 1,000,000 8,468,145
-------------
74,995,328
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS & PUBLIC SERVICES: 0.5%
+ Kardex AG, br. Swtz. 15,000 4,562,500
Lex Service PLC U.K. 3,000,000 18,243,845
* Waste Management International PLC U.K. 6,500,000 31,460,288
-------------
54,266,633
- ---------------------------------------------------------------------------------------------------------------------------------
CHEMICALS: 3.3%
Akzo Nobel NV Neth. 687,413 79,856,650
Bayer AG Ger. 1,500,000 53,569,619
DSM NV Neth. 895,000 82,466,125
European Vinyls Corp. EVC International NV Neth. 553,517 16,300,501
Fauji Fertilizer Co. Ltd. Pkr. 4,309,000 8,809,471
Kemira OY, 144A Fin. 4,141,000 45,362,560
Rhone-Poulenc SA, A Fr. 1,518,400 39,787,072
Shanghai Pechemical Co. Ltd., H Chn. 42,928,000 11,103,265
-------------
337,255,263
- ---------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & HOUSING: 0.6%
Cubiertas y Mzov SA Sp. 25,615 1,684,134
Dragados y Construcciones SA Sp. 1,027,875 12,974,176
* Fletcher Challenge Building Ltd. N.Z. 4,072,250 8,970,581
Hollandsche Beton Groep NV Neth. 145,300 26,426,137
Kyudenko Corp. Jpn. 700,000 8,955,361
* Raine PLC U.K. 5,222,700 1,263,905
-------------
60,274,294
- ---------------------------------------------------------------------------------------------------------------------------------
DATA PROCESSING & REPRODUCTION: 0.1%
* Enator AB, B Swe. 349,800 7,579,832
- ---------------------------------------------------------------------------------------------------------------------------------
ELECTRICAL & ELECTRONICS: 3.5%
ABB AB Swe. 838,161 90,494,328
Alcatel Alsthom SA Fr. 1,346,696 104,241,464
G.P. Batteries International Ltd. Sing. 2,464,698 6,901,154
+ Gold Peak Industries Holdings Ltd. H.K. 20,756,000 12,615,997
* Great Wall Electronic International Ltd. H.K. 34,540,800 2,211,147
Hitachi Ltd. Jpn. 6,000,000 55,112,747
Philips Electronics NV Neth. 2,343,900 79,188,672
-------------
350,765,509
- ---------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC COMPONENTS & INSTRUMENTS: 0.1%
BICC U.K. 1,000,000 5,206,951
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES: 0.4%
Koninklijke Pakhoed NV Neth. 1,302,048 36,697,288
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY SOURCES: 4.7%
* Fletcher Challenge Energy Ltd. N.Z. 4,072,250 9,420,516
Hafslund ASA, B Nor. 398,100 2,515,277
MOL Magyar Olay -- Es Gazipari RT, GDS 144A Hun. 1,325,000 13,581,250
Norsk Hydro AS Nor. 1,348,042 61,828,589
Repsol SA Sp. 2,011,000 65,306,291
Saga Petroleum AS, A Nor. 1,828,740 27,673,385
</TABLE>
15
<PAGE> 18
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996 (cont.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY SOURCES (cont.)
Saga Petroleum AS, B Nor. 826,380 $ 11,409,370
Societe Elf Aquitane SA Fr. 1,286,000 93,651,933
Total SA, B Fr. 1,124,760 82,731,520
Transportadora de Gas del Sur SA, ADR B Arg. 1,948,100 23,377,200
YPF Sociedad Anonima Arg. 1,475,000 30,992,666
YPF Sociedad Anonima, ADR Arg. 2,429,300 51,318,963
---------------
473,806,960
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES: 0.5%
Axa SA Fr. 352,114 19,760,241
Julius Baer Holdings AG Swtz. 15,000 16,650,000
London Pacific Group Ltd. U.K. 212,300 747,454
Peregrine Investments Holdings Ltd. H.K. 13,250,000 18,677,659
---------------
55,835,354
- ---------------------------------------------------------------------------------------------------------------------------------
FOOD & HOUSEHOLD PRODUCTS: 3.1%
Albert Fisher Group PLC U.K. 28,700,255 19,044,182
Burns Philp & Co. Ltd. Aus. 8,473,843 12,535,072
C.P. Pokphand Co. Ltd. H.K. 32,559,000 11,053,007
Cafe de Coral Holdings Ltd. H.K. 25,377,100 7,056,032
Chareon Pokphand Feedmill Public Co. Ltd., fgn. Thai. 633,000 2,776,645
Embotelladora Andina SA, ADR Chil. 1,265,950 42,725,813
Goodman Fielder Ltd. Aus. 9,573,100 9,920,389
* Grupo Embotellador de Mexico SA de CV, GDR Mex. 1,683,500 16,624,563
* Grupo Embotellador de Mexico SA, B Mex. 569,700 976,736
Grupo Industrial Maseca SA de CV, ADR B Mex. 15,000 275,625
Grupo Industrial Maseca SA de CV, B Mex. 9,938,000 11,900,698
Hillsdown Holdings PLC U.K. 24,046,153 69,267,518
Lam Soon Foods Inc. H.K. 8,000,000 569,027
McBride PLC U.K. 5,000,000 10,187,513
Melco International Development Ltd. H.K. 2,283,300 745,597
National Foods Ltd. Aus. 8,626,000 9,416,584
Panamerican Beverages Inc., A Mex. 1,461,900 61,765,275
Vitasoy International Holdings Ltd. H.K. 12,645,000 4,905,917
Vitro SA Mex. 8,183,320 15,972,718
Vitro SA, ADR Mex. 1,463,840 8,783,040
---------------
316,501,951
- ---------------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER: 5.6%
Aracruz Celulose SA, ADR Braz. 3,677,700 32,639,588
* Asia Pulp & Paper Co. Ltd., ADR Indo. 1,882,300 22,117,025
Assidomaen AB Swe. 1,562,500 38,930,667
Carter Holt Harvey Ltd. N.Z. 7,127,200 15,995,498
Cartiere Burgo SPA Itl. 5,771,750 26,312,474
* Empaques Ponderosa SA de CV, B Mex. 861,600 2,613,492
* Enso OY, A Fin. 285,000 2,414,795
* Enso OY, R Fin. 4,702,800 40,162,073
Fletcher Challenge Ltd. Forestry Division, Aus. N.Z. 324,619 439,112
Fletcher Challenge Ltd. Forestry Division, N.Z. N.Z. 11,107,235 15,340,214
* Fletcher Challenge Paper Ltd. N.Z. 11,105,301 21,395,871
* Mayr-Melnhof Karton AG Aust. 400,000 18,783,310
Metsa Serla OY, B Fin. 2,759,000 20,662,970
Mo Och Domsjoe AB, B Swe. 1,324,300 38,295,084
Munksjo AB Swe. 1,100,000 10,132,355
Norske Skogindustrier AS, A Nor. 410,860 12,659,004
Portucel Industrial Empresa Product de Celulose SA Port. 1,600,000 10,842,279
Primex Forest Products Ltd. Can. 300,000 1,534,695
PT Barito Pacific Timber, fgn. Indo. 18,872,000 11,684,202
</TABLE>
16
<PAGE> 19
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996 (cont.)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER (cont.)
PT Indah Kiat Pulp & Paper Corp., fgn. Indo. 43,221,200 $ 35,064,167
* PT Indah Kiat Pulp & Paper Corp., wts. Indo. 3,432,000 1,575,320
PT Inti Indorayon Utama, fgn. Indo. 20,000,000 17,292,912
PT Pabrik Kertas Tjiwi Kimia, fgn. Indo. 16,248,568 16,130,624
Sappi Ltd. S.AF. 2,000,000 19,253,482
Stora Kopparbergs Bergslags AB, A Swe. 531,700 7,466,851
Stora Kopparbergs Bergslags AB, B Swe. 2,348,100 32,797,912
Svenska Cellulosa AB, B Swe. 735,600 15,606,514
Unipapel SA Sp. 167,900 3,017,975
UPM-Kymmene Corp. Fin. 3,267,834 74,882,459
-------------
566,042,924
- ---------------------------------------------------------------------------------------------------------------------------------
HEALTH & PERSONAL CARE: 0.8%
Ciba-Geigy AG Swtz. 55,000 69,437,500
* Nycomed ASA, B Nor. 398,100 4,751,078
Pacific Chemical Co. Ltd. Kor. 255,000 4,419,896
Swank International Manufacturing Co. Ltd. H.K. 8,802,000 1,365,975
-------------
79,974,449
- ---------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL COMPONENTS: 0.7%
Sandvik AB, A Swe. 180,000 4,104,283
Sandvik AB, B Swe. 1,791,000 40,837,618
SKF AB, B Swe. 967,600 22,720,303
-------------
67,662,204
- ---------------------------------------------------------------------------------------------------------------------------------
INSURANCE: 2.3%
Ace Ltd. Bmu. 1,329,000 61,964,625
Baloise-Holding Swtz. 30,208 64,192,000
HiH Winterthur International Holdings Ltd. Aus. 6,248,600 12,901,139
Ing Groep NV Neth. 1,633,750 50,867,133
London Insurance Group Inc. Can. 300,000 6,774,583
National Mutual Asia Ltd. H.K. 19,332,000 16,125,626
* Ste Centrale Du Groupe des Asurances Nationales Fr. 787,071 18,743,301
-------------
231,568,407
- ---------------------------------------------------------------------------------------------------------------------------------
LEISURE & TOURISM: 0.4%
Grand Hotel Holdings Ltd. H.K. 17,930,000 6,956,353
Harbour Centre Development Ltd. H.K. 2,296,000 3,073,210
Kuoni Reisen Holding AG, B Swtz. 12,849 29,766,850
-------------
39,796,413
- ---------------------------------------------------------------------------------------------------------------------------------
MACHINERY & ENGINEERING: 0.2%
Hitachi Koki Co. Ltd. Jpn. 588,000 5,682,467
Sasib SPA, di Risp Itl. 1,546,428 2,744,248
* Saurer AG Swtz. 19,187 7,482,930
* Tampella AB OY Fin. 1,108,599 2,404,044
-------------
18,313,689
- ---------------------------------------------------------------------------------------------------------------------------------
MERCHANDISING: 2.2%
Dairy Farm International Holdings Ltd. H.K. 53,568,491 42,319,108
+ Hudsons Bay Co. Can. 3,376,600 49,476,252
Koninklijke Bijenkorf Beheer NV (KBB) Neth. 150,000 11,653,117
Kwik Save Group PLC U.K. 6,050,119 37,312,011
* Sa des Galeries Lafayette Fr. 18,097 5,181,547
Safeway PLC U.K. 6,603,978 35,263,009
W.H. Smith Group U.K. 4,822,300 38,398,304
* Yaohan Hongkong Corp. Ltd. H.K. 10,000,000 446,169
-------------
220,049,517
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996 (cont.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
METALS & MINING: 4.4%
Alcan Aluminum Ltd. Can. 2,209,410 $ 69,752,996
Arbed SA Lux. 237,473 26,948,396
* Asturiana del Zinc SA Sp. 1,601,940 11,645,819
Boehler Uddeholm AG Aust. 97,000 7,563,643
Companhia Siderurgica Nacional ADR Braz. 877,975 20,257,306
De Beers Consolidated Mines Ltd. S.AF. 578,800 18,025,025
Elkem AS Nor. 1,524,000 21,635,401
Maanshan Iron & Steel Co. Ltd., H Chn. 106,776,000 19,332,221
Outokumpu OY, A Fin. 3,892,294 73,528,989
Pechiney SA, A Fr. 1,736,105 72,676,953
Pohang Iron & Steel Co. Ltd. Kor. 408,000 31,628,466
RGC Ltd. Aus. 1,748,401 8,021,838
Trelleborg AB, B Swe. 2,350,000 30,872,726
* Union Miniere NPV Bel. 500,000 38,455,231
-------------
450,345,010
- ---------------------------------------------------------------------------------------------------------------------------------
MULTI-INDUSTRY: 3.3%
Alfa SA de CV, A Mex. 677,000 2,968,711
* Alfa SA de CV, A 144A Mex. 3,323,000 14,571,678
Amer Group Ltd., A Fin. 800,500 19,148,791
Cheung Kong Holdings Ltd. H.K. 9,500,000 66,650,501
* Fotex First Hungarian-American Photo-Service Hun. 1,322,415 990,525
Jardine Matheson Holdings Ltd. H.K. 4,568,296 28,780,265
Jardine Strategic Holdings Ltd. H.K. 11,430,649 36,578,077
Marine Wendel Fr. 157,433 14,051,383
Nokia AB, A Fin. 1,822,600 77,417,869
Pacific Dunlop Ltd. Aus. 25,464,075 55,192,910
Swire Pacific Ltd., A H.K. 780,400 6,938,571
Swire Pacific Ltd., B H.K. 6,408,000 8,950,068
-------------
332,239,349
- ---------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE: 1.3%
+ Bail Investissement Fr. 164,302 25,468,148
Hang Lung Development Co. Ltd. H.K. 23,875,000 45,079,211
* Hang Lung Development Co. Ltd., wts. H.K. 856,700 183,915
Hon Kwok Land Investment Co. Ltd. H.K. 20,900,000 7,297,769
Hong Kong Land H.K. 8,428,000 19,131,560
* Naeckebro AB Swe. 8,600 118,825
Ryoden Development Ltd. H.K. 20,000,000 4,888,458
Tai Cheung Holdings Ltd. H.K. 16,524,613 12,715,350
Trans Tasman Properties Ltd. N.Z. 566,263 277,634
Union du Credit Bail Immobilier Unibail Fr. 150,000 15,342,844
-------------
130,503,714
- ---------------------------------------------------------------------------------------------------------------------------------
RECREATION & OTHER CONSUMER GOODS: 0.1%
Shenzhen China Bicycles Co. Holdings Ltd., B Chn. 21,389,400 4,896,119
Yue Yuen Industrial Holdings Ltd. H.K. 26,012,000 7,484,863
-------------
12,380,982
- ---------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS: 5.6%
British Telecommunications PLC U.K. 12,248,500 71,809,267
Cpt-Telefonica del Peru SA, ADR B Per. 125,000 2,921,875
Cpt-Telefonica del Peru SA, B Per. 8,109,856 18,944,886
* SPT Telecom AS Csk. 25,800 3,385,269
STET (Sta Finanziaria Telefonica Torino) SPA Itl. 4,989,500 15,863,002
STET (Sta Finanziaria Telefonica Torino) SPA, di Risp Itl. 15,686,500 37,728,142
Telecom Argentina Stet France SA, ADR Arg. 970,800 37,739,850
Telecom Italia Spa, di Risp Itl. 38,806,100 62,393,769
</TABLE>
18
<PAGE> 21
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996 (cont.)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (cont.)
Tele Danmark AS, B Den. 1,050,000 $ 51,774,786
Telefonica de Argentina SA, B, ADR Arg. 1,800,000 42,975,000
Telefonica de Espana SA Sp. 6,161,700 114,447,394
Telefonos de Mexico SA, L Mex. 13,623,481 22,135,349
Telefonos de Mexico SA, L, ADR Mex. 2,700,200 88,769,075
-------------
570,887,664
- ---------------------------------------------------------------------------------------------------------------------------------
TEXTILES & APPAREL: 0.4%
Ceramico Corp. Ltd. N.Z. 2,000,000 2,030,218
Daehan Synthetic Fiber Co. Ltd. Kor. 21,740 2,043,308
Fountain Set Holdings Ltd. H.K. 5,657,000 1,163,224
PT Indorama Synthetics, fgn. Indo. 6,000,000 14,474,808
Tae Kwang Industrial Co. Ltd. Kor. 15,760 7,213,915
Winsor Industrial Corp. Ltd. H.K. 12,122,000 10,738,532
-------------
37,664,005
- ---------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION: 3.3%
Anangel-American Shipholdings Ltd., ADR Gr. 21,300 186,375
British Airways PLC U.K. 3,724,000 30,583,210
Cathay Pacific Airways Ltd. H.K. 40,060,000 66,572,389
Danzas Holding AS, partn. ctf. Swtz. 25,000 4,833,333
Great Eastern Shipping Co. Ltd. Ind. 4,000,000 4,712,482
* Great Eastern Shipping Co. Ltd., GDR Ind. 543,000 3,380,175
Great Eastern Shipping Co. Ltd., GDR 144A Ind. 652,500 4,061,813
IMC Holdings Ltd. H.K. 11,982,000 6,818,080
Kvaerner Industrier AS, A Nor. 600,000 21,435,090
Malaysian International Shipping Corp. Bhd., fgn. Mal. 3,936,000 12,167,140
Orient Overseas International Ltd. H.K. 12,360,000 9,111,154
Peninsular & Oriental Steam Navigation Co. U.K. 1,980,000 15,905,166
Qantas Airways Ltd., ADR, 144A Aus. 481,700 8,068,475
Shanghai Hai Xing Shipping Co., H Chn. 73,850,000 5,348,335
Shun Tak Holdings H.K. 45,666,000 26,871,038
Singapore Airlines Ltd., fgn. Sing. 5,595,000 59,242,112
Stena Line AB, B free Swe. 2,000,000 8,969,626
* Swissair Schweizerische Luftverkehr AG Swtz. 48,940 44,739,317
Transport Development Group PLC U.K. 1,000,000 3,067,964
-------------
336,073,274
- ---------------------------------------------------------------------------------------------------------------------------------
UTILITIES--ELECTRICAL & GAS: 5.0%
* British Energy Ltd. U.K. 67,500 103,280
* British Energy Ltd., 144A U.K. 11,050,385 16,907,957
British Gas PLC U.K. 23,774,000 76,278,427
* CEZ Csk. 210,352 8,346,658
Cia Energetica de Minas Gerais, ADR Braz. 7,000 210,754
Compania Sevillana de Electricidad Sp. 7,397,428 59,392,172
Consolidated Electric Power Asia Ltd. H.K. 15,094,700 27,817,585
Electrabel SA Bel. 220,000 48,632,338
Electricidad de Caracas Venz. 11,423,655 9,273,364
Evn Energie-Versorgung Niederoesterreich AG Aust. 162,800 22,102,717
Guangdong Electric Power Development Co Ltd, B, 144A Chn. 10,341,200 7,622,999
Hongkong Electric Holdings Ltd. H.K. 2,656,000 7,934,510
Iberdrola SA Sp. 10,267,215 92,685,863
Shandong Huaneng Power Chn. 3,000,000 28,125,000
Thames Water Group PLC U.K. 6,000,000 52,178,801
VEBA AG Ger. 1,000,000 52,403,960
-------------
510,016,385
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
TEMPLETON FOREIGN FUND
Investment Portfolio, August 31, 1996 (cont.)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
- ---------------------------------------------------------------------------------------------------------------------------------
WHOLESALE & INTERNATIONAL TRADE: 0.1%
Inchcape Bhd., fgn. Sing. 792,100 $ 2,510,493
Sime Darby Hongkong Ltd. H.K. 5,030,000 5,301,584
---------------
7,812,077
---------------
TOTAL COMMON STOCKS (cost $6,280,137,644) 7,050,102,622
- ---------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS: 2.2%
- ---------------------------------------------------------------------------------------------------------------------------------
Ballast Nedam NV, ctf., conv., pfd. Neth. 140,000 6,660,644
Banco Bradesco SA, pfd. Braz. 300,000,000 2,538,496
Bayerische Motorenwerke (BMW), pfd. Ger. 10,000 4,142,312
Cemig-Cia Energetica de Minas Gerais, pfd. Braz. 411,765,636 12,397,332
Fiat Spa, pfd. Itl. 20,887,000 33,030,026
Jardine Strategic Holdings Ltd., 7.50%, conv. H.K. 9,900,000 10,791,000
+ Krones AG Herman Kronseder Maschinen Fabrik, pfd. Ger. 30,000 11,149,779
Petrobras-Petroleo Brasileiro SA, pfd. Braz. 22,929,500 2,741,117
Telebras-Telecomunicacoes Brasileiras SA, pfd. Braz. 572,200,000 42,506,125
Telebras-Telecomunicacoes Brasileiras SA, pfd., ADR Braz. 1,100,000 81,812,500
Telesp-Telecomunicacoes de Sao Paulo SA, pfd. Braz. 24,372,500 4,676,182
Volkswagen AG, pfd. Ger. 23,000 6,387,810
---------------
TOTAL PREFERRED STOCKS (cost $153,882,773) 218,833,323
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL IN
LOCAL CURRENCY**
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS: 14.3%
- ---------------------------------------------------------------------------------------------------------------------------------
Arbed SA, 2.50%, conv., 7/15/03 Ger. 4,500,000 2,592,324
British Airways, 9.75%, 6/15/05 U.K. 1,450,000 5,133,193
Government of Australia:
7.00%, 8/15/98 Aus. 60,600,000 47,952,110
6.25%, 3/15/99 Aus. 61,700,000 47,817,085
7.00%, 4/15/00 Aus. 61,700,000 48,253,916
Softe SA, 4.25%, conv., 7/30/98, 144A Itl. 2,280,000,000 2,081,847
U.S. Treasury Notes:
7.00%, 9/30/96 U.S. 180,000,000 180,225,000
6.875%, 10/31/96 U.S. 180,000,000 180,394,200
7.25%, 11/15/96 U.S. 45,000,000 45,154,800
7.25%, 11/30/96 U.S. 180,000,000 180,703,800
7.50%, 12/31/96 U.S. 180,000,000 181,125,000
6.375%, 6/30/97 U.S. 25,800,000 25,933,128
6.125%, 3/31/98 U.S. 200,000,000 199,656,000
6.375%, 7/15/99 U.S. 102,500,000 102,211,975
6.00%, 10/15/99 U.S. 103,000,000 101,535,340
6.375%, 1/15/00 U.S. 103,000,000 102,324,320
---------------
TOTAL BONDS (cost $1,445,618,607) 1,453,094,038
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM OBLIGATIONS: 13.0% (cost $1,313,183,797)
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bills 4.92% to 5.15% with
maturities to 11/21/96 U.S. 1,322,203,000 1,313,564,855
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS: 99.1% (cost $9,192,822,821) 10,035,594,838
OTHER ASSETS, LESS LIABILITIES: 0.9% 94,057,605
---------------
TOTAL NET ASSETS: 100.0% $10,129,652,443
===============
</TABLE>
* NON-INCOME PRODUCING.
** CURRENCY OF COUNTRIES INDICATED.
+ SEE NOTE 5.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 23
TEMPLETON FOREIGN FUND
Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1996
Assets:
Investments in securities, at value
(identified cost $9,192,822,821) $10,035,594,838
Cash 478,977
Receivables:
Investment securities sold 57,736,625
Capital shares sold 57,118,169
Dividends and interest 53,516,843
---------------
Total assets 10,204,445,452
---------------
Liabilities:
Payables:
Investment securities purchased 57,211,513
Capital shares redeemed 6,202,642
Accrued expenses and other 11,378,854
---------------
Total liabilities 74,793,009
---------------
Net assets, at value $10,129,652,443
===============
Net assets consist of:
Undistributed net investment income $ 209,796,228
Net unrealized appreciation 842,772,017
Accumulated net realized gain 176,358,750
Net capital paid in on shares of capital stock 8,900,725,448
---------------
Net assets, at value $10,129,652,443
===============
Class I
Net asset value per share
($9,602,209,014 - 963,394,211
shares outstanding) $ 9.97
===============
Maximum offering price ($9.97 - 94.25%) $ 10.58
===============
Class II
Net asset value per share
($527,443,429 - 53,423,444
shares outstanding) $ 9.87
===============
Maximum offering price ($9.87 - 99.00%) $ 9.97
===============
STATEMENT OF OPERATIONS
for the year ended August 31, 1996
Investment income:
(net of $25,040,711 foreign taxes
withheld)
Dividends $219,029,252
Interest 136,447,476
------------
Total income $355,476,728
Expenses:
Management fees (Note 3) 51,600,846
Administrative fees (Note 3) 6,639,420
Distribution fees (Note 3)
Class I 20,366,669
Class II 2,844,257
Transfer agent fees (Note 3) 6,871,000
Custodian fees 4,352,070
Reports to shareholders 2,005,000
Audit fees 56,000
Legal fees (Note 3) 36,200
Registration and filing fees 1,350,000
Directors' fees and expenses 98,000
Other 233,418
------------
Total expenses 96,452,880
------------
Net investment income 259,023,848
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 266,891,513
Foreign currency transactions (4,965,890)
------------
261,925,623
Net unrealized appreciation on
investments 309,726,009
------------
Net realized and unrealized gain 571,651,632
------------
Net increase in net assets resulting
from operations $830,675,480
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE> 24
TEMPLETON FOREIGN FUND
Financial Statements (cont.)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended August 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
--------------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 259,023,848 $ 163,691,643
Net realized gain on investment and foreign currency transactions 261,925,623 219,225,783
Net unrealized appreciation (depreciation) 309,726,009 (131,760,311)
-------------- --------------
Net increase in net assets resulting from operations 830,675,480 251,157,115
Distributions to shareholders:
From net investment income
Class I (185,409,586) (84,334,594)
Class II (2,866,694) --
From net realized gain
Class I (267,921,946) (275,006,347)
Class II (4,593,277) --
Capital share transactions (Note 2)
Class I 2,308,641,984 2,035,091,105
Class II 446,460,741 63,320,854
-------------- --------------
Net increase in net assets 3,124,986,702 1,990,228,133
Net assets:
Beginning of year 7,004,665,741 5,014,437,608
-------------- --------------
End of year $10,129,652,443 $7,004,665,741
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE> 25
TEMPLETON FOREIGN FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Templeton Foreign Fund (the Fund) is a series of Templeton Funds, Inc. (the
Company) which is an open-end, diversified management investment company
registered under the Investment Company Act of 1940. The Fund seeks long-term
capital growth through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the United States. The
following summarizes the Fund's significant accounting policies.
A. SECURITIES VALUATIONS:
Securities listed or traded on a recognized national or foreign exchange or
NASDAQ are valued at the last reported sales prices on the principal exchange on
which the securities are traded. Over-the-counter securities and listed
securities for which no sale is reported are valued at the mean between the last
current bid and asked prices. Securities for which market quotations are not
readily available are valued at fair value as determined by management and
approved in good faith by the Board of Directors.
B. FOREIGN CURRENCY TRANSACTIONS:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of portfolio securities and income items denominated in foreign currencies
are translated into U.S. dollar amounts on the respective dates of such
transactions. When the Fund purchases or sells foreign securities it customarily
enters into foreign exchange contracts to minimize foreign exchange risk between
the trade date and the settlement date of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the differences between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities resulting from
changes in the exchange rates.
C. INCOME TAXES:
It is the Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all its
taxable income to its shareholders. Therefore, no provision has been made for
income taxes.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND EXPENSES:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date. Certain dividend income on foreign
securities is recorded as soon as information is available to the Fund. Interest
income and estimated expenses are accrued daily. Distributions to shareholders,
which are determined in accordance with income tax regulations, are recorded on
the ex-dividend date.
E. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. TRANSACTIONS IN SHARES OF CAPITAL STOCK
The Fund offers two classes of shares: Class I shares and Class II shares.
Shares of each class are identical except for their initial sales load, a
contingent deferred sales charge on Class II shares, distribution fees, and
voting rights on matters affecting a single class. At August 31, 1996, there
were 3.2 billion shares of capital stock authorized ($1.00 par value) of which
2.0 billion shares have been classified as Fund shares. Transactions in the
Fund's shares were as follows:
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------------
YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1995
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 351,052,593 $ 3,372,527,051 294,214,786 $2,724,124,163
Shares issued on reinvestment of distributions 42,603,776 387,492,970 32,535,343 299,952,040
Shares redeemed (151,516,955) (1,451,378,037) (106,358,799) (988,985,098)
------------ -------------- ------------ --------------
Net increase 242,139,414 $ 2,308,641,984 220,391,330 $2,035,091,105
============ ============== ============ ==============
</TABLE>
23
<PAGE> 26
TEMPLETON FOREIGN FUND
Notes to Financial Statements (cont.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS II
-----------------------------------------------------------
FOR THE PERIOD
MAY 1, 1995
YEAR ENDED THROUGH
AUGUST 31, 1996 AUGUST 31, 1995
---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 48,025,414 $ 458,405,634 6,634,457 $ 63,535,244
Shares issued on reinvestment of distributions 580,233 5,247,258 -- --
Shares redeemed (1,794,465) (17,192,151) (22,195) (214,390)
------------ -------------- ------------ --------------
Net increase 46,811,182 $ 446,460,741 6,612,262 $ 63,320,854
============ ============== ============ ==============
</TABLE>
3. INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Company are also directors or officers of Templeton
Global Advisors Ltd. (TGAL), Templeton Global Investors, Inc. (TGII), Franklin
Templeton Distributors, Inc. (FTD), and Franklin Templeton Investor Services,
Inc. (FTIS), the Fund's investment manager, administrative manager, principal
underwriter, and transfer agent, respectively.
The Fund pays monthly an investment management fee to TGAL equal, on an annual
basis, to 0.75% of the average daily net assets of the Fund up to $200 million,
reduced to 0.675% of such average daily net assets in excess of $200 million,
and further reduced to 0.60% of such net assets in excess of $1.3 billion. The
Fund pays TGII monthly its allocated share of an administrative fee of 0.15% per
annum on the first $200 million of the Company's aggregate average daily net
assets, 0.135% of the next $500 million, 0.10% of the next $500 million, and
0.075% per annum of such average net assets in excess of $1.2 billion. For the
year ended August 31, 1996, FTD received net commissions of $3,233,516 from the
sale of the Fund's shares and FTIS received fees of $6,871,000.
Under the distribution plans for Class I and Class II shares, the Fund
reimburses FTD quarterly for FTD's costs and expenses in connection with any
activity that is primarily intended to result in a sale of Fund shares, subject
to a maximum of 0.25% and 1.00% per annum of the average daily net assets of
Class I and Class II shares, respectively. Under the Class I distribution plan,
costs and expenses exceeding the maximum may be reimbursed in subsequent
periods. At August 31, 1996, unreimbursed expenses amount to $2,163,307. Class
II shares redeemed within 18 months are subject to a contingent deferred sales
charge. Contingent deferred sales charges of $105,779 were paid to FTD for the
year ended August 31, 1996.
An officer of the Company is a partner of Dechert Price & Rhoads, legal counsel
for the Fund, which firm received fees of $36,200 for the year ended August 31,
1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1996 aggregated $2,794,163,325 and $1,093,754,415,
respectively. The cost of securities for federal income tax purposes is
$9,193,456,715. Realized gains and losses are reported on an identified cost
basis.
At August 31, 1996, the aggregate gross unrealized appreciation and depreciation
of portfolio securities, based on cost for federal income tax purposes, was as
follows:
<TABLE>
<S> <C>
Unrealized appreciation $1,240,843,029
Unrealized depreciation (398,704,906)
--------------
Net unrealized appreciation $ 842,138,123
==============
</TABLE>
5. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Act of 1940 defines "affiliated companies" as investments in
portfolio companies in which the Company owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at August 31, 1996
amounted to $103,272,676. For the year ended August 31, 1996, dividend income
from affiliated companies was $3,537,269.
24
<PAGE> 27
TEMPLETON FOREIGN FUND
Independent Auditor's Report
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Templeton Foreign Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of Templeton Foreign Fund series of Templeton Funds,
Inc. as of August 31, 1996, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the periods indicated in
the accompanying financial statements. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Foreign Fund series of Templeton Funds, Inc. as of August 31, 1996,
the results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles.
/s/McGladrey & Pullen, LLP
[McGladrey & Pullen, LLP]
New York, New York
September 27, 1996
25
<PAGE> 28
NOTES
<PAGE> 29
LITERATURE REQUEST
- --------------------------------------------------------------------------------
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. To ensure the highest quality of service, telephone calls
to or from our service departments may be monitored, recorded and accessed.
These calls can be determined by the presence of a regular beeping tone.
FRANKLIN TEMPLETON GROUP
<TABLE>
<S> <C> <C> <C>
GLOBAL GROWTH GLOBAL INCOME INCOME FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
Franklin Global Health Franklin Global Government Franklin Adjustable Rate TAX-FREE INCOME
Care Fund Income Fund Securities Fund Alabama
Franklin Templeton Franklin Templeton Hard Franklin Adjustable U.S. Arizona*
Japan Fund Currency Fund Government Securities Fund Arkansas**
Templeton Developing Franklin Templeton High Franklin's AGE High California*
Markets Trust Income Currency Fund Income Fund Colorado
Templeton Foreign Fund Templeton Americas Franklin Investment Grade Connecticut
Templeton Foreign Smaller Government Securities Fund Income Fund Florida*
Companies Fund Franklin Short-Intermediate U.S. Georgia
Templeton Global GROWTH Government Securities Fund Hawaii**
Infrastructure Fund Franklin Blue Chip Fund Franklin U.S. Government Indiana
Templeton Global Franklin California Growth Fund Securities Fund Kentucky
Opportunities Trust Franklin DynaTech Fund Franklin Money Fund Louisiana
Templeton Global Franklin Equity Fund Franklin Federal Money Fund Maryland
Real Estate Fund Franklin Gold Fund Massachusetts***
Templeton Global Smaller Franklin Growth Fund FOR NON-U.S. INVESTORS: Michigan*
Companies Fund Franklin MidCap Growth Fund Franklin Tax-Advantaged Minnesota***
Templeton Greater Franklin Small Cap Growth Fund High Yield Securities Fund Missouri
European Fund Franklin Tax-Advantaged New Jersey
Templeton Growth Fund GROWTH AND INCOME International Bond Fund New York*
Templeton Latin America Franklin Asset Allocation Fund Franklin Tax-Advantaged U.S. North Carolina
Fund Franklin Balance Sheet Government Securities Fund Ohio***
Templeton Pacific Investment Fund Oregon
Growth Fund Franklin Convertible FOR CORPORATIONS: Pennsylvania
Templeton World Fund Securities Fund Franklin Corporate Qualified Tennessee**
Franklin Equity Income Fund Dividend Fund Texas
GLOBAL GROWTH AND INCOME Franklin Income Fund Virginia**
Franklin Global Utilities Fund Franklin MicroCap Value Fund FRANKLIN FUNDS SEEKING Washington**
Franklin Templeton German Franklin Natural Resources Fund TAX-FREE INCOME
Government Bond Fund Franklin Real Estate Federal Intermediate-Term VARIABLE ANNUITIES
Franklin Templeton Securities Fund Tax-Free Income Fund Franklin Valuemark(SM)
Global Currency Fund Franklin Rising Dividends Fund Federal Tax-Free Income Fund Franklin Templeton
Templeton Global Bond Fund Franklin Strategic Income Fund High Yield Tax-Free Valuemark Income Plus
Templeton Growth and Franklin Utilities Fund Income Fund (an immediate annuity)
Income Fund Franklin Value Fund Insured Tax-Free Income Fund
Templeton American Trust, Inc. Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
</TABLE>
*Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
**The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
***Portfolio of insured municipal securities.
