TEMPLETON FUNDS, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUSES OF
TEMPLETON WORLD FUND AND TEMPLETON FOREIGN FUND DATED
JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME, 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/DIAL BEN
TABLE OF CONTENTS
General Information and History.......................1
Investment Objectives and Policies....................1
-Investment Policies.................................1
-Repurchase Agreements...............................2
-Loans of Portfolio Securities.......................2
-Debt Securities.....................................2
-Structured Investments .............................4
-Stock Index Futures Contracts.......................5
-Stock Index Options.................................6
-Investment Restrictions.............................7
-Risk Factors . . . . . . . . . .................10
-Trading Policies...................................15
-Personal Securities Transactions...................15
Management of the Company............................16
Director Compensation................................21
Principal Shareholders...............................22
Investment Management and Other
Services.......................................... 23
-Investment Management
Agreements.........................................23
-Management Fees....................................25
-The Investment Manager.............................26
-Business Manager...................................26
-Custodian and Transfer Agent.......................27
-Legal Counsel......................................28
-Independent Accountants............................28
-Reports to Shareholders............................28
Brokerage Allocation.................................28
Purchase, Redemption and
Pricing of Shares..................................31
-Ownership and Authority
Disputes..........................................32
-Tax-Deferred Retirement Plans......................32
-Letter of Intent...................................34
-Special Net Asset Value Purchases..................35
-Redemptions in Kind. . . . . . . ..................36
Tax Status...........................................36
Principal Underwriter................................43
Description of Shares................................45
Performance Information..............................46
Financial Statements.................................49
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 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
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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 Global
Advisors Limited (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.
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 lower than Baa by
Moody's or BBB 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
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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 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
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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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities
in which the Funds may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchases by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
("Structured Investments") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities or interest rate provisions; the extent of the payments made with
respect to Structured Investments is dependent on the extent of the cash flow on
the underlying instruments. Because Structured Investments of the type in which
the Funds anticipate investing typically involve no credit enhancement, their
credit risk will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments
that is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structures Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act.
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Structured Investments are typically sold in private placement transactions, and
there currently is no active trading market for Structured Investments. To the
extent such investments are illiquid, they will be subject to the Fund's
restrictions on investments in illiquid securities.
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 ("NYSE"). 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 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
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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 1/2% 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 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,
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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 1/2 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
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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 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.)
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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 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 developing, 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. A Fund, therefore, may encounter difficulty in obtaining market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Foreign markets have substantially less volume than the NYSE 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,
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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 or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which a Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had any may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
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.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (1) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (2) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (3) pervasiveness
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of corruption and crime in the Russian economic system; (4) currency exchange
rate volatility and the lack of available currency hedging instruments; (5)
higher rates of inflation (including the risk of social unrest associated with
periods of hyper-inflation); (6) controls on foreign investment and local
practices disfavoring foreign investors and limitations on repatriation of
invested capital, profits and dividends, and on a Fund's ability to exchange
local currencies for U.S. dollars; (7) the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies to the
detriment of investors, including non-market-oriented policies such as the
support of certain industries at the expense of other sectors or investors, or a
return to the centrally planned economy that existed prior to the dissolution of
the Soviet Union; (8) the financial condition of Russian companies, including
large amounts of inter-company debt which may create a payments crisis on a
national scale; (9) dependency on exports and the corresponding importance of
international trade; (10) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and
(11) possible difficulty in identifying a purchaser of securities held by a Fund
due to the underdeveloped nature of the securities markets.
There is little historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia are privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision and it is possible for a Fund to lose its
registration through fraud, negligence or even mere oversight. While a Fund will
endeavor to ensure that its interest continues to be appropriately recorded
either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Fund
of its ownership rights or improperly
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dilute its interests. In addition, while applicable Russian regulations impose
liability on registrars for losses resulting from their errors, it may be
difficult for a Fund to enforce any rights it may have against the registrar or
issuer of the securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than 1,000
shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. This practice may prevent a Fund from investing in the securities of
certain Russian companies deemed suitable by the Investment Manager. Further,
this also could cause a delay in the sale of Russian company securities by a
Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to
potential loss on the investment.
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 cessation of trading on national exchanges, 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. Some countries in which a Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally traded. Certain
of these currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a Fund's portfolio
securities are denominated may have a detrimental impact on that Fund. Through
the flexible
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<PAGE>
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 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. The Directors 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.
- 14 -
<PAGE>
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 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 certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated 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
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<PAGE>
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
HARRIS J. ASHTON
Metro Center
1 Station Place
Stamford, Connecticut
Director
Chairman of the Board, president
and chief executive officer of
General Host Corporation (nursery
and craft centers); and a director
of RBC Holdings (U.S.A.) Inc. (a
bank holding company) and Bar-S
Foods. Age 63.
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Director
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman
of Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillon, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
- 16 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING PAST FIVE YEARS
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Director
Retired; formerly, credit adviser for the National Bank of Canada.
Age 85.
HASSO-G VON DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Director
Farmer; and president of Clairhaven
Investments, Ltd. and other private
investment companies. Age 79.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Director
Member of the law firm of Pitney,
Hardin, Kipp & Szuch; and a
director of General Host
Corporation. Age 63.
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Director
President of Galbraith Properties,
Inc. (personal investment company);
director of Gulfwest Banks, Inc.
(bank holding company) (1995-
present) and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith & Hansberger
Ltd. (1986-1992); and chairman of
Templeton Funds Management, Inc.
(1974-1991). Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director
Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida 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); and
a director of Checkers Drive-In Restaurants, Inc.
Age 72.
- 17 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING PAST FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of General Host Corporation, and
Templeton Global Investors, Inc.; and officer and director, trustee or managing
general partner, as the case may be, of most other subsidiaries of Franklin and
of 55 of the investment companies in the Franklin Templeton Group. Age 62.
RUPERT H. JOHNSON, JR.*
777 Mariners Island Blvd.
San Mateo, California
Director
Executive vice president and director of Franklin Resources, Inc.;
president and director of Franklin Advisers, Inc.; executive vice president and
director of Franklin Templeton Distributors, Inc.; and officer and/or director,
trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin, and of 42 of the investment companies in the Franklin
Templeton Group. Age 55.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Director
Director or trustee of various
civic associations; formerly,
economic analyst, U.S. Government.
Age 66.
- 18 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING PAST FIVE YEARS
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director
Chairman of White River Corporation (information services); director of Fund
America Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, Fusion Systems Corporation, Infovest Corporation,
and Medimmune, Inc.; formerly, chairman of Hambrecht and Quist Group, director
of H&Q Healthcare Investors, and president of the National Association of
Securities Dealers, Inc. Age 67.
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978-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 The Federal Reserve Bank
of Atlanta (1958-1965); and a director of various other business and nonprofit
organizations. Age 66.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
President
President and director of Templeton Global Advisors Limited; chief investment
officer of global equity research for Templeton Worldwide, Inc.; president or
vice president of the Templeton Funds; formerly, investment administrator with
Roy West Trust Corporation (Bahamas) Limited (1984-1985). Age 35.
- 19 -
<PAGE>
NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH COMPANY DURING PAST FIVE YEARS
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior vice president, treasurer and chief financial officer of
Franklin Resources, Inc.; director and executive vice president of Templeton
Investment Counsel, Inc.; director, president and chief executive officer of
Templeton Global Investors, Inc.; president or vice president of various
Templeton Funds; director or trustee of six Templeton Funds; accountant, Arthur
Andersen & Company (1982-1983); and a member of the International Society of
Financial Analysts and the American Institute of Certified Public Accountants.
Age 35.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the Templeton Funds; vice president and
treasurer of Templeton Global Investors, Inc. and Templeton Worldwide, Inc.;
assistant vice president of Franklin Templeton Distributors, Inc.; formerly,
vice president and controller of the Keystone Group, Inc. Age 55.
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds;
senior vice president of Templeton Worldwide, Inc., Templeton Global Investors,
Inc., and Templeton Funds Trust Company; formerly, senior tax manager of Ernst &
Young (certified public accountants) (1977-1989). Age 41.
- 20 -
<PAGE>
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice president of
Franklin Templeton Distributors, Inc.; formerly, secretary of the Templeton
Funds; attorney, Dechert Price & Rhoads (1985-1988) and Freehill, Hollingdale &
Page (1988); and judicial clerk, U.S. District Court (Eastern District of
Virginia) (1984-1985). Age 42.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads.
Age 50.
- --------------------
* These Directors 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 Global Advisors Limited are limited partners of
Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Directors, except
that Messrs. Charles B. Johnson and Rupert H.
Johnson, Jr. are brothers.
DIRECTOR COMPENSATION
All of the Company's Officers and Directors also hold positions with
other investment companies in the Franklin Templeton Group. No compensation is
paid by the Company to any officer or Director who is an officer, trustee or
employee of the Investment Manager or its affiliates. Each Templeton Fund pays
its independent directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount of which is
based on the level of assets in each fund. Accordingly, the Company currently
pays the independent Directors and Mr. Brady an annual retainer of $12,500
- 21 -
<PAGE>
and a fee of $950 per meeting attended of the Board and its Committees. The
independent Directors and Mr. Brady are reimbursed for any expenses incurred in
attending meetings, paid pro rata by each Franklin Templeton Fund in which they
serve. No pension or retirement benefits are accrued as part of Company
expenses.
The following table shows the total compensation paid to the Directors
by the Company and by all investment companies in the Franklin Templeton Group:
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Fund in
Name of Compensation Fund Boards on which Franklin Templeton
DIRECTOR FROM THE COMPANY* DIRECTOR SERVES GROUP**
- -------- ----------------- -------------------- ---------------
<S> <C> <C> <C>
Harris J. Ashton $14,225 56 $ 327,925
Nicholas F. Brady 14,225 24 98,225
F. Bruce Clarke 16,225 20 83,350
Hasso G. von Diergardt-Naglo 14,225 20 77,350
S. Joseph Fortunato 14,225 58 344,745
John Wm. Galbraith 4,075 23 70,100
Andrew H. Hines, Jr. 16,225 24 106,325
Betty P. Krahmer 14,225 24 93,475
Gordon S. Macklin 14,225 53 321,525
Fred R. Millsaps 16,225 24 104,325
</TABLE>
- ---------------
* For the fiscal year ended August 31, 1995.
** For the calendar year ended December 31, 1995
PRINCIPAL SHAREHOLDERS
As of December 1, 1995, there were 394,994,390 World Fund Shares
outstanding, of which 912,183 Shares (or 0.231% 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 1, 1995, no person owned of record or, to the
knowledge of management, owned beneficially or of record, 5% or more of the
outstanding World Fund-Class I Shares, and no person owned of record or, to the
knowledge of management, owned beneficially, 5% or more of the outstanding World
Fund-Class II Shares, except Merrill Lynch, Pierce, Fenner & Smith, Inc., 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484 owned of record 145,954
Shares (representing 14% of the outstanding Shares). As of December 1, 1995,
there were 790,763,336 Foreign Fund Shares
- 22 -
<PAGE>
outstanding, of which 653,565 Shares (or 0.083% 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 1, 1995, to the knowledge of management, no
person owned beneficially of record 5% or more of the outstanding Foreign
Fund-Class I Shares, except Merrill Lynch, Pierce, Fenner & Smith, Inc., 4800
Deer Lake Drive East, P.O. Box 45286, Jacksonville, Florida 32246-6484 owned of
record 48,828,748 Shares (representing 6% of the outstanding Shares) and no
person owned beneficially 5% or more of the outstanding Foreign Fund-Class II
Shares, except Merrill Lynch, Pierce, Fenner & Smith, Inc., 4800 Deer Lake Drive
East, P.O. Box 45286, Jacksonville, Florida 32246-6484 owned 3,858,566 Shares
(representing 25% of the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of each Fund
is Templeton Global Advisors Limited, 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, amended and restated December 6, 1994, was approved by the
Shareholders of each Fund on October 30, 1992, and was 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 5, 1995 and will continue through December
31, 1996.
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.
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
- 23 -
<PAGE>
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 certain of its
affiliates have selected for one or more of the Investment Manager's other
clients or for clients of its affiliates, the orders for all such securities
trades may be 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.
The Investment Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its own account, which may differ from action taken by the Investment
Manager on behalf of a Fund. Similarly, with respect to a Fund, the Investment
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Investment Manager and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund or account. Furthermore,
the Investment Manager is not obligated to refrain from investing in securities
held by a Fund or other funds or accounts which it manages or administers. Any
transactions for the accounts of the Investment Manager and other access persons
will be made in compliance with the Company's Code of Ethics as
- 24 -
<PAGE>
described in section "Investment Objectives and Policies --
Personal Securities Transactions."
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 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. Each class of Shares pays a portion of the fee, determined by
the proportion of the Fund that it represents. During the fiscal years ended
August 31, 1995, 1994 and 1993, the Investment Manager received fees from World
Fund of $33,261,874, $31,051,062, and $25,931,668, respectively, and from
Foreign Fund of $36,110,792, $23,889,119, and $12,676,159, respectively,
pursuant to the Investment Management Agreements.
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.
- 25 -
<PAGE>
THE INVESTMENT MANAGER. The Investment Manager is an
indirect wholly owned subsidiary of Franklin, a publicly traded
company whose shares are listed on the NYSE. Charles B. Johnson
(a Director and Officer of the Fund) and Rupert H. Johnson, Jr.
(a Director of the Fund) are principal shareholders of Franklin
and own, respectively, approximately 20% and 16% 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:
o providing office space, telephone, office equipment and
supplies for the Company;
o paying all compensation of the Company's officers;
o authorizing expenditures and approving bills for
payment on behalf of the Company;
o supervising preparation of annual and semiannual reports to
Shareholders, notices of dividends, capital gain distributions
and tax credits, and attending to correspondence and other
communications with individual Shareholders;
o 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;
o monitoring relationships with organizations serving the
Company, including the custodian and printers;
o providing trading desk facilities to the Company;
o 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;
o monitoring the qualifications of the tax-deferred
retirement plans offered by the Company; and
o providing executive, clerical and secretarial help
needed to carry out these responsibilities.
- 26 -
<PAGE>
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. Each class of
Shares pays a portion of the fee, determined by the proportion of the Fund that
it represents. 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, 1995, 1994, and
1993, the Business Manager (and, prior to April 1, 1993, Templeton Funds
Management, Inc., the previous business manager) received business management
fees of $8,965,630, $7,161,271, and $5,119,730, 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 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.
- 27 -
<PAGE>
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
$13.74 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, LLP, 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 ("SEC") and the Internal Revenue Service ("IRS").
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. Shareholders who
would like to receive an interim quarterly report may phone the Fund Information
Department at 1-800/DIAL BEN.
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
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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
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
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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.
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
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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, 1995, 1994, and 1993 (not including any spreads or
concessions on principal transactions) were $8,042,091, $6,895,789, and
$4,751,804. The total brokerage commissions on Foreign Fund's portfolio
transactions during the fiscal years ended August 31, 1995, 1994, and 1993 (not
including any spreads or concessions on principal transactions) were
$11,925,138, $7,329,697, and $3,185,372. 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.
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 scheduled closing of the NYSE (generally 4:00
p.m., New York time), 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 NYSE is closed, which
currently are: New Year's Day, Presidents' Day, Good Friday,
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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 NYSE 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 NYSE 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 NYSE is closed other than for customary weekend and
holiday closings, (2) trading on the NYSE 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 SEC 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: (1) 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 (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Funds may surrender ownership of all or
a portion of an account to the IRS 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:
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o For individuals whether or not covered by other
qualified plans;
o For simplified employee pensions;
o For employees of tax-exempt organizations; and
o 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 Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request from FTTC) 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 IRA. 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 IRAs
are available through FTTC. Disclosure statements summarizing certain aspects of
IRAs are furnished to all persons investing in such accounts, in accordance with
IRS 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 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.
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<PAGE>
Such deferred compensation plans, which are intended to qualify under Section
403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), are
available through the Principal Underwriter. Custodian services are provided by
FTTC.
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 IRS. A "Section 401(k) plan" is also available.
FTTC 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
Class I Shares of the Funds or any other fund in the Franklin Group of Funds and
the Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, Templeton Variable Products Series Fund,
Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin
Templeton Funds"), 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 unless the investor is a qualifying
employee benefit plan (the "Benefit Plan"), including automatic investment and
payroll deduction plans), and to beneficially hold the total amount of such
Class I 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 Shareholder Application in the
Prospectus. Payment for not less than 5% of the total intended amount must
accompany the executed LOI unless the investor is a Benefit Plan. Except for
purchases of Shares by a Benefit Plan, those Class I 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 Class I 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
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<PAGE>
not originally made pursuant to an LOI may be included under a subsequent LOI
executed within 90 days of such purchase. In this case, an adjustment will be
made at the end of 13 months from the effective date of the 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, including Class
II 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.
If an LOI is executed on behalf of a benefit plan (such plans are
described under "How to Buy Shares of the Fund -- Net Asset Value Purchases
(Both Classes)" in the Prospectus), the level and any reduction in sales charge
for these employee benefit plans will be based on actual plan participation and
the projected investments in the Franklin Templeton Funds under the LOI. Benefit
Plans are not subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination of a plan, nor
are Benefit Plans entitled to receive retroactive adjustments in price for
investments made before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under
"How to Buy Shares of the Fund -- Description of Special Net Asset Value
Purchases," certain categories of investors may purchase Class I Shares of a
Fund at net asset value (without a front-end or contingent deferred sales
charge). Franklin Templeton Distributors, Inc. ("FTD") or one of its affiliates
may make payments, out of its own resources, to securities dealers who initiate
and are responsible for such purchases, as indicated below. FTD may make these
payments in the form of contingent advance payments, which may require
reimbursement from the securities dealers with respect to certain redemptions
made within 12 months of the calendar month following purchase, as well as other
conditions, all of which may be imposed by an agreement between FTD, or its
affiliates, and the securities dealer.
The following amounts will be paid by FTD or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and fixed-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 millon, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
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<PAGE>
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
fixed-income Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases. With
respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Funds' Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to compute the Fund's
net asses value. If shares are redeemed in kind, the redeeming Shareholder might
incur brokerage costs in converting the assets into cash. A Fund is obligated to
redeem Shares solely in cash up to the lesser $250,000 or 1% of its net assets
during any 90-day period for any one Shareholder.
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 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.
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<PAGE>
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.
Generally, dividends and distributions are taxable to Shareholders, whether
received in cash or reinvested in Shares of a Fund. Any distributions that are
not from a Fund's investment company taxable income or net capital gain may be
characterized as a return of capital to Shareholders or, in some cases, as
capital gain. Shareholders will be notified annually as to the Federal tax
status of dividends and distributions they receive and any tax withheld thereon.
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,
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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.
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
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<PAGE>
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 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
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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 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
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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 financial 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, or as a capital gain.
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 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
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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 IRS notifies the Shareholder or a Fund that the Shareholder has
failed to report properly certain interest and dividend income to the IRS 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.
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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"), 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 with respect to each class of Shares ("Plans") on behalf of
each Fund. Under the Plans adopted with respect to Class I Shares, a Fund may
reimburse the Principal Underwriter or others quarterly (subject to a limit of
0.25% per annum of each Fund's average daily net assets attributable to Class I
Shares) for costs and expenses incurred by FTD or others in connection with any
activity which is primarily intended to result in the sale of a Fund's Shares.
Under the Plans adopted with respect to Class II Shares, each Fund will pay FTD
or others quarterly (subject to a limit of 1.00% per annum of each Fund's
average daily assets attributable to Class II Shares of which up to 0.25% of
such net assets may be paid to dealers for personal service and/or maintenance
of Shareholder accounts) for costs and expenses incurred by FTD or others in
connection with any activity which is primarily intended to result in the sale
of the Fund's Shares. Payments to FTD or others 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 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 the Plan adopted with respect to Class I
Shares of a Fund, the costs and expenses not reimbursed in any one given quarter
(including costs and expenses not reimbursed because they exceed 0.25% of
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the Fund's average daily net assets attributable to Class I Shares) may be
reimbursed in subsequent quarters or years.
During the fiscal year ended August 31, 1995, FTD incurred in
connection with the distribution of shares costs and expenses of $10,215,632 for
Class I Shares of World Fund, $11,211 for Class II Shares of World Fund,
$15,404,475 for Class I Shares of Foreign Fund, and $355,895 for Class II Shares
of Foreign Fund. During the same period, the Company made reimbursements
pursuant to the Plans in the amount of $10,215,632 on behalf of Class I Shares
of World Fund $11,211 on behalf of Class II Shares of World Fund, $14,581,987 on
behalf of Class I Shares of Foreign Fund, and $90,617 on behalf of Class II
Shares of Foreign Fund. As indicated above, unreimbursed expenses, which amount
to $1,087,776 for Shares of Foreign Fund, may be reimbursed by the Company
during the fiscal year ending August 31, 1996 or in subsequent years. In the
event that a Plan 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, 1995, FTD spent, with respect to
Class I Shares of World Fund, the following amounts on: compensation to dealers,
$8,860,935; sales promotion, $287,494; printing, $183,388; advertising,
$817,078; and wholesale costs and expenses, $66,736; and with respect to Class
II Shares of World Fund, the following amounts on: compensation to dealers,
$818; sales promotion, $6; printing, $5; advertising, $32; and wholesale costs
and expenses, $10,349; and, with respect to Class I Shares of Foreign Fund, the
following amounts on: compensation to dealers, $12,429,081; sales promotion,
$290,597; printing, $734,122; advertising, $1,443,337; and wholesale costs and
expenses, $507,338; and with respect to Class II Shares of Foreign Fund, the
following amounts on: compensation to dealers, $25,609; sales promotion, $198;
printing, $919; advertising, $1,118; and wholesale costs and expenses, $328,050.
The Distribution 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, 1995, 1994, and 1993, FTD
(and, prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such
discount $1,962,439, $1,931,397, and $1,208,991, respectively, or approximately
18.64%, 17.97%, and 19.87% of the gross sales commissions for those years with
respect to World
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Fund, and retained $6,510,032, $9,452,983, and $3,975,783, respectively, or
approximately 13.17%, 15.79%, and 15.81% of the gross sales commissions for
those years with respect to Foreign Fund.
The Distribution 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 prospectuses and 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 Distribution 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 Distribution 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 Shareholders. The Principal
Underwriter is relieved of liability for any act or omission in the course of
its performance of the Distribution Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the Principal Underwriter of the Shares of the Fund throughout
the world, except for Hong Kong and other parts of Asia, and other countries or
territories as it might hereafter relinquish to another principal underwriter.
The Fund has entered into a non-exclusive underwriting agreement with Templeton
Franklin Investment Services (Asia) Limited ("Templeton Investment Services"),
whose office address is 2701 Shui On Centre, Hong Kong as principal underwriter
for sale of the Shares in Hong Kong and other parts of Asia. The terms of the
underwriting agreements with Templeton Investment Services are substantially
similar to those of the Distribution Agreement with FTD. Templeton Investment
Services is an indirect wholly owned subsidiary of Franklin.
FTD is the principal underwriter for the other Templeton Funds.
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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 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, 1995 was 3.56%,
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13.39% and 12.91%, respectively. Foreign Fund's average annual total return for
the one-, five- and ten-year periods ended August 31, 1995, was (2.79)%, 8.99%
and 16.43%, 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
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
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(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due to
a liberalization of securities laws and a reduction of foreign exchange
controls, and improving communication technology, of various countries
as published by various statistical organizations.
(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:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by
country."
o "Always maintain a long-term perspective."
- --------
* Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October, 1992 and resigned from the
Company's Board on April 16, 1995. He is no longer involved
with the investment management process.
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o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic
outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help
you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
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 of
the Franklin Templeton Funds or the dollar amount of fund and private account
assets under management in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Reports to
Shareholders of Templeton World Fund and Templeton Foreign Fund dated August 31,
1995 are incorporated herein by
reference.
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