TEMPLETON FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1997
700 CENTRAL AVENUE
ST. PETERSBURG, FL 33701 1-800/DIAL BEN
TABLE OF CONTENTS
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Contents Page
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How do the Funds Invest their Assets?........................ 2
What are the Funds' Potential Risks?......................... 5
Investment Restrictions...................................... 7
Officers and Directors....................................... 9
Investment Management and Other Services..................... 14
How do the Funds Buy Securities for their Portfolios?........ 15
How Do I Buy, Sell and Exchange Shares?...................... 16
How are Fund Shares Valued?.................................. 19
Additional Information on Distributions and Taxes............ 19
The Funds' Underwriter....................................... 23
How do the Funds Measure Performance?....................... 25
Miscellaneous Information.................................... 28
Financial Statements......................................... 29
Useful Terms and Definitions................................. 29
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
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Templeton Funds, Inc. (the "Company") is a diversified, open-end management
investment company. It has two series of shares, each of which is a separate
mutual fund: Templeton World Fund ("World Fund") and Templeton Foreign Fund
("Foreign Fund") (collectively, the "Funds"). World Fund's investment objective
is long-term capital growth, which it seeks to achieve through a flexible policy
of investing in stocks and debt obligations of companies and governments of any
nation. Any income realized will be incidental. Foreign Fund's investment
objective is long-term capital growth, which it seeks to achieve through a
flexible policy of investing in stocks and debt obligations of companies and
governments outside the U.S. Any income realized will be incidental.
Each Fund's Prospectus, dated January 1, 1997, as may be amended from time to
time, contains the basic information you should know before investing in the
Fund. For a free copy, call 1-800/DIAL BEN or write the Fund at the address
shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN EACH FUND'S PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF EACH
FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DO THE FUNDS INVEST THEIR ASSETS?
The following provides more detailed information about some of the securities
the Funds may buy and their investment policies. You should read it together
with the section in the Prospectus entitled "How does the Fund Invest its
Assets?" Each Fund may invest for defensive purposes in commercial paper which,
at the date of investment, must be rated A-1 by S&P or Prime-1 by 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. TGAL 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, I.E., banks or broker-dealers which have been determined
by TGAL 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
TGAL. 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 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 it 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 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 "Additional
Information on Distributions and Taxes"). Thus, a Fund may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash in
order to satisfy the distribution requirement.
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. 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 TGAL's
ability to predict correctly movements in the direction of the stock markets. No
assurance can be given that TGAL'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 S&P 500 Stock Index is composed of 500 selected common stocks, most of which
are listed on the NYSE. The S&P 500 Stock Index ("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 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, 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.
WHAT ARE THE FUNDS' POTENTIAL RISKS?
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 U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. 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 U.S. 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 U.S., 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 U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed 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 and 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 U.S. 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 U.S. 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 U.S. 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 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 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
TGAL. 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
policy of the Funds, TGAL 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 Shareholder Servicing Agent and Custodian"). However, in the absence of
willful misfeasance, bad faith or gross negligence on the part of TGAL, 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 TGAL's ability to predict correctly movements in the direction
of the market, as to which no assurance can be given.
There are several risks associated with transactions in options on securities
indices. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when World Fund seeks to close out an
option position. If World Fund were unable to close out an option that it had
purchased on a securities index, it would have to exercise the option in order
to realize any profit or the option may expire worthless. If trading were
suspended in an option purchased by World Fund, it would not be able to close
out the option. If restrictions on exercise were imposed, World Fund might be
unable to exercise an option it has purchased. Except to the extent that a call
option on an index written by World Fund is covered by an option on the same
index purchased by World Fund, movements in the index may result in a loss to
World Fund; however, such losses may be mitigated by changes in the value of
World Fund's securities during the period the option was outstanding.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the respective Fund. Under the 1940 Act, this
means the approval of (i) more than 50% of the outstanding shares of a Fund or
(ii) 67% or more of the shares of a Fund present at a shareholder meeting if
more than 50% of the outstanding shares of a Fund are represented at the meeting
in person or by proxy, whichever is less.
The Funds MAY NOT:
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 U.S. 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 may
by resolution approve. As an operating policy approved by the
Board 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 NYSE or AMEX, 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 U.S. 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 "How does the Fund Buy
Securities for its Portfolio?" as to transactions in the same
securities for the Fund, other clients and/or other mutual
funds within the Franklin Templeton Group of Funds.)
The Fund may also be subject to investment limitations imposed by foreign
jurisdictions in which the Fund sells its shares.
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). If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the Funds,
including general supervision and review of their investment activities. The
Board, in turn, elects the officers of the Company who are responsible for
administering the Funds' day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Company under the 1940 Act are indicated by an asterisk ("*").
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITIONS AND PRINCIPAL OCCUPATION DURING THE PAST FIVE
OFFICES WITH THE COMPANY YEARS
<S> <C> <C>
HARRIS J. ASHTON Director Chairman of the board, president and chief
Metro Center executive officer of General Host
1 Station Place Corporation (nursery and craft centers);
Stamford, Connecticut director of RBC Holdings (U.S.A.) Inc. (a
Age 64 bank holding company) and Bar-S Foods; and
director or trustee of 55 of the
investment companies in the Franklin
Templeton Group of Funds.
<PAGE>
NICHOLAS F. BRADY* Director Chairman of Templeton Emerging Markets
The Bullitt House Investment Trust PLC; chairman of
102 East Dover Street Templeton Latin America Investment Trust
Easton, Maryland PLC; chairman of Darby Overseas
Age 66 Investments, Ltd. (an investment firm)
(1994-present); chairman and director
of Templeton Central and Eastern
European Fund; director of the Amerada
Hess Corporation, Christiana Companies,
and the H.J. Heinz Company; formerly,
Secretary of the United States Department
of the Treasury (1988-1993) and chairman
of the board of Dillon, Read & Co.
Inc. (investment banking) prior to
1988; and director or trustee of 23 of the
investment companies in the Franklin
Templeton Group of Funds.
S. JOSEPH FORTUNATO Director Member of the law firm of Pitney, Hardin,
200 Campus Drive Kipp & Szuch; director of General Host
Florham Park, New Jersey Corporation (nursery and craft centers);
Age 64 and director or trustee of 57 of the
investment companies in the Franklin
Templeton Group of Funds.
JOHN Wm. GALBRAITH Director President of Galbraith Properties, Inc.
360 Central Avenue (personal investment company); director of
Suite 1300 Gulf West Banks, Inc. (bank holding
St. Petersburg, Florida company) (1995-present); formerly,
Age 75 director of Mercantile Bank (1991-1995),
vice chairman of Templeton, Galbraith &
Hansberger Ltd. (1986-1992), and chairman
of Templeton Funds Management, Inc.
(1974-1991); and director or trustee of 22
of the investment companies in the
Franklin Templeton Group of Funds.
ANDREW H. HINES, Jr Director Consultant for the Triangle Consulting
150 2nd Avenue N. Group; chairman and director of Precise
St. Petersburg, Florida Power Corporation; executive-in-residence
Age 73 of Eckerd College (1991-present); director
of Checkers Drive-In Restaurants, Inc.;
formerly, chairman of the board and
chief executive officer of Florida
Progress Corporation (1982-1990) and
director of various of its subsidiaries;
and director or trustee of 24 of the
investment companies in the Franklin
Templeton Group of Funds.
CHARLES B. JOHNSON* Chairman of the Board President, chief executive officer, and
777 Mariners Island Blvd. and Vice President director of Franklin Resources, Inc.;
San Mateo, California chairman of the board and director of
Age 63 Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of
General Host Corporation (nursery and
craft centers), Franklin Templeton
Investor Services, Inc.; and officer
and/or director, trustee or managing
general partner, as the case may be, of
most other subsidiaries of Franklin
Resources, Inc. and 56 of the investment
companies in the Franklin Templeton Group
of Funds.
RUPERT H. JOHNSON, JR.* Director Executive vice president and director of
777 Mariners Island Blvd. Franklin Resources, Inc. and Franklin
San Mateo, California Templeton Distributors, Inc.; president
Age 56 and director of Franklin Advisers, Inc.;
director of Franklin Templeton Investor
Services, Inc.; and officer and/or
director, trustee or managing general
partner, as the case may be, of most
other subsidiaries of Franklin
Resources, Inc.; and 60 of the
investment companies in the Franklin
Templeton Group of Funds.
<PAGE>
BETTY P. KRAHMER Director Director or trustee of various civic
2201 Kentmere Parkway associations; formerly, economic analyst,
Wilmington, Delaware U.S. government; and director or trustee
Age 67 of 23 of the investment companies in the
Franklin Templeton Group of Funds.
GORDON S. MACKLIN Director Chairman of White River Corporation
8212 Burning Tree Road (information services); director of Fund
Bethesda, Maryland America Enterprises Holdings, Inc., MCI
Age 68 Communications Corporation, Fusion Systems
Corporation, Infovest Corporation, MedImmune,
Inc., Source One Mortgage Services Corporation,
and Shoppers Express, Inc. (on-line shopping
service); formerly, chairman of Hambrecht
and Quist Group, director of H&Q Healthcare
Investors and Lockheed Martin Corporation,
and president of the National Association
of Securities Dealers, Inc.; and director
or trustee of 52 of the investment companies
in the Franklin Templeton Group of Funds.
FRED R. MILLSAPS Director Manager of personal investments
2665 N.E. 37th Drive (1978-present); director of various
Fort Lauderdale, Florida business and nonprofit organizations;
Age 67 formerly, chairman and chief executive
officer of Landmark Banking Corporation
(1969-1978), financial vice president
of Florida Power and Light (1965-1969),
and vice president of The Federal
Reserve Bank of Atlanta (1958-1965);
and director or trustee of 24 of the
investment companies in the Franklin
Templeton Group of Funds.
MARK G. HOLOWESKO Vice President President and director of Templeton Global
Lyford Cay Advisors Limited; chief investment officer
Nassau, Bahamas of global equity research for Templeton
Age 36 Worldwide, Inc.; president or vice
president of the Templeton Funds; formerly,
investment administrator with Roy West
Trust Corporation (Bahamas) Limited
(1984-1985); and officer of 23 of the
investment companies in the Franklin
Templeton Group of Funds.
HARMON E. BURNS Vice President Executive vice president, secretary and
777 Mariners Island Blvd. director of Franklin Resources, Inc.;
San Mateo, California executive vice president and director of
Age 51 Franklin Templeton Distributors, Inc.;
executive vice president of Franklin
Advisers, Inc.; officer and/or director,
as the case may be, of other subsidiaries
of Franklin Resources, Inc.; and officer
and/or director or trustee of 60 of the
investment companies in the Franklin
Templeton Group of Funds.
<PAGE>
CHARLES E. JOHNSON Vice President Senior vice president and director of
500 East Broward Blvd. Franklin Resources, Inc.; senior vice
Fort Lauderdale, Florida president of Franklin Templeton
Age 40 Distributors, Inc.; president and chief
executive officer of Templeton Worldwide,
Inc.; president and director of Franklin
Institutional Services Corporation;
chairman of the board of Templeton
Investment Counsel, Inc.; officer and/or
director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee
of 39 of the investment companies in the
Franklin Templeton Group of Funds.
DEBORAH R. GATZEK Vice President Senior vice president and general counsel
777 Mariners Island Blvd. of Franklin Resources, Inc.; senior vice
San Mateo, California president of Franklin Templeton
Age 47 Distributors, Inc.; vice president of
Franklin Advisers, Inc.; and officer of 60
of the investment companies in the
Franklin Templeton Group of Funds.
MARTIN L. FLANAGAN Vice President Senior vice president, treasurer and chief
President financial officer of Franklin Resources,
777 Mariners Island Blvd. Inc.; director and executive vice
San Mateo, California president of Templeton Investment Counsel,
Age 36 Inc.; a member of the International
Society of Financial Analysts and the
American Institute of Certified Public
Accountants; formerly, with Arthur
Andersen & Company (1982-1983); officer
and/or director, as the case may be,
of other subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee of 60 of the
investment companies in the Franklin
Templeton Group of Funds.
<PAGE>
JOHN R. KAY Vice President Vice president and treasurer of Templeton
500 East Broward Blvd. Worldwide, Inc.; assistant vice president
Fort Lauderdale, Florida of Franklin Templeton Distributors, Inc.;
Age 56 formerly, vice president and controller of
the Keystone Group, Inc.; and officer
of 27 of the investment companies in the
Franklin Templeton Group of Funds.
JEFFREY A. EVERETT Vice President Executive vice president, portfolio
Lyford Cay management/research of Templeton Global
Nassau, Bahamas Advisors Limited; formerly, investment
Age 32 officer at First Pennsylvania Investment
Research (until 1989); and officer of 2 of
the investment companies in the Franklin
Templeton Group of Funds.
ELIZABETH M. KNOBLOCK Vice President- Compliance General counsel, secretary and a senior
500 East Broward Blvd. vice president of Templeton Investment
Fort Lauderdale, Florida Counsel, Inc.; formerly, vice president
Age 41 and associate general counsel of Kidder
Peabody & Co. Inc. (1989-1990), assistant
general counsel of Gruntal & Co., Inc.
(1988), vice president and associate
general counsel of Shearson Lehman Hutton
Inc. (1988), vice president and assistant
general counsel of E.F. Hutton & Co. Inc.
(1986-1988), and special counsel of the
division of investment management of the
Securities and Exchange Commission
(1984-1986); and officer of 23 of the
investment companies in the Franklin
Templeton Group of Funds.
<PAGE>
JAMES R. BAIO Treasurer Certified public accountant; senior vice
500 East Broward Blvd. president of Templeton Worldwide, Inc. and
Fort Lauderdale, Florida Templeton Funds Trust Company; formerly,
Age 42 senior tax manager with Ernst & Young
(certified public accountants)(1977-1989);
and treasurer of 23 of the investment
companies in the Franklin Templeton
Group of Funds.
BARBARA J. GREEN Secretary Senior vice president of Templeton
500 East Broward Blvd. Worldwide, Inc. and an officer of other
Fort Lauderdale, Florida subdiaries of Templeton Worldwide, Inc.;
Age 49 formerly, deputy director of the Division
of Investment Management, executive
assistant and senior advisor to the
chairman, counsellor to the chairman,
special counsel and attorney fellow,
U.S. Securities and Exchange Commission
(1986-1995), attorney, Rogers &
Wells, and judicial clerk, U.S. District
Court (District of Massachusetts); and
secretary of 23 of the investment
companies in the Franklin Templeton
Group of Funds.
</TABLE>
* Nicholas F. Brady, Charles B. Johnson and Rupert H. Johnson, Jr. are
"interested persons" of the Company under the 1940 Act, which limits the
percentage of interested persons that can comprise a fund's board. Charles
B. Johnson and Rupert H. Johnson, Jr. are interested persons due to their
ownership interest in Resources. Mr. Brady's status as an interested
person results from his business affiliations with Resources and TGAL. Mr.
Brady and Resources are both limited partners of Darby Overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in February
1994, and is Chairman and shareholder of the corporate general partner of
Darby Overseas. In addition, Darby OVerseas and TGAL are limited partners
of Darby Emerging Markets Fund, L.P. The remaining Board members of the
Company are not interested persons (the "independent member of the Board").
The table above shows the officers and Board members who are affiliated with
Distributors and TGAL. Nonaffiliated members of the Board and Mr. Brady are
currently paid 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 the
Funds. Accordingly, the Company currently pays the independent members of the
Board and Mr. Brady an annual retainer of $12,500 and a fee of $950 per meeting
of the Board and its portion of a flat fee of $2,000 for each Audit Committee
meeting and/or Nominating and Compensation Committee meeting attended. As shown
above, some of the nonaffiliated Board members also serve as directors, trustees
or managing general partners of other investment companies in the Franklin
Templeton Group of Funds. They may receive fees from these funds for their
services. The following table provides the total fees paid to nonaffiliated
Board members and Mr. Brady by the Company and by other funds in the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED FROM THE NUMBER OF BOARDS IN THE
TOTAL FEES RECEIVED FROM FRANKLIN TEMPLETON GROUP OF FRANKLIN TEMPLETON GROUP OF
THE COMPANY(1) FUNDS(2) FUNDS ON WHICH EACH SERVES(3)
NAME
<S> <C> <C> <C>
Harris J. Ashton $17,250 $339,592 55
Nicholas F. Brady 17,250 119,275 23
F. Bruce Clarke (4) 17,536 69,500 0
Hasso-G von Diergardt-Naglo (5) 17,250 66,375 0
S. Joseph Fortunato 17,250 356,412 57
John Wm. Galbraith 15,636 102,475 22
Andrew H. Hines, Jr. 17,670 130,525 24
Betty P. Krahmer 17,250 119,275 23
Gordon S. Macklin 17,384 331,542 52
Fred R. Millsaps 17,536 130,525 24
</TABLE>
1 For the fiscal year ended August 31, 1996.
2 For the calendar year ended December 31, 1996.
3 We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, with approximately 171 U.S. based
funds or series.
4 Mr. Clarke resigned as a director on October 20, 1996.
5 Mr. von Diergardt resigned as a director on December 31, 1996.
Nonaffiliated members of the Board and Mr. Brady are reimbursed for expenses
incurred in connection with attending board meetings, and paid pro rata by each
fund in the Franklin Templeton Group of Funds for which they serve as director,
trustee or managing general partner. No officer or Board member received any
other compensation, including pension or retirement benefits, directly or
indirectly from the Company or other funds in the Franklin Templeton Group of
Funds. Certain officers or Board members who are shareholders of Resources may
be deemed to receive indirect remuneration by virtue of their participation, if
any, in the fees paid to its subsidiaries.
As of December 1, 1996, the officers and Board members as a group, owned of
record and beneficially approximately 1,759,267 shares, or less than 1% of World
Fund's total outstanding shares and approximately 687,622 shares, or less than
1% of Foreign Fund's total outstanding shares. Many of the Board members also
own shares in other funds in the Franklin Templeton Group of Funds. Charles B.
Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle,
respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. Each Fund's investment manager is
TGAL. TGAL provides investment research and portfolio management services,
including the selection of securities for the Funds to buy, hold or sell and
the selection of brokers through whom the Funds' portfolio transactions are
executed. TGAL renders its services to the Fund from outside the U.S. and its
activities are subject to the review and supervision of the Board to whom TGAL
renders periodic reports of the Funds' investment activities. TGAL is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Funds.
TGAL and its affiliates act as investment manager to numerous other investment
companies and accounts. TGAL may give advice and take action with respect to any
of the other unds it manages, or for its own account, that may differ from
action taken by TGAL on behalf of a Funds. Similarly, with respect to the Funds,
TGAL is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that TGAL and access persons, as
defined by the 1940 Act, may buy or sell for its or their own account or for the
accounts of any other fund. TGAL is not obligated to refrain from investing in
securities held by the Funds or other funds that it manages. Of course, any
transactions for the accounts of TGAL and other access persons will be made in
compliance with the Funds' Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, each Fund pays TGAL a monthly
management fee equal to an annual rate of 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 pays its proportionate share of the management fee.
For the fiscal years ended August 31, 1996, 1995 and 1994, management fees were
as follows:
<TABLE>
<CAPTION>
Year Ended August 31 1996 1995 1994
<S> <C> <C> <C>
World Fund Management Fees $38,564,076 $33,261,874 $31,051,062
Foreign Fund Management Fees $51,600,846 $36,110,792 $23,889,119
</TABLE>
MANAGEMENT AGREEMENTS. Each Fund's management agreement may continue in effect
for successive annual periods if its continuance is specifically approved at
least annually by a vote of the Board or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to the management agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. Each management agreement may be
terminated without penalty at any time by the Board or by a vote of the holders
of a majority of the respective Fund's outstanding voting securities, or by TGAL
on 60 days' written notice, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services (and, prior to October 1, 1996, Templeton
Global Investors, Inc.) provides certain administrative services and facilities
for the Funds. These include preparing and maintaining books, records, and tax
and financial reports, and monitoring compliance with regulatory requirements.
FT Services is a wholly owned subsidiary of Resources.
Under its administration agreement, the Company pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Company's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal years ended August 31, 1996, 1995, and 1994,
administration fees totaling $11,564,072, $8,965,630 and $7,161,271,
respectively, were paid to Templeton Global Investors, Inc.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Company's shareholder servicing agent and acts as the
Company's transfer agent and dividend-paying agent. Investor Services
is compensated on the basis of a fixed fee per account.
CUSTODIAN. The Chase Manhattan Bank, at its principal office at MetroTech
Center, Brooklyn, NY 11245, and at the offices of its branches and agencies
throughout the world, acts as custodian of the Funds' assets. The custodian
does not participate in decisions relating to the purchase and sale of
portfolio securities.
AUDITORS. McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, are
the Company's independent auditors. During the fiscal year ended August 31,
1996, their auditing services consisted of rendering an opinion on each
Fund's financial statements included in the Fund's Annual Report to
Shareholders for the fiscal year ended August 31, 1996, and review of the Funds'
filings with the SEC and the IRS.
HOW DO THE FUNDS BUY SECURITIES FOR THEIR PORTFOLIOS?
The selection of brokers and dealers to execute transactions in the Funds'
portfolios is made by TGAL in accordance with criteria set forth in the
investment management agreements and any directions that the Board may give.
When placing a portfolio transaction, GAL seeks to obtain prompt execution of
orders at the most favorable net price. When portfolio transactions are done on
a securities exchange, the amount of commission paid by a Fund is negotiated
between TGAL and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid in connection
with portfolio transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors of comparable size. TGAL
will ordinarily place orders to buy and sell over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of TGAL, better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
In placing orders to effect transactions for the Fund, TGAL may pay to
particular brokers commissions that are higher than another broker might
charge, if TGAL determines in good faith that the amount of commission paid is
reasonable in relation to the value of the brokerage and research services to
be received, viewed in terms of the particular transaction or TGAL's overall
responsibilities with respect to client accounts for which TGAL exercises
investment discretion. Services received by TGAL may include, among other
things, information relating to particular companies, markets or countries,
local, regional, national or transnational economies, statistical data,
quotations and other securities pricing information and other information which
provide lawful and appropriate assistance to TGAL in carrying out its
investment advisory responsibilities. The services received may not always be
of direct benefit to the Fund, but must be of value to TGAL in carrying out its
overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services received by TGAL from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits TGAL to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, TGAL and its affiliates may use this research and data in
their investment advisory capacities with other clients. If the Company's
officers are satisfied that the best execution is obtained, consistent with
internal policies, the sale of a Fund's shares as well as shares of other funds
in the Franklin Templeton Group of Funds, may also be considered a factor in the
selection of broker-dealers to execute a Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when a Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of a Fund, any
portfolio securities tendered by a Fund will be tendered through Distributors if
it is legally permissible to do so. In turn, the next investment management fee
payable to TGAL will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of a Fund and one or more other investment
companies or clients supervised by TGAL are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by TGAL,
taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as a Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to a Fund.
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.
During the fiscal years ended August 31, 1996, 1995 and 1994, World Fund paid
brokerage commissions totaling $5,691,000, $8,042,091 and $6,895,789,
respectively. During the fiscal years ended August 31, 1996, 1995 and 1994,
Foreign Fund paid brokerage commissions totaling $10,641,000, $11,925,138 and
$7,329,697, respectively.
As of August 31, 1996, neither Fund owned securities of its regular broker
dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Funds continuously offers their shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the sales
charge may be deemed an underwriter under the 1933 Act.
Securities laws of states where a Fund offers its shares may differ from federal
law. Banks and financial institutions that sell shares of a Fund may be required
by state law to register as Securities Dealers. Financial institutions or their
affiliated brokers may receive an agency transaction fee in the percentages
indicated in the table under "How Do I Buy Shares? - Purchase Price of Fund
Shares" in each Fund's Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
a Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Funds'
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of a Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE
<S> <C>
Under $30,000 3.0%
$30,000 but less than $50,000 2.5%
$50,000 but less than $100,000 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more 0%
</TABLE>
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors will pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans pursuant to a sales
charge waiver, as discussed in each Fund's Prospectus: 1% on sales of $500,000
to $2 million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on
sales over $3 million to $50 million, plus 0.25% on sales over $50 million to
$100 million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primiarily on the amount of sales of the fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, Distributors' retention of underwriting concessions
and, in the case of Funds that have Rule 12b-1 plans, from payments to
Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commission generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in each Fund's Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales charge,
you may file with a Fund a signed shareholder application with the Letter of
Intent section completed. After the Letter is filed, each additional investment
will be entitled to the sales charge applicable to the level of investment
indicated on the Letter. Sales charge reductions based on purchases in more
than one Franklin Templeton Fund will be effective only after notification to
Distributors that the investment qualifies for a discount. Your holdings in the
Franklin Templeton Funds, including Class II shares, acquired more than 90 days
before the Letter is filed, will be counted towards completion of the Letter but
will not be entitled to a retroactive downward adjustment in the sales charge.
Any redemptions you make during the 13 month period, except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the Letter have been completed.
If the Letter is not completed within the 13 month period, there will be an
upward adjustment of the sales charge, depending on the amount actually
purchased (less redemptions) during the period. The upward adjustment does not
apply to certain retirement plans. If you execute a Letter prior to a change in
the sales charge structure of a Fund, you may complete the Letter at the lower
of the new sales charge structure or the sales charge structure in effect at the
time the Letter was filed.
As mentioned in each Fund's Prospectus, five percent (5%) of the amount of the
total intended purchase will be reserved in Class I shares of a Fund registered
in your name until you fulfill the Letter. This policy of reserving shares does
not apply to certain retirement plans. If total purchases, less redemptions,
equal the amount specified under the Letter, the reserved shares will be
deposited to an account in your name or delivered to you or as you direct. If
total purchases, less redemptions, exceed the amount specified under the Letter
and is an amount that would qualify for a further quantity discount, a
retroactive price adjustment will be made by Distributors and the Securities
Dealer through whom purchases were made pursuant to the Letter (to reflect such
further quantity discount) on purchases made within 90 days before and on those
made after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
each Fund's Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of a Fund under the exchange privilege, a Fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is a
Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with a Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of a Fund's shares to complete an exchange
will be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in each Fund's Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by a Fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
A Fund may discontinue a systematic withdrawal plan by notifying you in writing
and will automatically discontinue a systematic withdrawal plan if all shares in
your account are withdrawn or if a Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to a Fund in a
timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. Each Fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of a Fund, in case of
an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of a Fund. In these circumstances, the
securities distributed would be valued at the price used to compute a Fund's net
assets and you may incur brokerage fees in converting the securities to cash. A
Fund does not intend to redeem illiquid securities in kind. If this happens,
however, you may not be able to recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to a Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. The Franklin Templeton Institutional Services Department
provides specialized services, including recordkeeping, for institutional
investors. The cost of these services is not borne by a Fund.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with a Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, a Fund may reimburse Investor Services an amount not to
exceed the per account fee that a Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 4:00 p.m. Eastern time, each day that the NYSE is
open for trading. As of the date of this SAI, a Fund is informed that the NYSE
observes the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of a Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by TGAL.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day. Furthermore, trading takes place in
various foreign markets on days that are not business days for the NYSE and on
which the Net Asset Value of each class is not calculated. Thus, the calculation
of the Net Asset Value of each class does not take place contemporaneously with
the determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, a
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from a Fund:
1. INCOME DIVIDENDS. A Fund receives income generally in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Fund's operations, is its net investment income from
which income dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. A Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by a Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post October
loss deferral) may generally be made once a year in December to reflect any net
short-term and net long-term capital gains realized by the Fund as of October 31
of the current fiscal year and any undistributed capital gains from the prior
fiscal year. A Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
TAXES
As stated in the Prospectuses, each Fund has elected and qualified to be treated
as regulated investment company under Subchapter M of the Code. The status of
each Fund as a regulated investment company does not involve government
supervision of management or of its investment practices or policies. As a
regulated investment company, a Fund generally will be relieved of liability for
U.S. federal income tax on that portion of its net investment income and net
realized capital gains which it distributes to its shareholders. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement also are subject to a nondeductible 4% excise tax. To prevent
application of the excise tax, each Fund intends to make distributions in
accordance with the calendar year distribution requirement.
The Board reserves the right not to maintain the qualification of a Fund as a
regulated investment company if it determines this course of action to be
beneficial to shareholders. In that case, a Fund will be subject to federal and
possibly state corporate taxes on its taxable income and gains, and
distributions to shareholders will be taxable to the extent of a Fund's
available earnings and profits.
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, 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 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
shareholders, 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 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 U.S. 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
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 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.
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.
THE FUNDS' UNDERWRITER
Pursuant to underwriting agreements, Distributors acts as principal underwriter
in a continuous public offering for both classes of each Fund's shares. The
underwriting agreements will continue in effect for successive annual periods if
their continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of a Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreements or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreements terminate automatically in the
event of their assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of World Fund's shares, aggregate underwriting
commissions for the fiscal years ended August 31, 1996, 1995 and 1994, were
$10,048,765, $8,563,737 and $8,819,417, respectively. After allowances to
dealers, Distributors retained $1,549,642, $1,962,439 and $1,931,397 in net
underwriting discounts, commissions and compensation received in connection
with redemptions or repurchases of shares, for the respective years. In
connection with the offering of Foreign Fund's shares, aggregate underwriting
commissions for the fiscal years ended August 31, 1996, 1995 and 1994, were
$42,994,326, $42,927,772 and $50,417,520, respectively. After allowances to
dealers, Distributors retained $3,233,516, $6,510,032 and $9,452,983 in net
underwriting discounts, commissions and compensation received in connection
with redemptions or repurchases of shares, for the respective years.
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for
each class, as discussed below. Except as noted, Distributors received no
other compensation from the Funds for acting as underwriter.
THE RULE 12B-1 PLANS
The Company has adopted a distribution plan or "Rule 12b-1 plan" with respect to
each class of shares on behalf of each Fund pursuant to Rule 12b-1 of the
1940 Act.
THE CLASS I PLAN. Under the Class I plan each Fund may reimburse Distributors or
others up to a maximum of 0.25% per year of Class I's average daily net assets,
payable quarterly, for costs and expenses incurred in connection with any
activity which is primarily intended to result in the sale of the Fund's shares.
Under the Class I plan, the costs and expenses not reimbursed in any one given
quarter (including costs and expenses not reimbursed because they exceed 0.25%
of the Fund's average daily net assets attributable to Class I shares) may be
reimbursed in subsequent quarters or years.
THE CLASS II PLAN. Under the Class II plan, each Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
costs and expenses incurred by Distributors or others in connection with any
activity which is primarily intended to result in the sale of the Fund's shares.
Up to 0.25% of such net assets may be paid to dealers for personal service
and/or maintenance of shareholder accounts.
THE CLASS I AND CLASS II PLANS. For both the Class I and Class II plans,
payments to Distributors or others could be for various types of activities,
including (i) payments to broker-dealers who provide certain services of value
to a Fund's shareholders (sometimes referred to as a "trail fee"); (ii)
reimbursement of expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (iii) payments to employees or agents
of the Distributors who engage in or support distribution of shares; (iv)
payments of the costs of preparing, printing and distributing prospectuses and
reports to prospective investors and of printing and advertising expenses; (v)
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 (vi) such other similar services as the Board determines to be
reasonably calculated to result in the sale of shares.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of a Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Company and who have
no direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of a
Fund's investment management agreement with TGAL, or by vote of a majority of
the outstanding shares of the class. Distributors or any dealer or other firm
may also terminate their respective distribution or service agreement at any
time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended August 31, 1996, the total amounts paid by World Fund
pursuant to the Class I and Class II plans were $11,984,253 and $309,734,
respectively, which were used for the following purposes:
<TABLE>
<CAPTION>
CLASS I CLASS II
<S> <C> <C>
Advertising $894,674 $2,138
Printing and mailing of prospectuses 103,549 255
other than to current shareholders
Payments to underwriters 161,456 235,224
Payments to broker-dealers 10,792,197 72,090
Other 32,377 27
</TABLE>
For the fiscal year ended August 31, 1996, the total amounts paid by Foreign
Fund pursuant to the Class I and Class II plans were $20,366,669 and $2,844,257,
respectively, which were used for the following purposes:
<TABLE>
<CAPTION>
CLASS I CLASS II
<S> <C> <C>
Advertising $1,502,219 $39,981
Printing and mailing of prospectuses 405,844 13,065
other than to current shareholders
Payments to underwriters 806,764 2,182,641
Payments to broker-dealers 17,612,966 608,271
Other 38,876 299
</TABLE>
HOW DO THE FUNDS MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by each Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by a Fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by each
Fund to compute or express performance for each class follows. Regardless of the
method used, past performance is not necessarily indicative of future results,
but is an indication of the return to shareholders only for the limited
historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-, five- and ten-year periods
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge is
deducted from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each one-, five- and ten-year
period and the deduction of all applicable charges and fees. If a change is made
to the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum front-end sales charge reflected in each quotation is a
one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the Fund. World
Fund's average annual total return for Class I for the one-, five- and ten-year
periods ended August 31, 1996, was 5.32%, 13.13%, and 11.06%. World Fund's
average annual total return for Class II for the one-year period ended August
31, 1996 was 8.81%, and for the period from commencement of operations on May 1,
1995 to August 31, 1996, was 13.43%. Foreign Fund's average annual total return
for Class I for the one-, five- and ten-year periods ended August 31, 1996, was
4.28%, 10.34%, and 14.18%. Foreign Fund's average annual total return for Class
II for the one-year period ended August 31, 1996 was 7.65%, and for the period
from commencement of operations on May 1, 1995 to August 31, 1996, was 9.51%.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one-, five- or
ten-year periods at the end of the one-, five- or ten-
year periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-, five- and ten-year periods. World Fund's cumulative
total return for Class I for the one-, five- and ten-year periods ended August
31, 1996, was 5.32%, 85.53%, and 185.78%. World Fund's cumulative total return
for Class II for the one-year period ended August 31, 1996 was 8.81%, and for
the period from commencement of operations on May 1, 1995 to August 31, 1996,
was 18.40%. Foreign Fund's cumulative total return for Class I for the one-,
five- and ten-year periods ended August 31, 1996, was 4.28%, 63.72%, and
277.12%. Foreign Fund's cumulative total return for Class II for the one-year
period ended August 31, 1996 was 7.65%, and for the period from commencement of
operations on May 1, 1995 to August 31, 1996, was 12.95%.
VOLATILITY
Occasionally statistics may be used to show each Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's Net Asset
Value or performance to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market, as represented by an
index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
For investors who are permitted to buy Class I shares without a sales charge,
sales literature about Class I may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of a Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
Each Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisors and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
From time to time, advertisements or information for each Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a class' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in a Fund involves the risk of fluctuation of principal value, a risk
generally not present in an investment in a CD issued by a bank. For example, as
the general level of interest rates rise, the value of a Fund's fixed-income
investments, if any, as well as the value of its shares that are based upon the
value of such portfolio investments, can be expected to decrease. Conversely,
when interest rates decrease, the value of a Fund's shares can be expected to
increase. CDs are frequently insured by an agency of the U.S. government. An
investment in either Fund is not insured by any federal, state or private
entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to a Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by a Fund to calculate its figures. In addition,
there can be no assurance that a Fund will continue its performance as compared
to these other averages.
Performance information for each Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the securities market in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely
used independent research firm 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 a Fund during the particular time period on which the
calculations are based. Performance information should be considered in light of
a 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 TGAL may also refer to the following
information:
(1) TGAL'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 each Fund's portfolio and
each Fund's top ten holdings.
(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, each 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) Each 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) The number of shareholders in each Fund or the aggregate number of
shareholders of the open-end investment companies in the Franklin
Templeton Group of Funds or the dollar amount of fund and private
account assets under management.
(13) Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
(14) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
(infinity) "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
(infinity) "Diversify by company, by industry and by country."
(infinity) "Always maintain a long-term perspective."
(infinity) "Invest for maximum total real return."
(infinity) "Invest - don't trade or speculate."
(infinity) "Remain flexible and open-minded about types of
investment."
(infinity) "Buy low."
(infinity) "When buying stocks, search for bargains among
quality stocks."
(infinity) "Buy value, not market trends or the economic
outlook."
(infinity) "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
(infinity) "Do your homework or hire wise experts to help you."
(infinity) "Aggressively monitor your investments."
(infinity) "Don't panic."
(infinity) "Learn from your mistakes."
(infinity) "Outperforming the market is a difficult task."
(infinity) "An investor who has all the answers doesn't even
understand all the questions."
(infinity) "There's no free lunch."
(infinity) "And now the last principle: Do not be fearful or
negative too often."
MISCELLANEOUS INFORMATION
Each Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in a Fund
cannot guarantee that these goals will be met.
The Company is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years and
now services more than 2.5 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin Templeton Group has over $152
billion in assets under management for more than 4.2 million U.S. based mutual
fund shareholder and other accounts. The Franklin Templeton Group of Funds
offers 121 U.S. based open-end investment companies to the public. Each Fund may
identify itself by its NASDAQ symbol or CUSIP number.
The DALBAR Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past eight years.
As of December 1, 1996, the principal shareholders of the World Fund, beneficial
or of record, were as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
<S> <C> <C>
CLASS II
Merrill Lynch, Pierce, Fenner & Smith, Inc. 688,442 14%
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246
</TABLE>
As of December 1, 1996, the principal shareholders of the Foreign Fund,
beneficial or of record, were as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
<S> <C> <C>
CLASS I
Merrill Lynch, Pierce, Fenner & Smith, Inc. 63,250,305 6%
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246
CLASS II
Merrill Lynch, Pierce, Fenner & Smith, Inc. 16,814,108 25%
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246
</TABLE>
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, prior to
executing instructions regarding the account; (b) interplead disputed funds or
accounts with a court of competent jurisdiction; or (c) surrender ownership of
all or a portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of Resources or its subsidiaries who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed within 24 hours after clearance; (ii) copies of all brokerage
confirmations must be sent to a 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; and (iii) access persons involved in
preparing and making investment decisions must, in addition to (i) and (ii)
above, file annual reports of their securities holdings each January and inform
the compliance officer (or other designated personnel) if they own a security
that is being considered for a fund or other client transaction or if they are
recommending a security in which they have an ownership interest for purchase or
sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of each Fund, for the fiscal year ended August 31, 1996, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1933 ACT - SECURITIES ACT OF 1933, AS AMENDED
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the Company
CD - Certificate of deposit
CFTC - Commodity Futures Trading Commission
CLASS I AND CLASS II - The Funds offer two classes of shares, designated "Class
I" and "Class II." The two classes have proportionate interests in each Fund's
portfolio. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Funds' principal
underwriter
FRANKLIN FUNDS - the mutual funds in the Franklin Group of Funds
(TRADEMARK) except Franklin Valuemark Funds and the Franklin Government
Securities Trust
FRANKLIN TEMPLETON FUNDS - the Franklin Funds and the Templeton Funds
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - all U.S. registered investment companies in
the Franklin Group of Funds(TRADEMARK) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Funds' administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Funds'
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange, Inc.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. For each Fund, the
maximum front-end sales charge is 5.75% for Class I and 1% for Class II.
PROSPECTUS - the prospectus for each Fund dated January 1, 1997, as may be
amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - a financial institution which, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with a Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TEMPLETON FUNDS - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., the Templeton Variable
Annuity Fund, and the Templeton Variable Products Series Fund
TGAL - Templeton Global Advisers Limited, the Funds' investment manager, is
located in Lyford Cay, Nassau, Bahamas.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
TL SAI 01/97
- --------
* Sir John Templeton sold the Templeton organization to Resources in
October, 1992 and resigned from the Funds' Board on April 16, 1995.He
is no longer involved with the investment management process.
