ANNUAL REPORT
TEMPLETON WORLD FUND
AUGUST 31, 1998
[TEMPLETON LOGO]
PAGE
[50 YEAR LOGO]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective, and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds, which are managed by many of the investment professionals he
selected and trained.
[PHOTO APPEARS HERE]
Jeffrey A. Everett, CFA
Portfolio Manager
Templeton World Fund
PAGE
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Goal: Templeton World Fund seeks long-term capital growth through a
flexible policy of investing in the equity and debt securities of companies and
governments of any nation.
- --------------------------------------------------------------------------------
Dear Shareholder:
This annual report of Templeton World Fund covers the fiscal year ended August
31, 1998. During the 12 months under review, global financial markets gave new
meaning to the word "volatility." Governments in South Korea, Thailand and
Indonesia were swept out of office. Japan failed miserably in its attempts to
stimulate its economy, and, near the end of the period, Russia experienced a
major political shakeup as its economy nearly collapsed. In the U.S., stock
market indices hit new highs even in the face of disappointing news about
corporate earnings. But by the end of the period, U.S. equity markets suffered
record volatility and major declines as many investors seemed to be recognizing
what analysts at Templeton had suggested for some time - many U.S. stocks
appeared overvalued given their overall business and earnings prospects. The
only bright spot during the year was Europe, where markets
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 19 of
this report.
CONTENTS
Shareholder Letter ........ 1
Performance Summaries
Class I ................ 8
Class II ............... 12
Financial Highlights &
Statement of Investments .. 17
Financial Statements ...... 27
Notes to Financial
Statements ................ 30
Independent Auditor's
Report .................... 34
Tax Designation ........... 35
[PYRAMID GRAPH OMITTED]
PAGE
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
8/31/98
<TABLE>
<S> <C>
European Stocks 29.5%
North American Stocks 25.7%
Asian Stocks 8.2%
Latin American Stocks 6.8%
Australian & New Zealand Stocks 2.9%
Middle Eastern & African Stocks 1.6%
Fixed-Income Securities 19.4%
Short-Term Investments & Other Net Assets 5.9%
</TABLE>
continued to rally as they moved toward the upcoming European Monetary Union.
Within this environment, Templeton World Fund - Class I produced a -7.80%
cumulative total return for the one-year period ended August 31, 1998, as
discussed in the Performance Summary on page 8.
Despite the changes that occurred in the global economic and political
landscape, our management philosophy remained constant. Believing that the best
way to minimize volatility is to diversify, we invested in what we believed to
be the most undervalued securities worldwide, while reducing the number of
overvalued securities in the portfolio. On August 31, 1998, the Fund had
investments in 30 different countries. The top five equity weightings by country
or region were the United States (22.3% of total net assets), the United Kingdom
(10.1%), Hong Kong SAR (6.6%), France (5.8%) and Sweden (3.6%).
During the period under review, there was sharp contrast between Europe and
Asia. Comparing these areas in 1998 provides completely opposite results from
those that would have been obtained if such a comparison had been made five
years ago. In 1993, investors were clamoring to invest in Asia, a region with
fantastic growth prospects, where governments and investors had adopted
capitalist ways, and where over three billion people lived, many of them under
the age of 25. Europe was the polar opposite - with an older, aging population,
governments that were likely to favor socialist ways and investors who preferred
fixed income investments. However, in 1998, Europe has become the favored
region, while Asian companies, even those we believe have high quality
management teams, products, strategies, and balance sheets, were, in our
opinion, extremely undervalued. This turnabout has been mammoth in scale.
2
PAGE
EUROPE
In Europe, many stock markets appreciated significantly during the period. For
example, the Spanish and Italian stock market indices increased substantially as
these countries prepared to participate in the European Monetary Union. This
strength allowed us to sell some stocks that we felt no longer offered value. We
also sold other stocks that we believed were no longer bargains because their
prices reflected the anticipated results of restructuring begun by some
companies, results which needed more time to be fully realized. As value
investors, we are keenly aware that such stocks, embedded with optimism, tend to
be vulnerable to sharp and sudden share price declines.
We do, however, believe that restructuring will benefit several of our European
holdings. One of the best examples is Axa-UAP, which owns Alliance Capital and
The Equitable, both U.S. firms. Its shares traded at a discount to what we
believed was the estimated earnings potential and future value of the company.
In our opinion, Axa-UAP is but one of many opportunities in Europe that has
potential to deliver attractive returns due to management, financial strength,
strategy, quality of business units, and relatively low valuations.
ASIA
During the reporting period, Asian markets appeared to present many
opportunities as economic and stock market reforms were put in place.
Unfortunately, such reforms often lead first to pain and only later to gain. We
therefore focused our investments on operating and manufacturing companies, as
opposed to asset-based companies, because they might find it easier to deal with
(or even benefit from) depreciating natural resource and property prices.
However, we did
TOP 10 INDUSTRIES
8/31/98
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------
<S> <C>
Insurance 9.0%
Banking 7.2%
Utilities Electrical & Gas 6.7%
Automobiles 6.6%
Financial Services 5.6%
Telecommunications 5.3%
Multi-Industry 4.9%
Energy Sources 4.3%
Metals & Mining 4.3%
Real Estate 4.2%
</TABLE>
3
PAGE
invest in some asset-based companies in situations where a doomsday scenario had
already discounted their stock price, and, at the end of the fiscal year, we had
a small percentage of the Fund's total net assets invested in South Korean and
Thai companies whose value, in our opinion, was intact. We also hope to uncover
new opportunities in Southeast Asian markets.
Throughout the period, we continued to be intrigued by investors' attitudes
towards Hong Kong SAR, one of the more volatile Asian markets. After looking at
and closely considering the possibilities and probabilities of various economic
scenarios, we purchased shares we believed were relatively cheap early in
January 1998. At fiscal year end, Cheung Kong Holdings Ltd., the Fund's largest
position, was trading at essentially the same levels as when we purchased its
shares in January. Our second-largest Hong Kong weighting, HSBC Holdings Plc.,
has been a survivor for the past 25 years despite far worse economic turmoil
than we have witnessed recently. In 1973 and 1974, HSBC Holdings Plc. withstood
a 91% fall in the value of the stock market. And in the early 1980's, it
withstood a 33% average annual drop in property prices and a 53% fall in the
Hong Kong dollar.(1) In our opinion, the purchase price of these stocks
reflected investors' fears, rather than the companies' long-term earnings
potential.
Because of Japan's inability to solve its economic problems, it reduced imports
significantly at a time when other Asian countries needed it to purchase goods
and services. Despite the failure of the Japanese government to inspire
confidence in its banking system or to revive consumer demand, we are optimistic
about the potential for lower corporate taxes and increased profit margins in
Japan. In addition, we
(1) Source: Data Stream. As measured in Hong Kong dollars.
4
PAGE
have begun to see evidence that a few companies there are being managed for the
benefit of shareholders. By focusing on businesses with strong management,
meaningful restructuring, and a competitive advantage, we identified and
purchased a few Japanese stocks during the period. These additions represent a
modest change to our continued underweight position there and we recognize that,
as with Asia in general, the challenges Japan faces could take years to work
through.
When searching for investment opportunities, we aggressively look for and
rigorously analyze companies about which gloom is deepest, relying on share
price declines to create bargains to fuel our future performance. But, we do not
purchase stocks simply because prices have declined. Before we buy a security,
we closely evaluate it, attempting to determine a conservative estimate of
earnings, cash flow, or some other measurement of worth five years in the
future. For example, we might think the currency of an Asian nation could
stabilize and rebound in value, leading to growth in gross domestic product and
corporate sales, yet our analysis of a specific company there might indicate the
company's high debt levels could unfavorably affect its profit margins. And even
though we may forecast improving sales, rising profit margins, and growing net
income for a company, we may also anticipate its need to recapitalize by selling
additional shares of stock. This would reduce the company's earnings per share,
and often such stocks are too expensive to meet our stringent value criteria.
Accordingly, our purchases of Asian stocks have been limited to those companies
we believe have strong balance sheets, primarily in Hong Kong.
TOP 10 COUNTRIES
REPRESENTED IN THE FUND*
Equity Investments
(74.7% of Total Net Assets)
8/31/98
<TABLE>
<CAPTION>
% OF TOTAL
COUNTRY NET ASSETS
- ------------------------------
<S> <C>
United States 22.3%
United Kingdom 10.1%
Hong Kong** 6.6%
France 5.8%
Sweden 3.6%
Brazil 3.1%
Netherlands 2.8%
Australia 2.7%
Argentina 2.6%
Canada 2.1%
</TABLE>
*Does not include fixed-income securities and short-term investments and other
net assets.
**Hong Kong reverted to the sovereignty of China on July 1, 1997.
5
PAGE
TOP 10 EQUITY HOLDINGS
8/31/98
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ----------------------------------------------
<S> <C>
Cheung Kong Holdings Ltd.,
Multi-Industry, Hong Kong** 1.9%
National Westminster Bank Plc.,
Banking, United Kingdom 1.7%
Ford Motor Co.,
Automobiles, U.S. 1.6%
Morgan Stanley Dean Witter & Co.,
Financial Services, U.S. 1.6%
British Energy Ltd.,
Utilities Electrical & Gas,
United Kingdom 1.6%
HSBC Holdings Plc.,
Banking, Hong Kong** 1.6%
SCOR SA,
Insurance, France 1.5%
Entergy Corp.,
Utilities Electrical & Gas, U.S. 1.5%
Zuerich Versicherungs-Gesellschaft,
Reg D, Insurance, Switzerland 1.5%
Northern Telecom, Ltd.,
Telecommunications, Canada 1.4%
</TABLE>
**Hong Kong reverted to the sovereignty of China on July 1, 1997.
U.S.
In the U.S., a seven-year economic expansion stretched valuations
of many securities to levels we believed were unsustainable because they seemed
to reflect a utopian economic situation. We believe the financial crisis in Asia
may present a great challenge to U.S. companies. If goods manufactured in Asia
cost less, and Asian demand for imports decreases, economic growth in the U.S.
could be undercut. Nevertheless, it is our experience that at any given time,
even relatively expensive markets can be home to a few undervalued stocks. Some
of our U.S. holdings are companies we felt were being overlooked and,
consequently, undervalued, and which might appreciate from levels at which each
was purchased. Among these are Morgan Stanley Dean Witter & Co., Entergy Corp.,
Rouse Co., and Eastman Kodak Co.
As part of the philosophy and discipline that govern the management of this
Fund, we sell stocks whenever we believe they are overpriced based on our
internal valuation measures. Although capital gains are onerous to us, we sold
shares of Travelers Inc. and Merrill Lynch & Co., Inc., incurring substantial
capital gains during the period. Hindsight indicates that this was a good
decision because both stocks' values have fallen precipitously from the prices
at which we sold them.
Students of value investing know that share prices may occasionally fall below
what they believe is the share's value and at other times rise above it. We
believe that studying value is quite a different matter from attempting to
predict market trends, and although tumultuous markets have been the rule during
the recent past, we shall continue to search for sound investment opportunities,
based on value investing, for the benefit of our shareholders.
6
PAGE
Please remember this discussion reflects our views, opinions and portfolio
holdings as of August 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the Fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
There are, of course, special risks associated with global investing related to
market, currency, economic, social, political and other factors. Emerging
markets involve similar but heightened risks in addition to those associated
with their relatively small size and lesser liquidity. Investing in any emerging
market means accepting a certain amount of volatility and, in some cases, severe
market corrections. While short-term volatility can be disconcerting, declines
of as much as 40% to 50% are not unusual in emerging markets. For example, the
Hong Kong equity market has increased 785% in the last 15 years, but has
suffered six declines of more than 20% during that time.(2) These risks and
other considerations are discussed in the Fund's prospectus.
We thank you for your participation in Templeton World Fund and welcome your
comments or suggestions.
Sincerely,
/s/JEFFREY A. EVERETT
Jeffrey A. Everett, CFA
Portfolio Manager
Templeton World Fund
(2) Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended June 30, 1998. Market returns are measured in Hong Kong dollars.
7
PAGE
PERFORMANCE SUMMARY
CLASS I
Templeton World Fund - Class I produced a -7.80% cumulative total return for
the one-year period ended August 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the initial sales charge. While we expect market volatility
in the short-term, we have always maintained a long-term perspective when
managing the Fund, and we encourage shareholders to view their investments in a
similar manner. As you can see from the table on page 11, the Fund delivered a
216.12% cumulative total return for the 10-year period ended August 31, 1998.
The Fund's share price, as measured by net asset value, decreased $4.21, from
$19.66 on August 31, 1997, to $15.45 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 44.0 cents ($0.4400) in
income dividends and $2.60 in capital gains, of which $2.5050 represented
long-term gains and 9.5 cents ($0.0950) represented short-term gains.
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the Fund's operating expenses.
Past performance is not predictive of future results.
8
PAGE
The graph on page 10 compares the performance of the Fund's Class I shares over
the past 10 years with the unmanaged Morgan Stanley Capital International(R)
(MSCI) World Index, which includes approximately 1,500 companies representing
the stock markets of 23 countries including the U.S., Canada, the United
Kingdom, and Japan. It also shows the Fund's performance versus the Consumer
Price Index (CPI), a commonly used measure of inflation. Please remember, the
Fund's performance differs from that of an index because an index is not managed
according to any investment strategy, does not contain cash (the Fund generally
carries a certain percentage of cash at any given time), and includes no sales
charges or management or operating expenses. Of course, one cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
Past performance is not predictive of future results.
9
PAGE
CLASS I
Total Return Index Comparison
$10,000 Investment (9/1/88 - 8/31/98)
[TOTAL RETURN INDEX COMPARISON GRAPH]
The following line graph compares the performance of Templeton World Fund's
Class I shares to that of the Morgan Stanley Capital International World Index
and to the Consumer Price Index based on a $10,000 investment from 9/1/88 to
8/31/98.
Templeton World Fund - Class I
<TABLE>
<CAPTION>
TEMPLETON WORLD
FUND - CLASS I MSCI WORLD INDEX CPI
----------------------------------------------------------
<S> <C> <C> <C>
Sep-88 $9,425 $10,000 $10,000
Sep-88 $9,778 $10,426 $10,068
Oct-88 $9,997 $11,122 $10,101
Nov-88 $9,833 $11,511 $10,110
Dec-88 $9,897 $11,617 $10,127
Jan-89 $10,575 $12,039 $10,178
Feb-89 $10,345 $11,966 $10,218
Mar-89 $10,568 $11,891 $10,277
Apr-89 $10,897 $12,167 $10,345
May-89 $11,086 $11,871 $10,404
Jun-89 $11,037 $11,739 $10,429
Jul-89 $11,931 $13,068 $10,455
Aug-89 $12,092 $12,753 $10,472
Sep-89 $12,162 $13,115 $10,505
Oct-89 $11,717 $12,680 $10,556
Nov-89 $11,864 $13,188 $10,580
Dec-89 $12,134 $13,615 $10,597
Jan-90 $11,307 $12,981 $10,706
Feb-90 $11,359 $12,426 $10,756
Mar-90 $11,397 $11,678 $10,815
Apr-90 $10,949 $11,512 $10,833
May-90 $11,918 $12,726 $10,857
Jun-90 $12,015 $12,638 $10,916
Jul-90 $12,209 $12,755 $10,958
Aug-90 $10,957 $11,563 $11,058
Sep-90 $9,876 $10,346 $11,151
Oct-90 $9,667 $11,314 $11,218
Nov-90 $10,017 $11,131 $11,243
Dec-90 $10,205 $11,366 $11,243
Jan-91 $10,863 $11,784 $11,311
Feb-91 $11,693 $12,877 $11,327
Mar-91 $11,701 $12,499 $11,344
Apr-91 $11,890 $12,599 $11,360
May-91 $12,326 $12,886 $11,393
Jun-91 $11,751 $12,093 $11,428
Jul-91 $12,326 $12,666 $11,445
Aug-91 $12,384 $12,628 $11,478
Sep-91 $12,507 $12,961 $11,529
Oct-91 $12,667 $13,174 $11,546
Nov-91 $12,302 $12,602 $11,579
Dec-91 $13,243 $13,522 $11,588
Jan-92 $13,317 $13,274 $11,604
Feb-92 $13,494 $13,047 $11,647
Mar-92 $13,187 $12,435 $11,705
Apr-92 $13,540 $12,610 $11,722
May-92 $14,088 $13,113 $11,738
Jun-92 $13,818 $12,676 $11,781
Jul-92 $13,846 $12,711 $11,806
Aug-92 $13,382 $13,023 $11,839
Sep-92 $13,382 $12,905 $11,873
Oct-92 $13,143 $12,559 $11,915
Nov-92 $13,372 $12,786 $11,931
Dec-92 $13,674 $12,892 $11,924
Jan-93 $13,852 $12,937 $11,983
Feb-93 $14,166 $13,245 $12,024
Mar-93 $14,742 $14,017 $12,067
Apr-93 $15,045 $14,668 $12,100
May-93 $15,495 $15,009 $12,117
Jun-93 $15,370 $14,885 $12,134
Jul-93 $15,810 $15,194 $12,133
Aug-93 $16,689 $15,893 $12,167
Sep-93 $16,605 $15,602 $12,192
Oct-93 $17,409 $16,034 $12,243
Nov-93 $17,037 $15,130 $12,251
Dec-93 $18,269 $15,873 $12,251
Jan-94 $19,373 $16,923 $12,285
Feb-94 $18,873 $16,706 $12,328
Mar-94 $18,152 $15,989 $12,370
Apr-94 $18,524 $16,486 $12,386
May-94 $18,699 $16,531 $12,394
Jun-94 $18,280 $16,488 $12,436
Jul-94 $19,141 $16,805 $12,469
Aug-94 $19,839 $17,314 $12,521
Sep-94 $19,315 $16,862 $12,554
Oct-94 $19,497 $17,344 $12,563
Nov-94 $18,583 $16,596 $12,579
Dec-94 $18,429 $16,759 $12,579
Jan-95 $18,272 $16,511 $12,629
Feb-95 $18,845 $16,755 $12,679
Mar-95 $19,209 $17,566 $12,721
Apr-95 $19,976 $18,181 $12,763
May-95 $20,613 $18,340 $12,789
Jun-95 $20,939 $18,338 $12,814
Jul-95 $21,966 $19,259 $12,814
Aug-95 $21,797 $18,834 $12,848
Sep-95 $22,317 $19,386 $12,872
Oct-95 $21,527 $19,084 $12,915
Nov-95 $22,087 $19,751 $12,906
Dec-95 $22,400 $20,332 $12,897
Jan-96 $23,286 $20,702 $12,973
Feb-96 $23,347 $20,832 $13,015
Mar-96 $23,662 $21,184 $13,082
Apr-96 $24,278 $21,685 $13,132
May-96 $24,533 $21,707 $13,157
Jun-96 $24,518 $21,821 $13,166
Jul-96 $23,647 $21,055 $13,191
Aug-96 $24,353 $21,301 $13,216
Sep-96 $24,894 $22,139 $13,258
Oct-96 $25,316 $22,297 $13,300
Nov-96 $26,704 $23,550 $13,325
Dec-96 $27,205 $23,178 $13,325
Jan-97 $28,044 $23,460 $13,367
Feb-97 $28,389 $23,734 $13,407
Mar-97 $28,241 $23,269 $13,441
Apr-97 $28,882 $24,034 $13,457
May-97 $30,411 $25,522 $13,449
Jun-97 $31,972 $26,798 $13,465
Jul-97 $33,583 $28,037 $13,481
Aug-97 $32,317 $26,165 $13,506
Sep-97 $34,520 $27,590 $13,540
Oct-97 $31,704 $26,143 $13,574
Nov-97 $31,742 $26,609 $13,566
Dec-97 $32,437 $26,938 $13,550
Jan-98 $32,379 $27,693 $13,574
Feb-98 $34,520 $29,571 $13,601
Mar-98 $36,391 $30,824 $13,629
Apr-98 $36,429 $31,129 $13,653
May-98 $35,176 $30,744 $13,678
Jun-98 $34,713 $31,478 $13,694
Jul-98 $34,790 $31,432 $13,710
Aug-98 $29,795 $27,245 $13,727
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS I SHARES. THE FUND
OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT
ITS PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
period shown, and have been restated to include the current, maximum 5.75%
initial sales charge, assuming reinvestment of distributions at net asset value.
Prior to July 1, 1992, Fund shares were offered at a higher initial sales
charge; thus, actual total returns would have been lower. On January 1, 1993,
the Fund implemented a Rule 12b-1 plan, which affects subsequent performance.
Past performance is not predictive of future results.
**Source: Morgan Stanley Capital International. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
10
PAGE
CLASS I
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (1/17/78)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) -7.80% 78.53% 216.12% 1,826.55%
Average Annual Total Return(2) -13.11% 10.97% 11.54% 15.09%
Value of $10,000 Investment(3) $8,689 $16,829 $29,795 $181,579
8/31/94 8/31/95 8/31/96 8/31/97 8/31/98
- --------------------------------------------------------------------------------------------------------
One-Year Total Return(4) 18.87% 9.87% 11.73% 32.70% -7.80%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to include the
current, maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares
were offered at a higher sales charge; thus, actual total returns would have
been lower.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and have been restated to include the current,
maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares were
offered at a higher sales charge; thus, actual total returns would have been
lower.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
On January 1, 1993, the Fund's Class I shares implemented a Rule 12b-1 plan,
which affects subsequent performance. All calculations assume reinvestment of
distributions at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
currency volatility, and the economic, social and political climates of
countries where the Fund invests. Emerging markets involve heightened risks
related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
11
PAGE
CLASS II
Templeton World Fund - Class II produced a -8.51% cumulative total return for
the one-year period ended August 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include sales charges.
The Fund's share price, as measured by net asset value, decreased $4.23, from
$19.39 on August 31, 1997, to $15.16 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 35.04 cents ($0.3504)
in income dividends and $2.60 in capital gains, of which $2.5050 represented
long-term gains and 9.5 cents ($0.0950) represented short-term gains.
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the Fund's operating expenses.
Past performance is not predictive of future results.
12
PAGE
The graph on page 14 compares the performance of the Fund's Class II shares
since inception with the unmanaged Morgan Stanley Capital
International(R) (MSCI) World Index, which includes approximately 1,500
companies representing the stock markets of 23 countries including the U.S.,
Canada, the United Kingdom and Japan. The graph also shows the Fund's
performance versus the Consumer Price Index (CPI), a commonly used measure of
inflation. Please remember, the Fund's performance differs from that of an index
because an index is not managed according to any investment strategy, does not
contain cash (the Fund generally carries a certain percentage of cash at any
given time), and includes no sales charges or management or operating expenses.
Of course, one cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
Past performance is not predictive of future results.
13
PAGE
CLASS II
Total Return Index Comparison
$10,000 Investment (5/1/95 - 8/31/98)
[TOTAL RETURN INDEX COMPARISON GRAPH]
The following line graph compares the performance of Templeton World Fund's
Class II shares to that of the Morgan Stanley Capital International World Index
and to the Consumer Price Index based on a $10,000 investment from 5/1/95 to
8/31/98.
Templeton World Fund - Class II
<TABLE>
<CAPTION>
TEMPLETON WORLD MSCI WORLD
FUND - CLASS II INDEX CPI
-----------------------------------------------
<S> <C> <C> <C>
5/1/95 $9,897 $10,000 $10,000
5/31/95 $10,200 $10,088 $10,020
6/30/95 $10,354 $10,086 $10,040
7/31/95 $10,857 $10,593 $10,040
8/31/95 $10,767 $10,359 $10,067
9/30/95 $11,018 $10,663 $10,086
10/31/95 $10,617 $10,497 $10,119
11/30/95 $10,887 $10,863 $10,112
12/31/95 $11,038 $11,183 $10,105
1/31/96 $11,469 $11,387 $10,164
2/29/96 $11,492 $11,458 $10,197
3/31/96 $11,633 $11,651 $10,250
4/30/96 $11,923 $11,927 $10,289
5/31/96 $12,050 $11,940 $10,309
6/30/96 $12,035 $12,002 $10,316
7/31/96 $11,596 $11,581 $10,335
8/31/96 $11,938 $11,716 $10,355
9/30/96 $12,191 $12,177 $10,388
10/31/96 $12,395 $12,264 $10,421
11/30/96 $13,065 $12,953 $10,441
12/31/96 $13,297 $12,748 $10,441
1/31/97 $13,703 $12,904 $10,473
2/28/97 $13,865 $13,054 $10,505
3/31/97 $13,776 $12,799 $10,531
4/30/97 $14,083 $13,219 $10,544
5/31/97 $14,813 $14,038 $10,537
6/30/97 $15,566 $14,739 $10,550
7/31/97 $16,336 $15,421 $10,563
8/31/97 $15,712 $14,392 $10,583
9/30/97 $16,774 $15,175 $10,609
10/31/97 $15,390 $14,379 $10,636
11/30/97 $15,399 $14,636 $10,629
12/31/97 $15,721 $14,816 $10,617
1/31/98 $15,683 $15,232 $10,636
2/28/98 $16,717 $16,265 $10,657
3/31/98 $17,608 $16,954 $10,678
4/30/98 $17,618 $17,122 $10,697
5/31/98 $16,992 $16,910 $10,717
6/30/98 $16,764 $17,314 $10,730
7/31/98 $16,793 $17,288 $10,742
8/31/98 $14,375 $14,985 $10,755
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS II SHARES. THE FUND
OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT
ITS PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
period shown and include all sales charges, assuming reinvestment of
distributions at net asset value. Past performance is not predictive of future
results.
**Source: Morgan Stanley Capital International. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
14
PAGE
CLASS II
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -8.51% 33.51% 45.25%
Average Annual Total Return(2) -10.33% 9.74% 11.49%
Value of $10,000 Investment(3) $8,967 $13,217 $14,375
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility and the economic, social
and political climates of countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares.
Past performance is not predictive of future results.
15
PAGE
TEMPLETON WORLD FUND
Class I
If you had invested $10,000 in Templeton World Fund - Class I at inception, it
would be worth more than $181,000 today. The chart below illustrates the
cumulative total return of a hypothetical $10,000 investment in the Fund on
January 17, 1978 (inception), with income dividends and capital gains reinvested
as shown through August 31, 1998.*
[TEMPLETON WORLD FUND - CLASS I GRAPH]
The following logarithmic chart illustrates the growth of a $10,000 investment
in Templeton World Fund's Class I shares from the Fund's inception on 1/17/78
through 8/31/98.
Templeton World
<TABLE>
<CAPTION>
Principal + Principal + Total Value Principal Income Cap Gains
Dividends Cap Gains
<S> <C> <C> <C> <C> <C>
1/17/78 $9,425 $9,425 $9,425 $9,425 $0 $0
12/78 $11,395 $11,405 $11,452 $11,348 $47 $57
12/79 $14,406 $14,388 $14,675 $14,119 $287 $269
12/80 $17,349 $16,973 $17,734 $16,588 $761 $385
12/81 $17,785 $17,405 $18,837 $16,352 $1,432 $1,052
12/82 $21,080 $20,021 $22,487 $18,615 $2,466 $1,407
12/83 $27,121 $26,233 $30,130 $23,223 $3,897 $3,009
12/84 $26,241 $27,017 $31,561 $21,697 $4,544 $5,320
12/85 $33,383 $34,640 $41,519 $26,503 $6,879 $8,136
12/86 $36,327 $40,184 $48,726 $27,785 $8,542 $12,399
12/87 $33,237 $41,021 $50,394 $23,864 $9,372 $17,157
12/88 $38,712 $48,297 $60,317 $26,692 $12,020 $21,605
12/89 $46,883 $57,755 $73,950 $30,688 $16,195 $27,067
12/90 $38,148 $47,435 $62,190 $23,393 $14,755 $24,042
12/91 $46,167 $61,438 $80,706 $26,899 $19,268 $34,539
12/92 $44,660 $63,289 $83,330 $24,618 $20,041 $38,670
12/93 $55,556 $85,391 $111,333 $29,614 $25,942 $55,777
12/94 $52,040 $86,978 $112,307 $26,711 $25,330 $60,267
12/95 $57,767 $106,848 $136,510 $28,106 $29,662 $78,743
12/96 $68,294 $128,697 $165,794 $31,197 $37,097 $97,500
12/97 $73,648 $155,737 $197,679 $31,706 $41,942 $124,031
8/31/98 $67,650 $143,052 $181,579 $29,123 $38,526 $113,929
</TABLE>
*Cumulative total return represents the change in value of an investment over
the indicated period. All figures have been restated to reflect the current,
maximum 5.75% initial sales charge; thus actual total return for purchasers of
shares during the periods shown may differ. Prior to July 1, 1992, these shares
were offered at a higher initial sales charge. On January 1, 1993, the Fund's
Class I shares implemented a Rule 12b-1 plan, which will affect subsequent
performance.
Except as noted, all figures assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
The historical data shown above pertain only to Class I shares of the Fund. The
Fund offers another share class, subject to different fees and expenses, which
will affect performance. Please see the prospectus for more details.
Past performance is not predictive of future results.
16
PAGE
TEMPLETON WORLD FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................. $19.66 $16.21 $16.76 $17.06 $15.94
------------------------------------------------------------------
Income from investment operations:
Net investment income.............................. .42 .45 .41 .33 .26
Net realized and unrealized gains (losses)......... (1.59) 4.47 1.29 1.11 2.50
------------------------------------------------------------------
Total from investment operations.................... (1.17) 4.92 1.70 1.44 2.76
------------------------------------------------------------------
Less distributions from:
Net investment income.............................. (.44) (.43) (.37) (.28) (.26)
Net realized gains................................. (2.60) (1.04) (1.88) (1.46) (1.38)
------------------------------------------------------------------
Total distributions................................. (3.04) (1.47) (2.25) (1.74) (1.64)
------------------------------------------------------------------
Net asset value, end of year........................ $15.45 $19.66 $16.21 $16.76 $17.06
------------------------------------------------------------------
------------------------------------------------------------------
Total Return*....................................... (7.80)% 32.70% 11.73% 9.87% 18.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $7,852,041 $8,649,994 $6,483,146 $5,868,967 $5,421,691
Ratios to average net assets:
Expenses........................................... 1.04% 1.03% 1.03% 1.05% 1.04%
Net investment income.............................. 2.34% 2.58% 2.66% 2.18% 1.67%
Portfolio turnover rate............................. 43.36% 39.16% 22.05% 34.05% 30.77%
</TABLE>
*Total return does not reflect sales commissions.
17
PAGE
TEMPLETON WORLD FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
-----------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1998 1997 1996 1995+
-----------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $19.39 $16.04 $16.71 $15.36
-----------------------------------------------
Income from investment operations:
Net investment income...................................... .33 .34 .45 .03
Net realized and unrealized gains (losses)................. (1.61) 4.39 1.11 1.32
-----------------------------------------------
Total from investment operations............................ (1.28) 4.73 1.56 1.35
-----------------------------------------------
Less distributions from:
Net investment income...................................... (.35) (.34) (.35) --
Net realized gains......................................... (2.60) (1.04) (1.88) --
-----------------------------------------------
Total distributions......................................... (2.95) (1.38) (2.23) --
-----------------------------------------------
Net asset value, end of year................................ $15.16 $19.39 $16.04 $16.71
-----------------------------------------------
-----------------------------------------------
Total Return*............................................... (8.51)% 31.61% 10.88% 8.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $325,319 $207,679 $58,619 $7,623
Ratios to average net assets:
Expenses................................................... 1.80% 1.83% 1.84% 1.82%**
Net investment income...................................... 1.66% 1.92% 2.14% 1.37%**
Portfolio turnover.......................................... 43.36% 39.16% 22.05% 34.05%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period May 1, 1995 (effective date) to August 31, 1995.
See Notes to Financial Statements.
18
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 71.7%
AEROSPACE & MILITARY TECHNOLOGY 1.1%
Raytheon Co., A............................................. United States 2,066,100 $ 92,587,106
--------------
APPLIANCES & HOUSEHOLD DURABLES
Guangdong Kelon Electrical Holdings Ltd., H................. China 268,700 135,231
--------------
AUTOMOBILES 6.0%
Autoliv Inc., ADR........................................... Sweden 2,731,900 84,102,110
Fiat SpA, di Risp........................................... Italy 10,000,000 18,177,124
Ford Motor Co. ............................................. United States 3,063,400 134,789,600
General Motors Corp. ....................................... United States 1,800,000 103,950,000
Volkswagen AG............................................... Germany 589,600 43,463,567
Volvo AB, B................................................. Sweden 3,840,500 105,885,229
--------------
490,367,630
--------------
BANKING 6.5%
Banco Popular Espanol SA, Reg S............................. Spain 527,376 35,530,490
Bangkok Bank Public Co. Ltd., fgn. ......................... Thailand 17,828,000 12,551,933
Banque Nationale de Paris BNP............................... France 739,106 50,511,830
Credit Suisse Group, Reg D.................................. Switzerland 11,530 2,020,919
Deutsche Bank AG............................................ Germany 869,800 56,622,081
Development Bank of Singapore Ltd., fgn. ................... Singapore 1,793,000 6,208,868
HSBC Holdings Plc. ......................................... Hong Kong 6,057,261 128,583,523
National Australia Cap Sec Plc. ............................ Australia 2,164,653 58,716,213
National Bank of Canada..................................... Canada 2,982,000 38,701,275
National Westminster Bank Plc. ............................. United Kingdom 7,889,875 139,779,429
*Shinhan Bank Co. Ltd....................................... South Korea 807,667 1,895,820
--------------
531,122,381
--------------
BROADCASTING & PUBLISHING .2%
*Scholastic Corp. .......................................... United States 337,900 13,093,625
South China Morning Post Ltd. .............................. Hong Kong 19,038,700 6,264,993
--------------
19,358,618
--------------
BUILDING MATERIALS & COMPONENTS .9%
Anglian Group Plc. ......................................... United Kingdom 41,200 132,460
Caradon Plc. ............................................... United Kingdom 10,191,987 23,637,204
Cemex SA.................................................... Mexico 10,917,000 21,900,797
Gujarat Ambuja Cements Ltd. ................................ India 2,224,500 9,464,065
Gujarat Ambuja Cements Ltd., GDR, Reg S..................... India 576,000 2,116,800
Gujarat Ambuja Cements Ltd., GDR, 144A...................... India 647,000 2,377,725
Owens Corning Capital LLC................................... United States 275,000 9,642,187
Pioneer International Ltd. ................................. Australia 322,014 589,671
--------------
69,860,909
--------------
</TABLE>
19
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BUSINESS & PUBLIC SERVICES 2.0%
Columbia HCA Healthcare Corp. .............................. United States 2,094,700 $ 47,261,669
*Humana Inc. ............................................... United States 739,600 9,614,800
*Waste Management Inc. ..................................... United States 2,372,925 104,705,316
--------------
161,581,785
--------------
CHEMICALS 1.8%
Beijing Yanhua Petrochemical Company Limited, ADR........... China 390,960 1,026,270
Cookson Group Plc. ......................................... United Kingdom 12,603,302 32,922,774
DSM NV...................................................... Netherlands 476,608 41,959,610
Eastman Chemical Co. ....................................... United States 838,400 43,230,000
Imperial Chemical Industries Plc. .......................... United Kingdom 1,442,000 15,864,197
Kemira OY................................................... Finland 549,600 4,628,857
Shanghai Petrochemical Co. Ltd., H.......................... China 103,092,000 5,520,980
--------------
145,152,688
--------------
DATA PROCESSING & REPRODUCTION .7%
International Business Machines Corp. ...................... United States 300,000 33,787,500
*Intuit Inc. ............................................... United States 354,600 12,122,887
*Quantum Corp. ............................................. United States 1,024,560 11,718,405
--------------
57,628,792
--------------
ELECTRICAL & ELECTRONICS 2.0%
ABB AB, A................................................... Sweden 2,048,000 22,788,472
Alcatel Alsthom Cie Generale O'Electricite SA............... France 247,255 42,087,738
Ametek Inc. ................................................ United States 236,200 4,605,900
General Electric Co. Plc.................................... United Kingdom 7,707,500 50,528,077
Philips Electronics NV...................................... Netherlands 625,460 40,795,311
--------------
160,805,498
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .1%
Harman International Industries Inc. ....................... United States 282,600 9,908,663
--------------
ENERGY SOURCES 3.9%
Norsk Hydro AS.............................................. Norway 345,333 12,449,831
Occidental Petroleum Corp. ................................. United States 834,800 15,443,800
Perez Companc SA, Reg B..................................... Argentina 2,410,800 9,548,678
*Petron Corporation......................................... Philippines 49,928,000 3,020,758
Rao Gazprom, ADR, Reg S..................................... Russia 689,251 4,652,444
Repsol SA................................................... Spain 900,000 40,563,550
Societe Elf Aquitaine SA.................................... France 809,000 82,679,526
Transportadora de Gas del Sur SA, B, ADR.................... Argentina 1,400,000 13,300,000
Valero Energy Corp., new.................................... United States 1,899,550 33,954,456
YPF Sociedad Anonima, D..................................... Argentina 1,400,000 31,366,273
YPF Sociedad Anonima, D, ADR................................ Argentina 3,314,100 73,324,463
--------------
320,303,779
--------------
</TABLE>
20
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES 4.6%
Axa-UAP..................................................... France 920,663 $ 110,604,184
Ing Groep NV................................................ Netherlands 1,480,356 87,182,595
*Ing Groep NV, trading coupon............................... Netherlands 1,480,356 967,042
Lend Lease Corp. Ltd. ...................................... Australia 1,407,707 26,623,738
Merrill Lynch & Co. Inc. ................................... United States 75,200 4,963,200
Morgan Stanley Dean Witter & Co. ........................... United States 2,289,772 132,949,887
Paribas..................................................... France 138,800 12,071,607
--------------
375,362,253
--------------
FOOD & HOUSEHOLD PRODUCTS 2.1%
Archer Daniels Midland Co. ................................. United States 5,727,442 85,911,635
Hillsdown Holdings Plc. .................................... United Kingdom 15,923,076 37,728,617
IBP Inc. ................................................... United States 2,500,000 41,406,250
McBride Plc. ............................................... United Kingdom 2,561,600 7,227,676
--------------
172,274,178
--------------
FOREST PRODUCTS & PAPER 3.2%
Aracruz Celulose SA, ADR.................................... Brazil 1,607,700 10,148,606
Assidomaen AB............................................... Sweden 800,000 18,495,852
Enso OY, R.................................................. Finland 2,607,500 22,009,550
Fletcher Challenge Ltd. Forestry Division................... New Zealand 12,598,563 4,558,475
Fletcher Challenge Ltd. Forestry Division, fgn. ............ New Zealand 316,421 108,643
Fletcher Challenge Paper Ltd. .............................. New Zealand 9,189,576 5,693,524
Georgia Pacific Corp. ...................................... United States 915,200 39,239,200
Metsa Serla OY, B........................................... Finland 2,552,500 19,500,163
Mo Och Domsjoe AB (Modo), B................................. Sweden 1,200,000 23,589,629
Norske Skogindustrier AS, A................................. Norway 430,170 11,886,967
St. Joe Company............................................. United States 1,126,200 22,594,388
Stora Kopparbergs Bergslags AB, A........................... Sweden 248,000 3,004,834
Stora Kopparbergs Bergslags AB, B........................... Sweden 1,652,000 20,016,073
Svenska Cellulosa AB (SCA), B............................... Sweden 719,600 15,302,499
UPM-Kymmene Corporation..................................... Finland 2,242,290 45,123,645
--------------
261,272,048
--------------
HEALTH & PERSONAL CARE .9%
China Pharmaceutical Enterprise & Inv. Corp. Ltd. .......... China 578,000 35,802
Ono Pharmaceutical Co. Ltd. ................................ Japan 150,500 3,549,579
Pharmacia & Upjohn Inc. .................................... United States 1,682,700 69,937,219
--------------
73,522,600
--------------
</TABLE>
21
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL COMPONENTS 1.0%
BTR Plc..................................................... United Kingdom 29,256,338 $ 64,176,899
Goodyear Tire & Rubber Co. ................................. United States 301,400 14,768,600
Sandvik AB, A............................................... Sweden 121,000 2,468,380
Yamato Kogyo Co. Ltd. ...................................... Japan 272,000 1,791,628
--------------
83,205,507
--------------
INSURANCE 6.6%
Ace Ltd. ................................................... Bermuda 1,462,400 42,409,600
American Bankers Insurance Group Inc. ...................... United States 1,060,000 54,987,500
American International Group Inc. .......................... United States 721,200 55,757,775
+Berkley W.R. Corp. ........................................ United States 1,863,100 58,920,538
*Exel Ltd., A............................................... Bermuda 368,190 24,599,694
Muenchener Rueckversicherungs-Gesellschaft.................. Germany 26,001 6,457,861
*Muenchener Rueckversicherungs-Gesellschaft, 144A........... Germany 1,040 403,380
*Muenchener Rueckversicherungs-Gesellschaft, wts. .......... Germany 1,040 43,640
National Mutual Asia Ltd. .................................. Hong Kong 5,406,000 2,092,861
Partnerre Ltd. ............................................. Bermuda 875,800 35,250,950
+SCOR SA.................................................... France 1,930,533 122,495,749
UNUM Corp. ................................................. United States 343,900 15,131,600
Zuerich Versicherungs-Gesellschaft, Reg D................... Switzerland 198,480 118,843,725
--------------
537,394,873
--------------
LEISURE & TOURISM .3%
Rank Group Plc. ............................................ United Kingdom 5,522,116 26,261,005
--------------
MACHINERY & ENGINEERING .5%
+Harnischfeger Industries Inc. ............................. United States 2,434,650 39,106,566
--------------
MERCHANDISING 1.6%
*Cifra SA de CV............................................. Mexico 2,018,922 2,187,106
Coles Myer Ltd., A.......................................... Australia 6,969,277 25,524,251
Dairy Farm International Holdings Ltd. ..................... Hong Kong 29,643,409 28,161,239
David Jones Ltd. ........................................... Australia 13,322,194 11,587,897
Gucci Group NV.............................................. Netherlands 709,700 24,617,719
Li & Fung Ltd. ............................................. Hong Kong 5,688,000 6,679,502
Safeway Plc. ............................................... United Kingdom 4,360,133 22,742,870
Takashimaya Co. Ltd. ....................................... Japan 1,112,000 7,600,255
--------------
129,100,839
--------------
METALS & MINING 3.8%
Alcan Aluminum Ltd. ........................................ Canada 1,116,887 21,100,281
Anglo American Platinum Corp. Ltd. ......................... South Africa 8,009,072 99,719,974
British Steel Plc. ......................................... United Kingdom 25,213,500 45,281,198
Companhia Siderurgica Nacional CSN, ADR..................... Brazil 691,280 11,060,480
Elkem AS, A................................................. Norway 281,400 3,218,893
Ispat International NV, A, Reg D............................ Netherlands 2,756,470 29,804,332
</TABLE>
22
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING (CONT.)
Pechiney SA, A.............................................. France 587,123 $ 19,024,375
Pohang Iron & Steel Co. Ltd. ............................... South Korea 461,745 18,010,577
Reynolds Metals Co. ........................................ United States 740,752 35,509,799
RGC Ltd. ................................................... Australia 1,385,581 1,708,695
Titanium Metals............................................. United States 611,600 7,033,400
Union Miniere NPV........................................... Belgium 350,000 17,224,788
--------------
308,696,792
--------------
MISC MATERIALS & COMMODITIES .4%
De Beers/Centenary Linked Units, reg. ...................... South Africa 2,654,600 32,101,851
--------------
MULTI-INDUSTRY 4.9%
Alfa SA de CV, A............................................ Mexico 83,200 187,773
Broken Hill Proprietary Co. Ltd. ........................... Australia 13,928,455 96,124,823
Cheung Kong Hldgs. Ltd. .................................... Hong Kong 39,864,000 154,328,189
Elementis Plc. ............................................. United Kingdom 10,342,027 17,144,639
First Pacific Co. Ltd. ..................................... Hong Kong 18,747,244 5,806,197
Hutchison Whampoa Ltd. ..................................... Hong Kong 18,555,000 80,453,208
Jardine Strategic Holdings Ltd. ............................ Hong Kong 14,535,116 17,006,086
*Metro Pacific Corporation MDI.............................. Philippines 1,465,760 21,752
Pacific Dunlop Ltd. ........................................ Australia 584,000 1,017,954
Pilkington Plc. ............................................ United Kingdom 9,574,519 12,505,442
Swire Pacific Ltd., A....................................... Hong Kong 1,358,100 3,916,990
Swire Pacific Ltd., B....................................... Hong Kong 27,373,500 12,275,191
Wheelock and Company Ltd. .................................. Hong Kong 3,517,000 1,849,452
--------------
402,637,696
--------------
REAL ESTATE 4.2%
American Health Properties Inc. ............................ United States 443,400 9,865,650
Carramerica Realty Corp. ................................... United States 201,900 4,542,750
Crescent Real Estate Equities Co. .......................... United States 2,258,700 51,950,100
*Fastighets AB Balder....................................... Sweden 85,820 827,610
Federal Realty Investment Trust............................. United States 300,000 6,037,500
General Growth Properties................................... United States 900,000 32,456,250
Highwood Properties Inc. ................................... United States 1,222,900 31,107,519
Hon Kwok Land Investment Co. Ltd. .......................... Hong Kong 9,913,700 524,521
Inversiones y Representacion SA............................. Argentina 6,699,668 16,082,420
Inversiones y Representacion SA, GDR........................ Argentina 620,152 14,728,610
IRT Property Co............................................. United States 373,600 3,315,700
National Health Investors Inc. ............................. United States 1,080,000 28,620,000
Nationwide Health Properties Inc. .......................... United States 400,000 8,175,000
New World Development Co. Ltd. ............................. Hong Kong 36,733,151 39,581,094
Post Properties Inc. ....................................... United States 6,600 250,800
Rouse Co. .................................................. United States 1,660,000 47,725,000
</TABLE>
23
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
REAL ESTATE (CONT.)
Summit Properties Inc. ..................................... United States 867,900 $ 14,537,325
Union du Credit Bail Immobilier Unibail, Reg D.............. France 300,436 35,635,471
--------------
345,963,320
--------------
RECREATION & OTHER CONSUMER GOODS .8%
Eastman Kodak Co. .......................................... United States 888,800 69,437,500
--------------
TELECOMMUNICATIONS 4.4%
Bell Atlantic Corp. ........................................ United States 280,200 12,363,825
Hong Kong Telecommunications Ltd. .......................... Hong Kong 26,734,998 47,265,456
Nortel Inversora SA, ADR.................................... Argentina 146,490 2,746,687
Northern Telecom, Ltd. ..................................... Canada 2,348,018 112,961,260
++Receipts of Telebras Stock................................ Brazil 147,744,000 7,532,195
Rostelecom, ADR............................................. Russia 126,400 458,200
Telecom Argentina Stet-France SA (Teco), B, ADR............. Argentina 2,238,800 50,093,150
Telecom Italia SpA, di Risp................................. Italy 10,853,750 53,793,896
*Telecomunicacoes de Sao Paulo Celular SA (Telesp).......... Brazil 36,205,000 1,473,549
Telecomunicacoes de Sao Paulo Celular SA (Telesp), Reg D.... Brazil 36,205,000 3,999,193
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 1,887,151 67,347,701
--------------
360,035,112
--------------
TEXTILES & APPAREL .2%
Dawson International Plc. .................................. United Kingdom 614,477 174,921
*Fruit of the Loom Inc., A.................................. United States 842,600 18,905,838
Inner Mongolia Erdos Cashmere Products Co. Ltd., B.......... China 3,780,200 567,030
*Yizheng Chemical Fibre Company Ltd., H..................... China 16,536,000 778,873
--------------
20,426,662
--------------
TRANSPORTATION 1.0%
Air New Zealand Ltd., B..................................... New Zealand 3,980,000 3,748,110
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 6,442,515 74,437,538
Stolt Nielsen SA............................................ Norway 157,700 1,655,850
Stolt Nielsen SA, B, ADR.................................... Norway 5,450 54,500
--------------
79,895,998
--------------
UTILITIES ELECTRICAL & GAS 6.0%
BG Plc. .................................................... United Kingdom 10,898,823 67,434,403
British Energy Ltd. ........................................ United Kingdom 2,284,400 21,861,294
British Energy Ltd., 144A................................... United Kingdom 11,451,700 109,590,692
Centrais Eletricas Brasileiras SA (Eletrobras), ADR......... Brazil 1,154,800 8,242,264
*Centrais Geradoras Do Sul Do Brasil SA (Gerasul), ADR...... Brazil 115,480 583,827
*Centrica Plc. ............................................. United Kingdom 12,352,000 19,183,978
Entergy Corp. .............................................. United States 4,247,300 122,375,331
Guangdong Electric Power Development Co Ltd., B............. China 38,610 10,812
Hong Kong Electric Holdings Ltd. ........................... Hong Kong 2,636,500 7,825,259
</TABLE>
24
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS (CONT.)
Iberdrola SA................................................ Spain 2,461,317 $ 36,238,133
Korea Electric Power Corp. ................................. South Korea 4,010,850 51,676,261
National Grid Group Plc. ................................... United Kingdom 5,020,276 36,295,051
Potomac Electric Power Co. ................................. United States 201,200 4,929,400
Shandong Huaneng Power Development Co. Ltd., ADR............ China 1,000,000 3,625,000
--------------
489,871,705
--------------
TOTAL COMMON STOCKS (COST $5,642,299,670)................... 5,865,379,585
--------------
PREFERRED STOCKS 3.0%
Banco Bradesco SA BBD, pfd. ................................ Brazil 8,974,931,227 50,330,993
*Banco Bradesco SA BBD, pfd., rts. ......................... Brazil 217,647,364 24,041
Banco Itau SA, pfd. ........................................ Brazil 22,080,000 9,380,576
Centrais Eletricas Brasileiras SA (Electrobras), ADR,
pfd. ..................................................... Brazil 297,384 1,503,471
*Centrais Geradoras do Sul do Brasil SA (Gerasul), ADR,
pfd. ..................................................... Brazil 3,430,645 26,234,859
Cia Energetica de Minas Gerais (Cemig), ADR, pfd. .......... Brazil 8,566 160,126
Cia Vale do Rio Doce, A, pfd. .............................. Brazil 1,552,700 20,581,290
Cia Vale do Rio Doce, A, ADR, pfd. ......................... Brazil 1,566,800 20,768,188
Coteminas Cia Tecidos Norte de Minas (CTNM), pfd. .......... Brazil 93,090,200 9,609,592
Fiat SpA, pfd. ............................................. Italy 17,750,700 32,520,289
Petrobras Distribuidora SA, pfd. ........................... Brazil 1,728,195,300 16,872,262
Petroleo Brasileiro SA (Petrobras), pfd. ................... Brazil 179,486,000 18,300,892
++Receipts of Telebras Stock ............................... Brazil 533,400,000 37,844,252
*Telecomunicacoes de Sao Paulo Celular SA (Telesp), B,
pfd. ..................................................... Brazil 116,464 6,828
Telecomunicacoes de Sao Paulo Celular SA (Telesp), Reg D,
pfd. ..................................................... Brazil 116,464 16,526
--------------
TOTAL PREFERRED STOCKS (COST $430,322,043).................. 244,154,185
--------------
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
------- -------- -----
<S> <C> <C> <C>
BONDS 19.4%
Asia Pulp & Paper Co. Ltd., cvt., zero coupon, 11/18/12..... Indonesia $ 96,650,000 10,873,125
Bilboa Vizcaya Investment BV, 144A, 3.50%, 7/12/06.......... Spain 8,765,000 22,043,975
Finaxa SA, cvt., 3.00%, 1/01/07............................. France 240,900,000FRF 59,653,932
Government of Italy, cvt., 5.00%, 6/28/01................... Italy 123,095,000 199,260,031
National Grid Group Plc., cvt., 144A, 4.25%, 2/17/08........ United Kingdom 16,000,000GBP 31,263,752
Sony Corp., cvt., 1.40%, 3/31/05............................ Japan 7,300,000,000JPY 71,867,696
Telefonica Europe BV, 144A, 2.00%, 7/15/02.................. Netherlands 23,471,000 31,597,834
U.S. Treasury Bond, 6.375%, 8/15/27......................... United States 125,000,000 142,382,875
U S Treasury Notes:
5.12%, 8/31/02............................................ United States 50,000,000 52,157,500
5.50%, 3/31/03............................................ United States 125,000,000 127,617,250
5.75%, 4/30/03............................................ United States 125,000,000 128,828,250
5.50%, 5/31/03............................................ United States 150,000,000 153,140,700
7.00%, 7/15/06............................................ United States 125,000,000 140,039,125
5.19%, 10/15/06........................................... United States 50,000,000 54,502,500
6.125%, 8/15/07........................................... United States 75,000,000 80,296,950
</TABLE>
25
PAGE
TEMPLETON WORLD FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
5.625%, 5/15/08........................................... United States $ 100,000,000 $ 104,468,800
6.125%, 11/15/27.......................................... United States 150,000,000 166,359,450
Volkswagen International Finance, cvt., 144A, 3.00%,
1/24/02................................................... Netherlands 9,510,000 13,333,971
--------------
TOTAL BONDS (COST $1,493,865,898)........................... 1,589,687,716
--------------
SHORT TERM INVESTMENTS 6.8%
Fannie Mae, 5.56% to 5.59%, with maturities to 1/15/99...... United States 193,350,000 193,447,425
Federal Farm Credit Bank, 5.50% to 5.53% with maturities to
11/02/98.................................................. United States 205,982,000 206,003,005
Federal Home Loan Bank, 5.71%, 10/01/98..................... United States 46,500,000 46,509,626
U.S. Treasury Bill, 5.11%, 12/10/98......................... United States 9,870,000 9,738,127
U.S. Treasury Note, 5.875%, 10/31/98........................ United States 100,000,000 100,125,100
--------------
TOTAL SHORT TERM INVESTMENTS (COST $555,740,000)............ 555,823,283
--------------
TOTAL INVESTMENTS (COST $8,122,227,611) 100.9%.............. 8,255,044,769
OTHER ASSETS, LESS LIABILITIES (.9%)........................ (77,685,154)
--------------
TOTAL NET ASSETS 100.0%..................................... $8,177,359,615
--------------
--------------
CURRENCY ABBREVIATIONS:
</TABLE>
FRF -- French Franc
GBP -- British Pound
JPY -- Japanese Yen
*Non-income producing.
**Securities traded in U.S dollars unless otherwise indicated.
+The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in affiliated companies at August 31,
1998, were $220,522,853.
++Receipts of Telebras stock represent a basket of twelve new holding companies
to be received in conjunction with the "split-up" of Telecomunicacoes
Brasileiras SA (Telebras).
See Notes to Financial Statements.
26
PAGE
TEMPLETON WORLD FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $8,122,227,611).. $8,255,044,769
Cash....................................................... 318,257
Receivables:
Investment securities sold................................ 27,620,227
Capital shares sold....................................... 6,625,963
Dividends and interest.................................... 54,319,726
--------------
Total assets.......................................... 8,343,928,942
--------------
Liabilities:
Payables:
Investment securities purchased........................... 107,216,641
Capital shares redeemed................................... 48,675,332
To affiliates............................................. 9,077,062
Accrued liabilities........................................ 1,600,292
--------------
Total liabilities..................................... 166,569,327
--------------
Net assets, at value........................................ $8,177,359,615
--------------
--------------
Net assets consist of:
Undistributed net investment income........................ $ 174,852,694
Net unrealized appreciation................................ 132,817,158
Accumulated net realized gain.............................. 728,584,089
Capital shares............................................. 7,141,105,674
--------------
Net assets, at value........................................ $8,177,359,615
--------------
--------------
CLASS I:
Net asset value per share ($7,852,040,498 / 508,278,820
shares outstanding)....................................... $15.45
--------------
--------------
Maximum offering price per share ($15.45 / 94.25%)......... $16.39
--------------
--------------
CLASS II:
Net asset value per share ($325,319,117 / 21,466,033 shares
outstanding)*............................................. $15.16
--------------
--------------
Maximum offering price per share ($15.16 / 99.00%)......... $15.31
--------------
--------------
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
27
PAGE
TEMPLETON WORLD FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $18,092,332)
Dividends.................................................. $209,411,381
Interest................................................... 109,644,880
------------
Total investment income............................... $ 319,056,261
Expenses:
Management fees (Note 3)................................... 57,704,400
Administrative fees (Note 3)............................... 7,286,511
Distribution fees (Note 3)
Class I................................................... 21,510,541
Class II.................................................. 3,095,431
Transfer agent fees (Note 3)............................... 6,144,679
Custodian fees............................................. 1,954,668
Reports to shareholders.................................... 1,435,000
Registration and filing fees............................... 685,000
Professional fees.......................................... 74,000
Directors' fees and expenses............................... 79,000
Other...................................................... 169,166
------------
Total expenses........................................ 100,138,396
---------------
Net investment income........................... 218,917,865
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 970,088,016
Foreign currency transactions............................. (4,098,325)
------------
Net realized gain..................................... 965,989,691
Net unrealized depreciation on investments............ (1,892,989,415)
---------------
Net realized and unrealized loss............................ (926,999,724)
---------------
Net decrease in net assets resulting from operations........ $ (708,081,859)
---------------
---------------
</TABLE>
See Notes to Financial Statements.
28
PAGE
TEMPLETON WORLD FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 218,917,865 $ 197,482,420
Net realized gain from investments and foreign currency
transactions............................................ 965,989,691 1,070,814,751
Net unrealized appreciation (depreciation) on
investments............................................. (1,892,989,415) 862,081,294
------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ (708,081,859) 2,130,378,465
Distributions to shareholders from:
Net investment income:
Class I.................................................. (200,201,253) (173,704,228)
Class II................................................. (4,448,539) (1,366,380)
Net realized gains:
Class I.................................................. (1,180,370,911) (420,453,674)
Class II................................................. (33,385,853) (4,340,189)
Capital share transactions (Note 2):
Class I.................................................. 1,252,291,503 658,499,802
Class II................................................. 193,883,707 126,894,283
------------------------------------
Net increase (decrease) in net assets................... (680,313,205) 2,315,908,079
Net assets:
Beginning of year.......................................... 8,857,672,820 6,541,764,741
------------------------------------
End of year................................................ $ 8,177,359,615 $8,857,672,820
------------------------------------
------------------------------------
Undistributed net investment income included in net assets:
End of year................................................ $ 174,852,694 $ 160,584,621
------------------------------------
------------------------------------
</TABLE>
See Notes to Financial Statements.
29
PAGE
TEMPLETON WORLD FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton World Fund (the Fund) is a separate, diversified series of Templeton
Funds, Inc. (the Company), which is an open-end investment company registered
under the Investment Company Act of 1940. The Fund seeks long-term capital
growth through a flexible policy of investing in the equity and debt securities
of companies and governments of any nation. The following summarizes the Fund's
significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as
30
PAGE
TEMPLETON WORLD FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
information is available to the Fund. Interest income and estimated expenses are
accrued daily. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Company are allocated among the funds comprising
the Company based on the ratio of net assets of each fund to the combined net
assets. Other expenses are charged to each fund on a specific identification
basis.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II shares. The shares
differ by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.
At August 31, 1998, there were 3.7 billion shares of capital stock authorized
($1.00 par value) of which 1.2 billion shares have been classified as Fund
shares as follows: 800 million Class I shares and 400 million Class II shares.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold.......................................... 120,413,437 $ 2,177,193,072 50,518,371 $ 908,100,346
Shares issued on reinvestment of distributions....... 69,173,107 1,243,610,702 33,921,940 537,536,364
Shares redeemed...................................... (121,253,126) (2,168,512,271) (44,339,505) (787,136,908)
--------------------------------------------------------------------
Net increase......................................... 68,333,418 $ 1,252,291,503 40,100,806 $ 658,499,802
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
31
PAGE
TEMPLETON WORLD FUND
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
1998 1997
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold.............................................. 13,583,157 $242,883,205 7,233,238 $130,727,138
Shares issued on reinvestment of distributions........... 1,794,638 31,767,645 301,031 4,729,632
Shares redeemed.......................................... (4,622,432) (80,767,143) (479,002) (8,562,487)
--------------------------------------------------------------
Net increase............................................. 10,755,363 $193,883,707 7,055,267 $126,894,283
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers or directors of Templeton Global
Advisors Ltd. (TGAL), Franklin Templeton Services, Inc. (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors) and Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TGAL based on the average daily
net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.75% First $200 million
0.675% Over $200 million, up to and including $1.3 billion
0.60% Over $1.3 billion
</TABLE>
The Fund pays its allocated share of an administrative fee to FT Services based
on the Company's aggregate average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Under the Class I
distribution plan, costs and expenses exceeding the maximum may be reimbursed in
subsequent periods. At August 31, 1998, there were no unreimbursed costs.
Distributors received net commissions from sales of Fund shares and received
contingent deferred sales charges for the year of $2,520,423 and $208,313,
respectively.
Legal fees of $27,782 were paid to a law firm in which a partner is an officer
of the Fund.
32
PAGE
TEMPLETON WORLD FUND
Notes to Financial Statements (continued)
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown in the
Statement of Investments. At August 31, 1998, the net unrealized appreciation
based on the cost of investments for income tax purposes was as follows:
<TABLE>
<S> <C>
Unrealized appreciation.................................... $ 1,264,487,186
Unrealized depreciation.................................... (1,131,670,028)
---------------
Net unrealized appreciation................................ $ 132,817,158
---------------
---------------
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1998 aggregated $4,687,412,299 and $3,466,804,419,
respectively.
33
PAGE
TEMPLETON WORLD FUND
Independent Auditor's Report
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TEMPLETON WORLD FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton World Fund series of Templeton Funds,
Inc. as of August 31, 1998, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the periods indicated in
the accompanying financial statements. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton World Fund series of Templeton Funds, Inc. as of August 31, 1998, the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles.
[McGladrey & Pullen, LLP]
New York, New York
September 29, 1998
34
PAGE
TEMPLETON WORLD FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates the following amounts as capital gain dividends for the fiscal year
ended August 31, 1998:
<TABLE>
<S> <C>
28% Rate Gain............................................... $ 40,470,338
20% Rate Gain............................................... 910,993,310
------------
Total....................................................... $951,463,648
============
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
13.84% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1998.
35
PAGE
This page intentionally left blank.
PAGE
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. To ensure the highest quality of service, telephone
calls to or from our service departments may be monitored, recorded and
accessed. These calls can be determined by the presence of a regular beeping
tone.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Mutual Discovery Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Global
Currency Fund
Franklin Templeton Hard
Currency Fund
Templeton Americas Government
Securities Fund
GROWTH
Franklin Biotechnology
Discovery Fund
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund*
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends Fund
Franklin Strategic Income Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
FUND ALLOCATOR SERIES
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Floating Rate Trust
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida**
Georgia
Hawaii***
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota+
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas Virginia
Washington***
VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*These funds are now closed to new accounts, with the exception of retirement
plan accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+Portfolio of insured municipal securities.
++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
09/98
PAGE
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585
1-800/DIAL BEN(R)
www.franklin-templeton.com
SHAREHOLDER SERVICES AGENT
1-800/632-2301
FUND INFORMATION
1-800/342-5236
This report must be preceded or accompanied by the current prospectus of
Templeton World Fund, which contains more complete information, including risk
factors, charges and expenses. Like any investment in securities, the value of
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
Investment Manager, which will not always be profitable or wise. The Fund and
its investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept this risk should not invest in shares of
the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
102 A98 10/98 [RECYCLING SYMBOL] Printed on recycled paper
