As filed with the Securities and Exchange Commission on October 29, 1998
File Nos. 2-60067 and 811-2781
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _______
Post-Effective Amendment No. 31 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 32 [X]
TEMPLETON FUNDS, INC.
------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
500 EAST BROWARD BLVD., FT. LAUDREDALE, FLORIDA 33394
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(954) 527-7500
-----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
BARBARA J. GREEN, 500 E. BROWARD BLVD., FT. LAUDERDALE, FL 33394
-----------------------------------------------------------------
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public offering:
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] January 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
PAGE
PART A
TEMPLETON WORLD FUND PROSPECTUS
PAGE
PROSPECTUS
TEMPLETON
WORLD
FUND
Class I & II
INVESTMENT STRATEGY GLOBAL GROWTH
JANUARY 1, 1999
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE
Contents
THE FUND
- --------------------------------------------------------------------------------
Information about
the fund you
should know
before investing
[] Goals and Strategies
[] Main Risks
[] Performance
[] Fees and Expenses
[] Management
[] Distributions and Taxes
[] Financial Highlights
YOUR ACCOUNT
- --------------------------------------------------------------------------------
Information about
sales charges,
account
transactions and
services
[] Choosing a Share Class
[] Buying Shares
[] Investor Services
[] Selling Shares
[] Account Policies
[] Questions
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Where to learn Back Cover
more about the
fund
PAGE
THE FUND
[GRAPHIC PAGE] GOALS AND STRATEGIES
GOALS The fund's principal goal is long-term capital growth
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the common stocks of companies located anywhere in the world,
including emerging markets. At least 65% of its total assets will be invested in
issuers located in at least three countries (including the U.S.).
The fund also invests in American, European and Global Depositary Receipts,
which are certificates typically issued by a bank or trust company that give
their holders the right to receive securities issued by a foreign or domestic
company.
Depending upon current market conditions, the fund generally invests a portion
of its total assets in debt securities of companies and governments located
anywhere in the world.
- --------------------------------------------------------------------------------
In choosing investments, the fund's manager will focus on the market price of
a company's securities relative to its evaluation of the company's long-term
earnings, asset value and cash flow potential. A company's historical value
measures, including price/earnings ratio, profit margins and liquidation value,
will also be considered.
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal.
PAGE
[GRAPHIC DAGER] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies, or
industries or the securities market as a whole.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in American,
European and Global Depositary Receipts also involve some or all of the
following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes.
The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of legal, business and social frameworks to support securities
markets. While short-term volatility in these markets can be disconcerting,
declines of 40% to 50% are not unusual.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
PAGE
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.
- --------------------------------------------------------------------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
- --------------------------------------------------------------------------------
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 In evaluating current and potential portfolio positions, Year 2000 is
only one of the factors that the fund's manager takes into consideration. It
will rely upon public filings and other statements made by companies regarding
their Year 2000 readiness. Issuers in countries outside of the U.S., and in
particular in emerging markets, may not be required to make the same level of
disclosure regarding Year 2000 readiness that is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to verify
their Year 2000 readiness. If a company the fund is invested in is adversely
affected by Year 2000 problems, it is likely that the price of its security will
also be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's shares.
Please see "Year 2000 Problem" on page xx for more information.
PAGE
[GRAPHIC BULLS] Performance
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 years. The
table shows how the fund's average annual total returns compare to those of a
broad-based securities market index. Of course, past performance cannot
predict or guarantee future results.
Class I Annual Total Returns (1)
[AVERAGE ANNUAL RETURN GRAPH BAR CHART]
<TABLE>
<CAPTION>
YEAR 88 89 90 91 92 93 94 95 96 97
------ ----- ----- --- ------ ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19.69% 22.60% -15.90% 29.77% 3.25% 33.60% 0.88% 21.55% 21.45% 19.23%
</TABLE>
Best quarter:
Q1 '91 14.67%
Worst quarter:
Q3 '90 -17.80%
Average Annual Total Returns
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Templeton World Fund - Class I 12.37% 17.45% 13.97%
(2)
[MSCI World Index (3)] 16.23% 15.88% 11.14%
</TABLE>
<TABLE>
<CAPTION>
Since Inception
1 Year (5/1/95)
------ --------
<S> <C> <C>
Templeton World Fund Class II 16.03% 18.47%
(2)
[MSCI WorldIndex (3)] 16.23% 15.89%
</TABLE>
(1) Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 1998, the fund's year-to-date return was -8.03% for Class
I.
(2) Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. January 1, 1993, the fund implemented a Rule 12b-1
plan, which affects subsequent performance.
(3) The unmanaged MSCI World Index tracks the performance of approximately 1,500
securities in 23 countries and is designed to measure world stock market
performance. It includes reinvested dividends. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
PAGE
[GRAPHIC] Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended August 31, 1998.
Shareholder Fees (fees paid directly from your investment)
As a percentage of offering price
<TABLE>
<CAPTION>
Class I Class II
------- --------
<S> <C> <C>
Maximum sales charge (load) 5.75% 1.99%
Paid at time of purchase 5.75% 1.00%
Paid at redemption None(1) 0.99%(2)
Exchange fee (3) None None
</TABLE>
Please see "Choosing a Share Class" on page [11] for an explanation of how and
when these sales charges apply.
Annual Fund Operating Expenses (expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class I Class II
------- --------
<S> <C> <C>
Management fees 0.61% 0.61%
Distribution and service (12b-1) fees (4) 0.25%(5) 1.00%
Other expenses 0.19% 0.19%
---------- ----------
Total annual fund operating expenses 1.05% 1.80%
---------- ----------
</TABLE>
(1) Except for investments of $1 million or more (see page [11]) and purchases
by certain retirement plans without an initial sales charge.
(2) This is equivalent to a charge of 1% based on net asset value.
(3) There is a $5 fee for each exchange by a market timer (see page [22]).
(4) Because of the 12b-1 fees, over the long term you may indirectly pay more
than the equivalent of the maximum permitted initial sales charge.
(5) Class I total fund operating expenses are different than the ratio
of expenses to average net assets shown under "Financial Highlights" due to a
timing difference between the end of the 12b-1 plan year and the fund's fiscal
year end.
PAGE
Example
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class I $676 (1) $890 $1,121 $1,784
Class II $379 $661 $1,065 $2,195
</TABLE>
For the same Class II investment, your costs would be $281 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
(1) Assumes a contingent deferred sales charge (CDSC) will not apply.
PAGE
[Graphic People] Management
Templeton Global Advisors Limited (Global Advisors), Lyford Cay, Nassau,
Bahamas, is the fund's investment manager. Together, Global Advisors and its
affiliates manage over $207 billion in assets.
LEAD PORTFOLIO MANAGER
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Jeffrey A. Everett CFA, Mr. Everett has been the fund's lead portfolio
Executive Vice President manager since 1996. He joined the Franklin
of Global Advisors Templeton Group in 1989.
SECONDARY PORTFOLIO MANAGERS
- ------------------------------------------------------------------------------
Mark G. Holowesko CFA, Mr. Holowesko has been a manager of the fund since
President of Global 1987. He joined the Franklin Templeton Group in
Advisors 1985.
- ------------------------------------------------------------------------------
Richard Sean Farrington CFA, Mr. Farrington has been a manager of the fund since
Vice President of Global 1994. He joined the Franklin Templeton Group in 1991.
Advisors
- ------------------------------------------------------------------------------
</TABLE>
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended August 31, 1998, the fund paid
0.61% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM. The fund's business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
PAGE
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
PAGE
[GRAPHIC HAND] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this dividend will vary and there
is no guarantee the fund will pay dividends.
To receive an income dividends, you must be a shareholder on the record date.
The record date for the fund's dividend will vary. You may not want to invest a
large amount in the fund shortly before the record date since you will receive
some of your investment back as a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
- ------------------------------------------------------------------------------
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
- ------------------------------------------------------------------------------
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the
fund pays on its investments may be passed through to you as a foreign tax
credit. Non-U.S. investors may be subject to U.S. withholding and estate
tax. You should consult your tax professional about federal, state, local or
foreign tax consequences.
For more information, please call 1-800/DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
PAGE
[GRAPHIC DOLLAR SIGN] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by McGladrey & Pullen, LLP.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
CLASS I 1998 1997 1996 1995(1) 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 19.66 16.21 16.76 17.06 15.94
----------------------------------------------------------------------------
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
Dividends from net investment income (.44) (.43) (.37) (.28) (.26)
Distributions from 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 (%)(2) (7.80) 32.70 11.73 9.87 18.87
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 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>
<TABLE>
<CAPTION>
CLASS II 1998 1997 1996 1995(1)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 19.39 16.04 16.71 15.36
------------------------------------------------------------
Net investment income .33 .34 .45 .03
Net realized and unrealized gains (losses) (1.61) 4.39 1.11 1.32
------------------------------------------------------------
Total from investment operations (1.28) 4.73 1.56 1.35
Dividends from net investment income (.35) (.34) (.35) --
Distributions from net realized gains (2.60) (1.04) (1.88) --
------------------------------------------------------------
Total distributions (2.95) (1.38) (2.23) --
------------------------------------------------------------
Net asset value, end of year 15.16 19.39 16.04 16.71
============================================================
Total return (%)(2) (8.51) 31.61 10.88 8.79
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 325,319 207,679 58,619 7,623
Ratios to average net assets: (%)
Expenses 1.80 1.83 1.84 1.82(3)
Net investment income 1.66 1.92 2.14 1.37(3)
Portfolio turnover rate(%) 43.36 39.16 22.05 34.05
</TABLE>
PAGE
(1) The 1995 numbers for Class II are for the period May 1, 1995 (effective
date) through August 31, 1995.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
PAGE
YOUR ACCOUNT
[GRAPHIC PENCIL] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
Class I
- - Initial sales charge of 5.75% or less
- - Lower annual expenses than Class II due to lower distribution fees
Class II
- - Initial sales charge of 1%
- - Deferred sales charge of 1% on shares you sell within 18 months
SALES CHARGES
CLASS I
<TABLE>
<CAPTION>
WHICH EQUALS THIS %
THIS % IS DEDUCTED OF YOUR NET
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES INVESTMENT
<S> <C> <C>
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page [13]), you can buy Class I shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for both Class I and Class II (please see the next page).
DISTRIBUTION AND SERVICE (12b-1) FEES Class I has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows Class I to pay distribution fees of up
to 0.25% per year to those who sell and distribute its shares and provide other
services to shareholders. Because these fees are paid out of Class I's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
PAGE
CLASS II
<TABLE>
<CAPTION>
WHICH EQUALS THIS %
THIS % IS DEDUCTED OF YOUR NET
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES INVESTMENT
<S> <C> <C>
Under $1 million 1.00 1.01
</TABLE>
WE AUTOMATICALLY INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS I SHARES,
SINCE THERE IS NO INITIAL SALES CHARGE AND CLASS I ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class II
shares you sell within 18 months of purchase.
- -------------------------------------------------------------------------------
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, suppose you bought Class II shares on June 15th. On December 15th
of the following year, you could sell your Class II shares without a CDSC.
- -------------------------------------------------------------------------------
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends.
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page [18]
for exchange information).
DISTRIBUTION AND SERVICE (12b-1) FEES Class II has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows Class II to pay distribution
and other fees of up to 1% per year for the sale of its shares and for services
provided to shareholders. Because these fees are paid out of Class II's assets
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
PAGE
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases.
- -------------------------------------------------------------------------------
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
- -------------------------------------------------------------------------------
- - Cumulative Quantity Discount - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or grandchildren,
if they are under the age of 21. Certain company and retirement plan accounts
may also be included.
- - Letter of Intent (LOI) - expresses your intent to buy a stated number
of shares over a 13-month period and lets you receive the same sales charge as
if all shares had been purchased at one time. We will reserve a portion of your
shares to cover any additional sales charge that may apply if you do not buy the
amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR ACCOUNT
APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
invest some or all of the proceeds in the same share class of the fund within
365 days without an initial sales charge. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a new
CDSC will apply.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) may
also be invested without an initial sales charge if you invest them within 365
days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
PAGE
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class I shares may be purchased
without an initial sales charge or CDSC by investors who reinvest within 365
days:
- - certain annuity payments received under an annuity contract that offers a
Franklin Templeton investment option
- - distributions from an existing retirement plan invested in the Franklin
Templeton Funds
- - dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.
- - redemption proceeds from a repurchase of Franklin Floating Rate Trust shares
held continuously for at least 12 months
- - redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your shares,
we will credit your account with the amount of the CDSC paid but a new CDSC
will apply.
WAIVERS FOR CERTAIN INVESTORS Class I shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions, including
- - certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion
- - government entities that are prohibited from paying mutual fund sales
charges
- - certain unit investment trusts and their holders reinvesting trust
distributions
- - group annuity separate accounts offered to retirement plans
- - employees and other associated persons or entities of Franklin Templeton or
of certain dealers
CDSC WAIVERS The CDSC for either share class will generally be waived:
- - to pay account fees
- - to make payments through systematic withdrawal plans, up to certain amounts
- - for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
- - to return excess contributions from employee benefit plans
- - for redemptions following the death of the shareholder or beneficial owner
- - for redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R)
- - for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER, CALL YOUR
INVESTMENT REPRESENTATIVE OR SHAREHOLDER SERVICES FOR MORE INFORMATION.
PAGE
RETIREMENT PLANS Certain retirement plans may buy Class I shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
- - with at least 100 employees, or
- - with retirement plan assets of $1 million or more, or
- - that agrees to invest at least $500,000 in the Franklin Templeton Funds over
a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the tax code must also qualify under our group
investment program to buy Class I shares without an initial sales charge.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE
OR RETIREMENT PLAN SERVICES AT 1-800/527-2020.
[GRAPHIC PERSON] BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
MINIMUM INVESTMENTS
<TABLE>
<CAPTION>
INITIAL ADDITIONAL
<S> <C> <C>
Regular accounts $1,000 $ 50
- ---------------------------------------------------------------------------------
UGMA/UTMA accounts $ 100 $ 50
- ---------------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education IRAs
or Roth IRAs)
- ---------------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth IRAs $ 250 $ 50
- ---------------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs $ 250 $ 50
- ---------------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities, and
their immediate family members $ 100 $ 50
</TABLE>
PAGE
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will invest your purchase in
Class I shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see the
next page).
BUYING SHARES
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C> <C>
[GRAPHIC TWO PEOPLE SHAKING HANDS]
THROUGH YOUR INVESTMENT Contact your investment Contact your investment
REPRESENTATIVE representative representative
- --------------------------------------------------------------------------------------------------
[GRAPHIC ENVELOPE] Make your check payable Make your check payable
to Templeton World to Templeton World
Fund. Fund. Include your
BY MAIL account number on the
Mail the check and your check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do
not have a slip,
include a note with
your name, the fund
name, and your account
number.
Mail the check and
deposit slip or note
to Investor
Services.
- --------------------------------------------------------------------------------------------------
[GRAPHIC WIRE] Call to receive a wire Call to receive a wire
control number and wire control number and wire
instructions. instructions.
BY WIRE Mail your signed To make a same day wire
application to Investor investment, please call
1-800/632-2301 Services. Please us by 1:00 p.m. pacific
(or 1-650/312-2000 include the wire time and make sure your
collect) control number or your wire arrives by 3:00
new account number on p.m.
the application.
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------------------------
[GRAPHIC EXCHANGE ARROWS] Call Shareholder Call Shareholder
Services at the number Services at the number
BY EXCHANGE below, or send signed below or our automated
written instructions. TeleFACTS system, or
The TeleFACTS system send signed written
cannot be used to open instructions.
a new account.
TeleFACTS(R) 1-800/247-1753
(around-the-clock access) (Please see page [18] for (Please see page [18] for
information on information on
exchanges.) exchanges.)
- --------------------------------------------------------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES 100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
PAGE
[GRAPHIC HANDSHAKE]INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA).
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class I
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
the same share class* of the fund or another Franklin Templeton Fund. Initial
sales charges and CDSCs will not apply if you reinvest your distributions within
365 days. You can also have your distributions deposited in a bank account, or
mailed by check. Deposits to a bank account may be made by electronic funds
transfer.
- -------------------------------------------------------------------------------
For Franklin Templeton Trust Company retirement plans, special forms
may be needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
- -------------------------------------------------------------------------------
Please indicate on your application the distribution option you have chosen,
otherwise we will automatically reinvest your distributions in the same share
class of the fund.
*Class II shareholders may reinvest their distributions in Class I shares of the
fund or another Franklin Templeton Fund if they chose to do so before November
17, 1997, or in Class I shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require a separate application and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
PAGE
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
- -------------------------------------------------------------------------------
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges. Exchanges also have the same tax consequences as ordinary sales
and purchases.
- -------------------------------------------------------------------------------
Exchanges may only be made between identically registered accounts, unless you
send written instructions with a signature guarantee. Any CDSC will continue to
be calculated from the date of your initial investment and will not be charged
at the time of the exchange. If you exchange shares subject to a CDSC into a
Class I money fund, the time your shares are held there will not count towards
the CDSC holding period.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. To protect shareholders, there are limits on the number and amount
of exchanges you may make (please see Market timers on page [22]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class I without any sales charge.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed 1% a month of an account's net asset value. Certain
terms and minimums apply. To sign up, complete the appropriate section of your
application.
PAGE
[GRAPHIC PERSON] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell less than $100,000 can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
- - you are selling more than $100,000 worth of shares
- - you want your proceeds paid to someone who is not a registered owner
- - you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
- - you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
- ------------------------------------------------------------------------------
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
- ------------------------------------------------------------------------------
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you need to complete additional forms required by the
Internal Revenue Service. For participants under age 59 1/2, tax penalties may
apply. Call Retirement Plan Services at 1-800/527-2020 to request the necessary
forms.
PAGE
SELLING SHARES
TO SELL SOME OR ALL OF YOUR SHARES
[GRAPHIC TWO PEOPLE SHAKING HANDS]
THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE
- --------------------------------------------------------------------------------
[GRAPHIC ENVELOPE] Send written instructions and endorsed share
certificates (if you hold share certificates) to
BY MAIL Investor Services. Corporate, partnership or
trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- --------------------------------------------------------------------------------
[GRAPHIC PHONE] As long as your transaction is for $100,000 or
less, you do not hold share certificates and you
BY PHONE have not changed your address by phone within
the last 15 days, you can sell your shares by
phone.
1-800/632-2301 A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- --------------------------------------------------------------------------------
[GRAPHIC WIRE] You can call or write to have redemption proceeds of
$1,000 or more wired to a bank or escrow account.
See the policies above for selling shares by mail or
phone.
BY WIRE Before requesting a wire, please make sure we have
your bank account information on file. If we do not
have this information, you will need to send written
instructions with your bank's name and address, your
bank account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business day.
- --------------------------------------------------------------------------------
[GRAPHIC EXCHANGE ARROWS] Obtain a current prospectus for the fund you are
considering.
BY EXCHANGE
Call Shareholder Services at the number below or
TeleFACTS 1-800/247-1753 our automated TeleFACTS(R) system, or send signed
written instructions. See the policies above for
(around-the-clock access) selling shares by mail or phone.
If you hold share certificates, you will need to
return them to the fund before your exchange can be
processed.
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES 100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME)
PAGE
[GRAPHIC PAGE] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
- ------------------------------------------------------------------------------
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
PAGE
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5.00. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
- - The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
- - At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
- - The fund may modify or discontinue the exchange privilege on 60 days'
notice.
- - You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
- - In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
- - For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
- - To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
PAGE
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. from sales charges, distribution and service (12b-1) fees and
its other resources.
<TABLE>
<CAPTION>
CLASS I CLASS II
<S> <C> <C>
COMMISSION (%) -- 2.00
Investment under $50,000 5.00 --
$50,000 but under $100,000 3.75 --
$100,000 but under $250,000 2.80 --
$250,000 but under $500,000 2.00 --
$500,000 but under $1 million 1.60 --
$1 million or more up to 1.00(1) --
12b-1 FEE TO DEALER 0.25 1.00(2)
</TABLE>
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans(1) and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
(1) During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
(2) Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee in the 13th month.
[GRAPHIC QUESTION MARK] QUESTIONS
More detailed information about the fund and its policies can be found in the
fund's Statement of Additional Information (SAI). If you have any questions
about the fund or your account, you can write to us at 100 Fountain Parkway,
P.O. Box 33030, St. Petersburg, FL 33733-8030. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
<TABLE>
<CAPTION>
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
<S> <C> <C>
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>
PAGE
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #
Lit. Code #
PAGE
PART A
TEMPLETON FOREIGN FUND
CLASS I & II PROSPECTUS
PAGE
Prospectus
TEMPLETON
FOREIGN
FUND
Class I & II
INVESTMENT STRATEGY GLOBAL GROWTH
JANUARY 1, 1999
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE
CONTENTS
THE FUND
- --------------------------------------------------------------------------------
Information about the fund you should know before investing
[] Goals and Strategies
[] Main Risks
[] Performance
[] Fees and Expenses
[] Management
[] Distributions and Taxes
[] Financial Highlights
YOUR ACCOUNT
- --------------------------------------------------------------------------------
Information about sales charges, account transactions and services
[] Choosing a Share Class
[] Buying Shares
[] Investor Services
[] Selling Shares
[] Account Policies
[] Questions
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Where to learn more about the fund
Back Cover
PAGE
THE FUND
[GRAPHIC SHEET OF PAPER] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the common stocks of companies located outside the U.S., including
in emerging markets. The fund also invests in American, European and Global
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic company.
Depending upon current market conditions, the fund generally invests up to 25%
of its total assets in debt securities of companies and governments located
anywhere in the world.
- --------------------------------------------------------------------------------
In choosing investments, the fund's manager will focus on the market price of
a company's securities relative to its evaluation of the company's long-term
earnings, asset value and cash flow potential. A company's historical value
measures, including price/earnings ratio, profit margins and liquidation value,
will also be considered.
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal.
PAGE
[GRAPHIC DAGER] Main Risks
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies, or
industries or the securities market as a whole.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in American,
European and Global Depositary Receipts also involve some or all of the
following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes.
The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of legal, business and social frameworks to support securities
markets. While short-term volatility in these markets can be disconcerting,
declines of 40% to 50% are not unusual.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
PAGE
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.
- --------------------------------------------------------------------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
- --------------------------------------------------------------------------------
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 In evaluating current and potential portfolio positions, Year 2000 is
only one of the factors that the fund's manager takes into consideration. It
will rely upon public filings and other statements made by companies regarding
their Year 2000 readiness. Issuers in countries outside of the U.S., and in
particular in emerging markets, may not be required to make the same level of
disclosure regarding Year 2000 readiness that is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to verify
their Year 2000 readiness. If a company the fund is invested in is adversely
affected by Year 2000 problems, it is likely that the price of its security will
also be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's shares.
Please see "Year 2000 Problem" on page xx for more information.
PAGE
[GRAPHIC BULLS] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 years. The table shows how
the fund's average annual total returns compare to those of a broad-based
securities market index. Of course, past performance cannot predict or guarantee
future results.
CLASS I ANNUAL TOTAL RETURNS (1)
<TABLE>
<CAPTION>
YEAR 88 89 90 91 92 93 94 95 96 97
------ ----- ----- --- ------ ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21.99% 30.53% -3.01% 18.25% 0.10% 36.82% 0.35% 11.15% 18.00% 6.65%
</TABLE>
Best quarter:
Q3 '89 13.32%
Worst quarter:
Q3 '90 -11.65%
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Templeton Foreign Fund - Class I(2) 0.54% 12.60% 12.71%
MSCI EAFE Index(3) 2.06% 11.71% 6.56%
</TABLE>
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR (5/1/95)
------ ---------------
<S> <C> <C>
Templeton Foreign Fund Class II(2) 3.93% 10.58%
MSCI EAFE Index(3) 2.06% 5.19%
</TABLE>
(1) Figures do not reflect sales charges. If they did, returns would be lower.
As of September 30, 1998, the fund's year-to-date return was -15.08% for Class
I.
(2) Figures reflect sales charges. All fund performance assumes reinvestment of
dividends and capital gains. January 1, 1993, the fund implemented a Rule 12b-1
plan, which affects subsequent performance.
(3) The unmanaged MSCI Europe Australia Far East (EAFE) Index tracks the
performance of approximately 1,000 securities in 21 countries and is designed to
measure world stock market performance. It includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
PAGE
[GRAPHIC] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund. It is based on the fund's expenses for the fiscal
year ended August 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
As a percentage of offering price
<TABLE>
<CAPTION>
CLASS I CLASS II
------- --------
<S> <C> <C>
Maximum sales charge (load) 5.75% 1.99%
Paid at time of purchase 5.75% 1.00%
Paid at redemption None(1) 0.99%(2)
Exchange fee(3) None None
</TABLE>
Please see "Choosing a Share Class" on page [11] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS I CLASS II
------- --------
<S> <C> <C>
Management fees 0.61% 0.61%
Distribution and service (12b-1) fees(4) 0.25% 1.00%
Other expenses 0.26% 0.26%
---- ----
Total annual fund operating expenses 1.12% 1.87%
==== ====
</TABLE>
(1) Except for investments of $1 million or more (see page [11]) and purchases
by certain retirement plans without an initial sales charge.
(2) This is equivalent to a charge of 1% based on net asset value.
(3) There is a $5 fee for each exchange by a market timer (see page [22]).
(4) Because of the 12b-1 fees, over the long term you may indirectly pay more
than the equivalent of the maximum permitted initial sales charge.
PAGE
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
CLASS I $683(1) $911 $1,156 $1,860
CLASS II $386 $682 $1,101 $2,268
</TABLE>
For the same Class II investment, your costs would be $288 if you did not sell
your shares at the end of the first year. Your costs for the remaining periods
would be the same.
(1) Assumes a contingent deferred sales charge (CDSC) will not apply.
PAGE
[GRAPHIC PEOPLE] MANAGEMENT
Templeton Global Advisors Limited (Global Advisors), Lyford Cay, Nassau,
Bahamas, is the fund's investment manager. Together, Global Advisors and its
affiliates manage over $207 billion in assets.
<TABLE>
<CAPTION>
LEAD PORTFOLIO MANAGER
<S> <C>
- -------------------------------------------------------------------------------
Mark G. Holowesko CFA, Mr. Holowesko has been the fund's lead portfolio
President of Global manager since 1987. He joined the Franklin
Advisors Templeton Group in 1985.
SECONDARY PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------
Jeffrey A. Everett CFA, Mr. Everett has been a manager of the fund since
Executive Vice President of 1994. He joined the Franklin Templeton Group in
Global Advisors 1989.
- -------------------------------------------------------------------------------
Richard Sean Farrington CFA, Mr. Farrington has been a manager of the fund
Vice President of Global since 1993. He joined the Franklin Templeton
Advisors Group in 1991.
</TABLE>
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended August 31, 1998, the fund paid
0.61% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM. The fund's business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
PAGE
[GRAPHIC HAND] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realzied capital gains. The amount of this dividend will vary and there
is no guarantee the fund will pay dividends.
To receive an income dividends, you must be a shareholder on the record date.
The record date for the fund's dividend will vary. You may not want to invest a
large amount in the fund shortly before the record date since you will receive
some of your investment back as a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable as either ordinary
income or capital gains. This is true whether you reinvest your distributions in
additional shares of the fund or receive them in cash. Any capital gains the
fund distributes are taxable to you as long-term capital gains no matter how
long you have owned your shares.
- -------------------------------------------------------------------------------
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
- -------------------------------------------------------------------------------
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax professional about federal, state, local or foreign tax
consequences.
For more information, please call 1-800/DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
PAGE
[GRAPHIC DOLLAR SIGN] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by McGladrey & Pullen, LLP.
<TABLE>
<CAPTION>
CLASS I YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1998 1997 1996 1995(1) 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 11.40 9.97 9.62 10.01 8.74
----------- ----------- ----------- ----------- -----------
Net investment income .30 .32 .27 .23 .14
Net realized and unrealized gains (losses) (2.11) 1.56 .69 .05 1.39
----------- ----------- ----------- ----------- -----------
Total from investment operations (1.81) 1.88 .96 .28 1.53
Dividends from net investment income (.32) (.28) (.25) (.16) (.13)
Distributions from net realized gains (.84) (.17) (.36) (.51) (.13)
----------- ----------- ----------- ----------- -----------
Total distributions (1.16) (.45) (.61) (.67) (.26)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year 8.43 11.40 9.97 9.62 10.01
=========== =========== =========== =========== ===========
Total return (%) (2) (17.89) 19.55 10.68 3.14 17.94
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 10,745,504 14,367,787 9,602,209 6,941,238 5,014,438
Ratios to average net assets: (%)
Expenses 1.12 1.08 1.12 1.15 1.14
Net investment income 2.79 3.28 3.09 2.81 1.84
Portfolio turnover rate (%) 38.27 37.28 15.91 21.78 36.75
CLASS II
PER SHARE DATA ($)
Net asset value, beginning of year 11.25 9.87 9.59 9.16
----------- ----------- ----------- -----------
Net investment income .22 .26 .30 .03
Net realized and unrealized gains (losses) (2.07) 1.52 .58 .40
----------- ----------- ----------- -----------
Total from investment operations (1.85) 1.78 .88 .43
Dividends from net investment income (.26) (.23) (.24) --
Distributions from net realized gains (.84) (.17) (.36) --
----------- ----------- ----------- -----------
Total distributions (1.10) (.40) (.60) --
----------- ----------- ----------- -----------
Net asset value, end of year 8.30 11.25 9.87 9.59
=========== =========== =========== ===========
Total return (%) (2) (18.46) 18.65 9.78 4.81
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 1,159,810 1,303,639 527,443 63,428
Ratios to average net assets: (%)
Expenses 1.87 1.83 1.87 1.90(3)
Net investment income 2.07 2.62 2.63 1.86(3)
Portfolio turnover rate (%) 38.27 37.28 15.91 21.78
</TABLE>
PAGE
(1) The 1995 numbers for Class II are for the period May 1, 1995 (effective
date) through August 31, 1995.
(2) Total return does not include sales charges, and is not annualized.
(3) Annualized.
PAGE
YOUR ACCOUNT
[GRAPHIC PENCIL] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
CLASS I CLASS II
- - Initial sales charge of 5.75% or less - Initial sales charge of 1%
- - Lower annual expenses than Class - Deferred sales charge of 1% on
II due to lower distribution fees shares you sell within 18 months
SALES CHARGES
CLASS I
<TABLE>
<CAPTION>
WHICH EQUALS THIS %
THIS % IS DEDUCTED OF YOUR NET
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES INVESTMENT
- --------------------------- ----------------- -------------------
<S> <C> <C>
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page 13), you can buy Class I shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for both Class I and Class II (please see the next page).
DISTRIBUTION AND SERVICE (12b-1) FEES Class I has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows Class I to pay distribution fees of up
to 0.25% per year to those who sell and distribute its shares and provide other
services to shareholders. Because these fees are paid out of Class I's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
PAGE
CLASS II
<TABLE>
<CAPTION>
WHICH EQUALS THIS %
THIS % IS DEDUCTED OF YOUR NET
WHEN YOU INVEST THIS AMOUNT FOR SALES CHARGES INVESTMENT
- --------------------------- ----------------- -------------------
<S> <C> <C>
Under $1 million 1.00 1.01
</TABLE>
WE AUTOMATICALLY INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS I SHARES,
SINCE THERE IS NO INITIAL SALES CHARGE AND CLASS I ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class II
shares you sell within 18 months of purchase.
- -------------------------------------------------------------------------------
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, suppose you bought Class II shares on June 15th. On December 15th
of the following year, you could sell your Class II shares without a CDSC.
- -------------------------------------------------------------------------------
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares you
acquire by reinvesting your dividends.
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page 18
for exchange information).
DISTRIBUTION AND SERVICE (12b-1) FEES Class II has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows Class II to pay distribution
and other fees of up to 1% per year for the sale of its shares and for services
provided to shareholders. Because these fees are paid out of Class II's assets
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
PAGE
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases.
- -------------------------------------------------------------------------------
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
- -------------------------------------------------------------------------------
- - Cumulative Quantity Discount - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or grandchildren,
if they are under the age of 21. Certain company and retirement plan accounts
may also be included.
- - Letter of Intent (LOI) - expresses your intent to buy a stated number
of shares over a 13-month period and lets you receive the same sales charge as
if all shares had been purchased at one time. We will reserve a portion of your
shares to cover any additional sales charge that may apply if you do not buy the
amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR ACCOUNT
APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
invest some or all of the proceeds in the same share class of the fund within
365 days without an initial sales charge. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a new
CDSC will apply.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) may
also be invested without an initial sales charge if you invest them within 365
days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
PAGE
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class I shares may be purchased
without an initial sales charge or CDSC by investors who reinvest within 365
days:
- - certain annuity payments received under an annuity contract that offers a
Franklin Templeton investment option
- - distributions from an existing retirement plan invested in the Franklin
Templeton Funds
- - dividend or capital gain distributions from a real estate investment trust
sponsored or advised by Franklin Properties, Inc.
- - redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
- - redemption proceeds from Class A of any Templeton Global Strategy Fund, if
you are a qualified investor. If you paid a CDSC when you sold your shares,
we will credit your account with the amount of the CDSC paid but a new CDSC
will apply.
WAIVERS FOR CERTAIN INVESTORS Class I shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions, including
- - certain trust companies and bank trust departments investing $1 million or
more in assets over which they have full or shared investment discretion
- - government entities that are prohibited from paying mutual fund sales
charges
- - certain unit investment trusts and their holders reinvesting trust
distributions
- - group annuity separate accounts offered to retirement plans
- - employees and other associated persons or entities of Franklin Templeton or
of certain dealers
CDSC WAIVERS The CDSC for either share class will generally be waived:
- - to pay account fees
- - to make payments through systematic withdrawal plans, up to certain amounts
- - for IRA distributions due to death or disability or upon periodic
distributions based on life expectancy
- - to return excess contributions from employee benefit plans
- - for redemptions following the death of the shareholder or beneficial owner
- - for redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R)
- - for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER, CALL YOUR
INVESTMENT REPRESENTATIVE OR SHAREHOLDER SERVICES FOR MORE INFORMATION.
PAGE
RETIREMENT PLANS Certain retirement plans may buy Class I shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
- - with at least 100 employees, or
- - with retirement plan assets of $1 million or more, or
- - that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the tax code must also qualify under our group
investment program to buy Class I shares without an initial sales charge.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE
OR RETIREMENT PLAN SERVICES AT 1-800/527-2020.
[GRAPHIC PERSON] BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
INITIAL ADDITIONAL
<S> <C> <C>
Regular accounts $1,000 $50
- ----------------------------------------------------- ------------- -------------
UGMA/UTMA accounts $100 $50
- ----------------------------------------------------- ------------- -------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education IRAs or
Roth IRAs)
- ----------------------------------------------------- ------------- -------------
IRAs, IRA rollovers, Education IRAs or Roth IRAs $250 $50
- ----------------------------------------------------- ------------- -------------
Broker-dealer sponsored wrap account programs $250 $50
- ----------------------------------------------------- ------------- -------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities, and their
immediate family members $100 $50
</TABLE>
PAGE
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. Make sure you indicate the share class you
have chosen. If you do not indicate a class, we will invest your purchase in
Class I shares. To save time, you can sign up now for services you may want on
your account by completing the appropriate sections of the application (see the
next page).
<TABLE>
<CAPTION>
BUYING SHARES
<S> <C> <C>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------- --------------------------- ------------------------
[GRAPHIC OF TWO PEOPLE
SHAKING HANDS]
THROUGH YOUR INVESTMENT Contact your investment Contact your investment
REPRESENTATIVE representative representative
- --------------------------- --------------------------- ------------------------
[GRAPHIC ENVELOPE] Make your check payable Make your check payable
BY MAIL to Templeton Foreign to Templeton Foreign
Fund. Fund. Include your
account number on the
Mail the check and your check.
signed application to
Investor Services.
Fill out the deposit
slip from your account
statement. If you do not
have a slip, include a
note with your name, the
fund name, and your
account number.
Mail the check and
deposit slip or note to
Investor Services.
- --------------------------- --------------------------- ------------------------
[GRAPHIC WIRE] Call to receive a wire Call to receive a wire
BY WIRE control number and wire control number and wire
instructions. instructions.
Mail your signed To make a same day wire
application to Investor investment, please call
1-800/632-2301 Services. Please include us by 1:00 p.m. pacific
(or 1-650/312-2000 the wire control number time and make sure your
collect) or your new account wire arrives by 3:00
number on the application. p.m.
To make a same day wire
investment, please call
us by 1:00 p.m. pacific
time and make sure your
wire arrives by 3:00 p.m.
- --------------------------- --------------------------- ------------------------
[GRAPHIC EXCHANGE Call Shareholder Services Call Shareholder
ARROWS] at the number below, or Services at the number
BY EXCHANGE send signed written below or our automated
instructions. The TeleFACTS system, or
TeleFACTS system cannot send signed written
TeleFACTS(R) be used to open a new instructions.
1-800/247-1753 account.
(around-the-clock access)
(Please see page [18] for (Please see page [18] for
information on exchanges.) information on
exchanges.)
- --------------------------- --------------------------- ------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES 100 FOUNTAIN PARKWAY,
P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO
5:00 P.M., PACIFIC TIME)
PAGE
[GRAPHIC HANDSHAKE] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA).
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class I
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
the same share class* of the fund or another Franklin Templeton Fund. Initial
sales charges and CDSCs will not apply if you reinvest your distributions within
365 days. You can also have your distributions deposited in a bank account, or
mailed by check. Deposits to a bank account may be made by electronic funds
transfer.
- -------------------------------------------------------------------------------
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
- -------------------------------------------------------------------------------
Please indicate on your application the distribution option you have chosen,
otherwise we will automatically reinvest your distributions in the same share
class of the fund.
*Class II shareholders may reinvest their distributions in Class I shares of the
fund or another Franklin Templeton Fund if they chose to do so before November
17, 1997, or in Class I shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require a separate application and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
PAGE
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
- -------------------------------------------------------------------------------
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges. Exchanges also have the same tax consequences as ordinary sales
and purchases.
- -------------------------------------------------------------------------------
Exchanges may only be made between identically registered accounts, unless you
send written instructions with a signature guarantee. Any CDSC will continue to
be calculated from the date of your initial investment and will not be charged
at the time of the exchange. If you exchange shares subject to a CDSC into a
Class I money fund, the time your shares are held there will not count towards
the CDSC holding period.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. To protect shareholders, there are limits on the number and amount
of exchanges you may make (please see Market timers on page [22]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into Class I without any sales charge.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed 1% a month of an account's net asset value. Certain
terms and minimums apply. To sign up, complete the appropriate section of your
application.
PAGE
[GRAPHIC PERSON] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell less than $100,000 can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
- - you are selling more than $100,000 worth of shares
- - you want your proceeds paid to someone who is not a registered owner
- - you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
- - you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
- -------------------------------------------------------------------------------
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
- -------------------------------------------------------------------------------
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS Before you can sell shares in a Franklin Templeton Trust
Company retirement plan, you need to complete additional forms required by the
Internal Revenue Service. For participants under age 59 1/2, tax penalties may
apply. Call Retirement Plan Services at 1-800/527-2020 to request the necessary
forms.
PAGE
SELLING SHARES
<TABLE>
<CAPTION>
TO SELL SOME OR ALL OF YOUR SHARES
[GRAPHIC TWO PEOPLE
SHAKING HANDS]
THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE
- --------------------------- ----------------------------------------------------
<S> <C>
[GRAPHIC ENVELOPE] Send written instructions and endorsed share
BY MAIL certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address
on the account, or otherwise according to your
written instructions.
- --------------------------- ----------------------------------------------------
[GRAPHIC PHONE] As long as your transaction is for $100,000 or
BY PHONE less, you do not hold share certificates and you
1-800/632-2301 have not changed your address by phone within the
last 15 days, you can sell your shares by phone.
A check will be mailed to the name(s) and address
on the account. Written instructions, with a
signature guarantee, are required to send the check
to another address or to make it payable to another
person.
- --------------------------- ----------------------------------------------------
[GRAPHIC WIRE] You can call or write to have redemption proceeds of
BY WIRE $1,000 or more wired to a bank or escrow account.
See the policies above for selling shares by mail or
phone.
Before requesting a wire, please make sure we have
your bank account information on file. If we do not
have this information, you will need to send
written instructions with your bank's name and
address, your bank account number, the ABA routing
number, and a signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business day.
- --------------------------- ----------------------------------------------------
[GRAPHIC EXCHANGE ARROWS] Obtain a current prospectus for the fund you are
BY EXCHANGE considering.
Call Shareholder Services at the number below or
TeleFACTS 1-800/247-1753 our automated TeleFACTS(R) system, or send signed
(around-the-clock access) written instructions. See the policies above for
selling shares by mail or phone.
If you hold share certificates, you will need to
return them to the fund before your exchange can be
processed.
- --------------------------- ----------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES 100 FOUNTAIN PARKWAY,
P.O. BOX 33030, ST. PETERSBURG, FL. 33733-8030
CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO
5:00 P.M., PACIFIC TIME)
PAGE
[GRAPHIC PAPER] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). Each class's NAV is calculated by dividing
its net assets by the number of its shares outstanding.
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the NAV
plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
- -------------------------------------------------------------------------------
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee and UGMA/UTMA accounts) because you sell some of your shares, we
may mail you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record. You will not
be charged a CDSC if your account is closed for this reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
PAGE
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with two or
more owners are registered as "joint tenants with rights of survivorship" (shown
as "Jt Ten" on your account statement). To make any ownership changes to a joint
account, all owners must agree in writing, regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5.00. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
- - The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
- - At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
- - The fund may modify or discontinue the exchange privilege on 60 days'
notice.
- - You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
- - In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
- - For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
- - To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
PAGE
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive sales
commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. from sales charges, distribution and service (12b-1) fees and
its other resources.
<TABLE>
<CAPTION>
CLASS I CLASS II
<S> <C> <C>
COMMISSION (%) --- 2.00
Investment under $50,000 5.00 ---
$50,000 but under $100,000 3.75 ---
$100,000 but under $250,000 2.80 ---
$250,000 but under $500,000 2.00 ---
$500,000 but under $1 million 1.60 ---
$1 million or more up to 1.00(1) ---
12b-1 FEE TO DEALER 0.25 1.00(2)
</TABLE>
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans(1) and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive fee
programs.
(1) During the first year after purchase, dealers may not be eligible to receive
the 12b-1 fee.
(2) Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee in the 13th month.
[GRAPHIC QUESTION MARK] QUESTIONS
More detailed information about the fund and its policies can be found in the
fund's Statement of Additional Information (SAI). If you have any questions
about the fund or your account, you can write to us at 100 Fountain Parkway,
P.O. 33030, St. Petersburg, FL 33733-8030. You can also call us at one of the
following numbers. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
<TABLE>
<CAPTION>
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- --------------------------- -------------------- --------------------------------
<S> <C> <C>
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>
PAGE
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #
Lit. Code #
PAGE
PART A
TEMPLETON FOREIGN FUND
ADVISOR PROSPECTUS
PAGE
PROSPECTUS
TEMPLETON
FOREIGN FUND
Advisor Class
INVESTMENT STRATEGY GLOBAL GROWTH
JANUARY 1, 1999
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
PAGE
CONTENTS
THE FUND
- --------------------------------------------------------------------------------
Information about [] Goals and Strategies
the fund you
should know [] Main Risks
before investing
[] Performance
[] Fees and Expenses
[] Management
[] Distributions and Taxes
[] Financial Highlights
YOUR ACCOUNT
- --------------------------------------------------------------------------------
Information about [] Qualified Investors
qualified
investors, [] Buying Shares
account
transactions and [] Investor Services
services
[] Selling Shares
[] Account Policies
[] Questions
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Where to learn Back Cover
more about the
fund
PAGE
THE FUND
[GRAPHIC PAGE] GOALS AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
primarily in the common stocks of companies located outside the U.S., including
in emerging markets. The fund also invests in American, European and Global
Depositary Receipts, which are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic company.
Depending upon current market conditions, the fund generally invests up to 25%
of its total assets in debt securities of companies and governments located
anywhere in the world.
- --------------------------------------------------------------------------------
In choosing investments, the fund's manager will focus on the market price of
a company's securities relative to its evaluation of the company's long-term
earnings, asset value and cash flow potential. A company's historical value
measures, including price/earnings ratio, profit margins and liquidation value,
will also be considered.
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS The manager may take a temporary defensive position when
the securities trading markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment goal.
PAGE
[GRAPHIC DAGER] Main Risks
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies, or
industries or the securities market as a whole.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies located outside the U.S. may offer
significant opportunities for gain, but they also involve additional risks that
can increase the potential for losses in the fund. Investments in American,
European and Global Depositary Receipts also involve some or all of the
following risks.
COUNTRY RISK. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
which trade in that country. These movements will affect the fund's share price.
The political, economic and social structures of some countries the fund invests
in may be less stable and more volatile than those in the U.S. The risks of
investing in these countries include the possibility of the imposition of
exchange controls, expropriation, restrictions on removal of currency or other
assets, nationalization of assets and punitive taxes.
The fund's investments in developing or emerging markets are subject to all of
the risks of foreign investing generally, and have additional heightened risks
due to a lack of legal, business and social frameworks to support securities
markets. While short-term volatility in these markets can be disconcerting,
declines of 40% to 50% are not unusual.
COMPANY RISK. Foreign companies are not subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies and their
stocks may not be as liquid as stocks of similar U.S. companies. Foreign stock
exchanges, brokers and companies generally have less government supervision and
regulation than in the U.S. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies and obtaining judgments
with respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
PAGE
CURRENCY Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will affect the value of what the
fund owns and the fund's share price. Generally, when the U.S. dollar rises in
value against a foreign currency, an investment in that country loses value
because that currency is worth fewer U.S. dollars.
- --------------------------------------------------------------------------------
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
- --------------------------------------------------------------------------------
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to introduce a
new single currency, the euro, which will replace the national currency for
participating member countries. If the fund holds investments in countries with
currencies replaced by the euro, the investment process, including trading,
foreign exchange, payments, settlements, cash accounts, custody and accounting
will be impacted.
Because this change to a single currency is new and untested, the establishment
of the euro may result in market volatility. For the same reason it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on the value of fund shares. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
YEAR 2000 In evaluating current and potential portfolio positions, Year 2000 is
only one of the factors that the fund's manager takes into consideration. It
will rely upon public filings and other statements made by companies regarding
their Year 2000 readiness. Issuers in countries outside of the U.S., and in
particular in emerging markets, may not be required to make the same level of
disclosure regarding Year 2000 readiness that is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to verify
their Year 2000 readiness. If a company the fund is invested in is adversely
affected by Year 2000 problems, it is likely that the price of its security will
also be adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's shares.
Please see "Year 2000 Problem" on page xx for more information.
PAGE
[GRAPHIC BULLS] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past 10 years. The table shows how
the fund's average annual total returns compare to those of a broad-based
securities market index. Of course, past performance cannot predict or guarantee
future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS(1) (2)
[AVERAGE ANNUAL RETURN GRAPHIC BAR]
----------------
Best quarter:
Q3 '89 13.32%
Worst quarter:
Q3 '90 -11.65%
----------------
<TABLE>
<CAPTION>
88 89 90 91 92 93 94 95 96 97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21.99% 30.53% -3.01% 18.25% 0.10% 36.82% 0.35% 11.15% 18.00% 6.99%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Templeton Foreign Fund Advisor Class(2) 6.99% 14.01% 13.42%
MSCI EAFE Index (3) 2.06% 11.71% 6.56%
</TABLE>
(1) As of September 30, 1998, the fund's year-to-date return was 15.06%.
(2) Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class I performance, excluding the effect of
Class I's maximum initial sales charge and including the effect of the Class I
distribution and service (12b-1) fees; and (b) for periods after January 1,
1997, an actual Advisor Class figure is used reflecting a deduction of all
applicable charges and fees for that class. This blended figure assumes
reinvestment of dividends and capital gains.
(3) The unmanaged MSCI Europe Australia Far East (EAFE) Index tracks the
performance of approximately 1,000 securities in 21 countries and is designed to
measure world stock market performance. It includes reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
PAGE
[GRAPHIC PERSON] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. It is based on the fund's expenses for the fiscal year ended
August 31, 1998.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
ADVISOR CLASS
<S> <C>
Maximum sales charge (load) imposed on purchases None
Exchange fee (1) None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
ADVISOR CLASS
<S> <C>
Management fees 0.61%
Distribution and service (12b-1) fees None
Other expenses 0.26%
------
Total annual fund operating expenses 0.87%
------
</TABLE>
(1) There is a $5 fee for each exchange by a market timer (see page[18]).
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell all
of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 Years 5 Years 10 years
--------------------------------------------------------------------
<S> <C> <C> <C>
$89 $278 $482 $1,073
</TABLE>
PAGE
[GRAPHIC PEOPLE] MANAGEMENT
Templeton Global Advisors Limited (Global Advisors), Lyford Cay, Nassau,
Bahamas, is the fund's investment manager. Together, Global Advisors and its
affiliates manage over $207 billion in assets.
<TABLE>
<CAPTION>
LEAD PORTFOLIO MANAGER
<S> <C>
Mark G. Holowesko CFA, Mr. Holowesko has been the fund's lead portfolio
President of Global manager since 1987. He joined the Franklin
Advisors Templeton Group in 1985.
- --------------------------------------------------------------------------------
SECONDARY PORTFOLIO MANAGERS
Jeffrey A. Everett CFA, Mr. Everett has been a manager of the fund since
Executive Vice President of 1994. He joined the Franklin Templeton Group in
Global Advisors 1989.
- --------------------------------------------------------------------------------
Richard Sean Farrington CFA, Mr. Farrington has been a manager of the fund
Vice President of Global since 1993. He joined the Franklin Templeton
Advisors Group in 1991.
- --------------------------------------------------------------------------------
</TABLE>
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended August 31, 1998, the fund paid
0.61% of its average monthly net assets to the manager.
YEAR 2000 PROBLEM. The fund's business operations depend upon a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the date,
and unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the Year
2000 problem). In addition, the fact that the Year 2000 is a non-standard leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected if
the computer systems used by the manager, its service providers and other third
parties it does business with are not Year 2000 ready. For example, the fund's
portfolio and operational areas could be impacted, including securities trade
processing, interest and dividend payments, securities pricing, shareholder
account services, reporting, custody functions and others. The fund could
experience difficulties in effecting transactions if any of its foreign
subcustodians, or if foreign broker/dealers or foreign markets are not ready for
Year 2000.
PAGE
The fund's manager and its affiliated service providers are making a concerted
effort to take steps they believe are reasonably designed to address their Year
2000 problems. Of course, the fund's ability to reduce the effects of the Year
2000 problem is also very much dependent upon the efforts of third parties over
which the fund and its manager may have no control.
PAGE
[GRAPHIC HAND] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income and
any net realized capital gains. The amount of this dividend will vary and there
is no guarantee the fund will pay dividends.
To receive an income dividends, you must be a shareholder on the record date.
The record date for the fund's dividend will vary. You may not want to invest a
large amount in the fund shortly before the record date since you will receive
some of your investment back as a taxable distribution.
TAX CONSIDERATIONS In general, fund distributions are taxable as either
ordinary income or capital gains. This is true whether you reinvest your
distributions in additional shares of the fund or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
- --------------------------------------------------------------------------------
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds if
you do not provide your correct taxpayer identification number (TIN) or certify
that your TIN is correct, or if the IRS instructs the fund to do so.
- --------------------------------------------------------------------------------
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares, you may have a capital gain or loss. For tax
purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale. The tax rate on any gain from the sale or
exchange of your shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes the fund
pays on its investments may be passed through to you as a foreign tax credit.
Non-U.S. investors may be subject to U.S. withholding and estate tax. You should
consult your tax professional about federal, state, local or foreign tax
consequences.
For more information, please call 1-800/DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
PAGE
[GRAPHIC DOLLAR SIGN] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by McGladrey & Pullen, LLP.
<TABLE>
<CAPTION>
ADVISOR CLASS YEAR ENDED AUGUST 31,
1998 1997(1)
----------- -----------
<S> <C> <C>
PER SHARE DATA ($)
Net asset value, beginning of year 11.42 10.26
----------- -----------
Net investment income .33 .07
Net realized and unrealized gains (losses) (2.12) 1.09
----------- -----------
Total from investment operations (1.79) 1.16
Dividends from net investment income (.35) --
Distributions from net realized gains (.84) --
----------- -----------
Total distributions (1.19) --
----------- -----------
Net asset value, end of year 8.44 11.42
=========== ===========
Total return (%)(2) (17.75) 11.31
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1,000) 50,022 139,100
Ratios to average net assets:(%)
Expenses .87 .83(3)
Net investment income 3.08 3.37(3)
Portfolio turnover rate (%) 38.27 37.28
</TABLE>
(1) For the period January 2, 1997 (effective date) to August 31, 1997.
(2) Total return is not annualized.
(3) Annualized.
PAGE
YOUR ACCOUNT
- ----------------------------------
[GRAPHIC CHECK MARK] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
- - Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc. (Distributors).
Minimum investments: $1,000 initial and $50 additional.
- - Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $25 additional.
- - Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial and
$25 additional.
- - Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
- - Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $25 additional.
- - The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No
initial minimum and $25 additional.
PAGE
[GRAPHIC PERSON] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and sign
the enclosed account application. To save time, you can sign up now for services
you may want on your account by completing the appropriate sections of the
application (see the next page).
<TABLE>
<CAPTION>
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------------------
<S> <C> <C>
[GRAPHIC TWO
PEOPLE SHAKING
HANDS]
THROUGH YOUR INVESTMENT Contact your investment Contact your investment
REPRESENTATIVE representative representative
- -------------------------------------------------------------------------------------------
Make your check payable Make your check payable
[GRAPHIC to Templeton Foreign Fund. to Templeton Foreign
ENVELOPE] Fund. Include your account
BY MAIL Mail the check and your number on the check.
signed application to
Investor Services. Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and your
account number.
Mail the check and deposit slip
or note to Investor Services.
- -------------------------------------------------------------------------------------------
Call to receive a wire Call to receive a wire
[GRAPHIC control number and wire control number and wire
WIRE] instructions. instructions.
BY WIRE Mail your signed To make a same day wire
application to Investor investment, please call us by
1-800/632-2301 Services. Please include 1:00 p.m. pacific time and make
(or 1-650/312-2000 the wire control number sure your wire arrives by
collect) or your new account number 3:00 p.m.
on the application.
To make a same day wire
investment, please call
us by 1:00 p.m. pacific
time and make sure your
wire arrives by 3:00 p.m.
- -------------------------------------------------------------------------------------------
[GRAPHIC EXCHANGE Call Shareholder Services Call Shareholder Services at
ARROWS] at the number below, or the number below, or send
BY EXCHANGE send signed written signed written instructions.
instructions. (Please see (Please see page [14] for
page [14] for information information on exchanges.)
on exchanges.)
- -------------------------------------------------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES 100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00
P.M., PACIFIC TIME)
PAGE
[GRAPHIC HANDSHAKE] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest
in the fund by automatically transferring money from your checking or savings
account each month to buy shares.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
the same share class of the fund or in Advisor Class or Class I shares of
another Franklin Templeton Fund. You can also have your distributions deposited
in a bank account, or mailed by check. Deposits to a bank account may be made by
electronic funds transfer.
Please indicate on your application the distribution option you have chosen,
otherwise we will automatically reinvest your distributions in the same share
class of the fund.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
PAGE
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You may also exchange your Advisor Class shares for
Class I shares of a fund that does not currently offer an Advisor Class (without
any sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
- --------------------------------------------------------------------------------
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges. Exchanges also have the same tax consequences as ordinary sales
and purchases.
- --------------------------------------------------------------------------------
Exchanges may only be made between identically registered accounts, unless you
send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. To protect shareholders, there are limits on the number and amount
of exchanges you may make (please see Market timers on page [18]).
* If you exchange into Class I shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your Class I
shares for Advisor Class shares if you otherwise qualify to buy the fund's
Advisor Class.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
PAGE
[GRAPHIC PERSON] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell less than $100,000 can generally be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
- - you are selling more than $100,000 worth of shares
- - you want your proceeds paid to someone who is not a registered owner
- - you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
- - you have changed the address on your account by phone within the last 15
days
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
- --------------------------------------------------------------------------------
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
- --------------------------------------------------------------------------------
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
PAGE
<TABLE>
<CAPTION>
SELLING SHARES
- --------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
<S> <C>
[GRAPHIC TWO
PEOPLE SHAKING
HANDS]
THROUGH YOUR INVESTMENT Contact your investment representative
REPRESENTATIVE
- --------------------------------------------------------------------------------
[GRAPHIC Send written instructions and endorsed share
ENVELOPE] certificates (if you hold share certificates) to
BY MAIL Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address
on the account, or otherwise according to your
written instructions.
- --------------------------------------------------------------------------------
[GRAPHIC PHONE] As long as your transaction is for $100,000 or less,
you do not hold share certificates and you have not
BY PHONE changed your address by phone within the last 15
days, you can sell your shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and address
on the account. Written instructions, with a
signature guarantee, are required to send the check
to another address or to make it payable to another
person.
- --------------------------------------------------------------------------------
[GRAPHIC You can call or write to have redemption proceeds
WIRE] of $1,000 or more wired to a bank or escrow
account. See the policies above for selling shares
by mail or phone.
BY WIRE Before requesting a wire, please make sure we have
your bank account information on file. If we do not
have this information, you will need to send
written instructions with your bank's name and
address, your bank account number, the ABA routing
number, and a signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business day.
- --------------------------------------------------------------------------------
[GRAPHIC EXCHANGE Obtain a current prospectus for the fund you are
ARROWS] considering.
BY EXCHANGE
Call Shareholder Services at the number below, or
send signed written instructions. See the policies
above for selling shares by mail or phone.
If you hold share certificates, you will need to
return them to the fund before your exchange can be
processed.
- --------------------------------------------------------------------------------
</TABLE>
FRANKLIN TEMPLETON INVESTOR SERVICES 100 FOUNTAIN PARKWAY, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00
P.M., PACIFIC TIME)
PAGE
[GRAPHIC PAGE] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share (NAV)
each business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. pacific time). The NAV for Advisor Class is calculated by
dividing its net assets by the number of its shares outstanding.
The fund's assets are generally valued at their market value. If market prices
are unavailable, or if an event occurs after the close of the trading market
that materially affects the values, assets may be valued at their fair value. If
the fund holds securities listed primarily on a foreign exchange that trades on
days when the fund is not open for business, the value of your shares may change
on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated after
we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250 ($50
for employee accounts) because you sell some of your shares, we may mail you a
notice asking you to bring the account back up to its applicable minimum
investment amount. If you choose not to do so within 30 days, we may close your
account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the fund's financial
reports every six months. To reduce fund expenses, we try to identify related
shareholders in a household and send only one copy of the financial reports. If
you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she will also receive confirmations, account statements and other
information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have an
agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
PAGE
JOINT ACCOUNTS Unless you specify a different registration, accounts with two
or more owners are registered as "joint tenants with rights of survivorship"
(shown as "Jt Ten" on your account statement). To make any ownership changes to
a joint account, all owners must agree in writing, regardless of the law in your
state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5.00. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
- - The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
- - At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
- - The fund may modify or discontinue the exchange privilege on 60 days'
notice.
- - You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
- - In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
- - For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check would be harmful to existing
shareholders.
- - To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
PAGE
[GRAPHIC QUESTION MARK] QUESTIONS
More detailed information about the fund and its policies can be found in the
fund's Statement of Additional Information (SAI). If you have any questions
about the fund or your account, you can write to us at 100 Fountain Parkway,
P.O. Box 33030, St. Petersburg, FL 33733-8030. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
<TABLE>
<CAPTION>
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- --------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/ 632-2301 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/ DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/ 342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan 1-800/ 527-2020 5:30 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/ 524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/ 321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/ 851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>
PAGE
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
DC 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov.
Investment Company Act file #
Lit. Code #
PAGE
PART B
TEMPLETON FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
PAGE
TEMPLETON FUNDS, INC.
TEMPLETON WORLD FUND
TEMPLETON FOREIGN FUND
CLASS I & CLASS II
STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 1, 1999
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in each fund's prospectus. Each
fund's prospectus, dated January 1, 1999, which we may amend from time to time,
contains the basic information you should know before investing in the funds.
You should read this SAI together with each fund's prospectus.
The audited financial statements and auditor's report in the funds' Annual
Report to Shareholders, for the fiscal year ended August 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
PAGE
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
/bullet/ ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- --------------------------------------------------------------------------------
GOALS AND STRATEGIES
- --------------------------------------------------------------------------------
Each fund's investment goal is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
The World Fund tries to achieve its goal by investing in the equity and debt
securities of companies and governments located anywhere in the world. The fund
may invest without percentage limitation in domestic or foreign securities.
The Foreign Fund tries to achieve its goal by investing in the equity and debt
securities of companies and governments outside the U.S.
Each fund may invest up to 5% of its total assets in securities issued by any
one company or foreign government. Each may invest any amount of its assets in
U.S. government securities. Each may invest in any industry although it will not
concentrate (invest more than 25% of its total assets) in any one industry. Each
may invest up to 15% of its total assets in foreign securities that are not
listed on a recognized U.S. or foreign securities exchange, including up to 10%
of its total assets in securities with a limited trading market.
Each fund's principal investments are in common stocks. They also invest in
American, European and Global Depositary Receipts. Depending upon current market
conditions, each invests a portion of its assets in rated and unrated debt
securities. Independent rating organizations rate debt securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Each fund may buy debt securities which are rated
Caa by Moody's Investors Service, Inc. (Moody's) or CCC by Standard & Poor's
Corporation (S&P) or better; or unrated debt which it determines to be of
comparable quality. At present, each fund does not intend to invest more than 5%
of its total assets in non-investment grade securities (rated lower than Baa by
Moody's or BBB by S&P).
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive less
appreciation than common stockholders and may have greater voting rights as
well. Equity securities may also include convertible securities, warrants or
rights. Convertible securities typically are debt securities or preferred stocks
which are convertible into common stock after certain time periods or under
certain circumstances. Warrants or rights give the holder the right to purchase
a common stock at a given time for a specified price.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances; and
structured investments. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
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 each fund's Net Asset Value.
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 maturi- ties, 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 funds are 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 funds'
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 funds' assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (1940
Act). As a result, each 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 funds' restrictions on investments in
illiquid securities.
DEPOSITARY RECEIPTS are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
REPURCHASE AGREEMENTS Each fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers. Under a repurchase agreement, the fund agrees
to buy a U.S. government security from one of these issuers and then to sell the
security back to the issuer after a short period of time (generally, less than
seven days) at a higher price. The bank or broker-dealer must transfer to the
fund's custodian, securities with an initial value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the fund's ability to
dispose of the underlying securities. Each 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 Global
Advisors 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.
STOCK INDEX FUTURES CONTRACTS Changes in interest rates, securities prices or
foreign currency valuations may affect the value of the fund's investments. To
reduce its exposure to these factors, World Fund may invest up to 20% of its
total assets buying and selling stock index futures contracts.
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 ("S&P 500 Index") is composed of 500 selected common
stocks, most of which are listed on the NYSE. The S&P 500 Index assigns relative
weightings to the value of one share of each of these 500 common stocks included
in the Index, and the Index fluctuates with changes in the market values of the
shares of those common stocks. In the case of the S&P 500 Index, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the Index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if World Fund enters into a futures contract to buy 500 units of
the S&P 500 Index at a specified future date at a contract price of $150 and the
S&P 500 Index is at $154 on that future date, World Fund will gain $2,000 (500
units x gain of $4). If World Fund enters into a futures contract to sell 500
units of the stock index at a specified future date at a contract price of $150
and the S&P 500 Index is at $154 on that future date, World Fund will lose
$2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, World Fund may
enter into a "long hedge" of common stock which it proposes to add to its
portfolio by purchasing stock index futures for the purpose of reducing the
effective purchase price of such common stock. To the extent that the 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).
SECURITIES INDEX OPTIONS World Fund may buy and sell put and call options on
securities indices to earn additional income and/or to help protect its
portfolio against market and/or exchange rate movements. An option on a
securities index is a contract that allows the buyer of the option the right to
receive from the seller cash, in an amount equal to the difference between the
index's closing price and the option's exercise price. The fund may only buy
options if the total premiums it paid for such options are 5% or less of its
total assets.
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.
TEMPORARY INVESTMENTS When each fund's manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest the
fund's portfolio in a temporary defensive manner. Under such circumstances, each
fund may invest up to 100% of its assets in: (1) U.S. government securities; (2)
bank time deposits denominated in the currency of any major nation; (3)
commercial paper rated A-1 by S&P or Prime-1 by Moody's or, if unrated, issued
by a company which, at the date of investment, had an outstanding debt issue
rated AAA or AA by S&P or Aaa or Aa by Moody's; and (4) repurchase agreements
with banks and broker-dealers.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of a fund's outstanding shares or (ii) 67% or more
of a fund's shares present at a shareholder meeting if more than 50% of a fund's
outstanding shares are represented at the meeting in person or by proxy,
whichever is less.
Each fund 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
PAGE
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 Templeton Funds, Inc. (the Company) or of the funds'
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. 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 board may by
resolution approve. As an operating policy approved by the board,
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.)
PAGE
7. Invest more than 5% of the value of a fund's total assets in securities
of issuers which have been in continuous operation less than three
years.
8. Invest more than 5% of a fund's total assets in warrants, whether or
not listed on the New York Stock Exchange (NYSE) or American Stock
Exchange, including no more than 2% of its total assets which may be
invested in warrants that are not listed on those exchanges. Warrants
acquired by a fund in units or attached to securities are not included
in this restriction. This restriction does not apply to options on
securities indices.
9. Invest more than 15% of a fund's total assets in securities of foreign
issuers which are not listed on a recognized 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 "Portfolios Transactions" as to
transactions in the same securities for the funds, other clients
and/or other mutual funds within the Franklin Templeton Group of
Funds.)
The funds may also be subject to investment limitations imposed by foreign
jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the funds own, the funds may receive stock, real estate, or other
investments that the funds would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders. 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).
PAGE
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
RISKS
- --------------------------------------------------------------------------------
FOREIGN SECURITIES 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. The funds, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating their 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 each fund may invest up to 15% of its total assets in unlisted foreign
securities, including up to 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.
Each fund may invest up to 100% of its total assets in emerging markets.
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
each 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 the funds 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, the fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
certain 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 the funds'
shareholders.
Each fund may invest up to 5% of its total assets in Russian securities.
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,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider-trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) 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; (g) 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, a return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalizations,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many Russian
securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including large
amounts of inter-company debt which may create a payments crisis on a national
scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or, in
the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by the funds due to the
underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in certain
industries, thereby limiting the number of investment opportunities in Russia;
(o) the risk that pending legislation would confer to Russian courts the
exclusive jurisdiction to resolve disputes between foreign investors and the
Russian government, instead of bringing such disputes before an
internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term 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 nor are they licensed with any
governmental entity and it is possible for the funds to lose their registration
through fraud, negligence or even mere oversight. While each 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 funds of their ownership
rights or improperly dilute their interests. In addition, while applicable
Russian regulations impose liability on registrars for losses resulting from
their errors, it may be difficult for the funds to enforce any rights they 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 500 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. In addition, so-called "financial- industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the funds from
investing in the securities of certain Russian companies deemed suitable by
the manager. Further, this also could cause a delay in the sale of Russian
company securities by the funds if a potential purchaser is deemed unsuitable,
which may expose the fund to potential loss on the investment.
CURRENCY RISK Each fund's management 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 the fund
change 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 the funds
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 the funds 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, Global Advisor 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 board considers 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 board also considers 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 Global
Advisors, 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 board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
Euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, each fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
INTEREST RATE RISK To the extent each fund invests in debt securities, changes
in interest rates in any country where the fund is invested will affect the
value of the its portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
LOWER-RATED SECURITIES Bonds rated Caa by Moody's are of poor standing. Such
securities may be in default or there may be present elements of danger with
respect to principal or interest. Bonds rated CCC by S&P are regarded, on
balance, as speculative. Such securities will have some quality and protective
characteristics, but these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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 to principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. Each fund may invest up to 10% of
its total assets in defaulted debt securities. The purchase of defaulted debt
securities involves risks such as the possibility of complete loss of the
investment in the event the issuer does not restructure or reorganize to enable
it to resume paying interest and principal to holders.
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 the funds' 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 its
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 each fund to achieve its investment
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the 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, the funds may incur additional expenses to seek
recovery.
The funds may accrue and report interest on high yield bonds structured as zero
coupon bonds or pay-in-kind securities as income even though they receive no
cash interest until the security's maturity or payment date. In order to qualify
for beneficial tax treatment afforded regulated investment companies, each fund
must distribute substantially all of its income to shareholders (see "Additional
Information on Distributions and Taxes"). Thus, the funds may have to dispose of
its portfolio securities under disadvantageous circumstances to generate cash in
order to satisfy the distribution requirement.
DERIVATIVE SECURITIES Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments or
indices; in contrast to common stock, for example, whose value is dependent upon
the operations of the issuer. Stock index futures contracts and options on
securities indices are considered derivative investments. To the extent the
World Fund enters into these transactions, their success will depend upon the
manager's ability to predict pertinent market movements.
Some of the risks involved in stock index futures transactions relate to World
Fund's ability to reduce or eliminate its futures positions, which will depend
upon the liquidity of the secondary markets for such futures. World Fund intends
to purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract at any particular
time. Use of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the stock index
futures on the one hand and movements in the prices of the securities being
hedged or of the underlying stock index on the other. Successful use of stock
index futures by World Fund for hedging purposes also depends upon the managers'
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.
OFFICERS AND DIRECTORS
- --------------------------------------------------------------------------------
The company has a board of directors. The board is responsible for the overall
management of the funds, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the company
who are responsible for administering the funds' day-to-day operations. The
board also monitors the funds to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE COMPANY PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (66) Director Director, RBC Holdings, Inc. (a bank holding company) and
191 Clapboard Ridge Road Bar-S Foods (a meat packing company); director or trustee,
Greenwich, CT 06830 as the case may be, of 49 of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the
Board, General Host Corporation (nursery and craft centers).
- ------------------------------------------------------------------------------------------------------------------------
*NICHOLAS F. BRADY (68) Director Chairman, Templeton Emerging Markets Investment Trust PLC,
The Bullitt House Templeton Latin America Investment Trust PLC, Darby
102 East Dover Street Overseas Investments, Ltd. and Darby Emerging Markets
Easton, MD 21601 Investments LDC (investment firms) (1994-present);
PAGE
- --------------------------------------------------------------------------------------------------------------------------
Director, Templeton Global Strategy Funds,
Amerada Hess Corporation (exploration and refining of
natural gas), Christiana Companies, Inc. (operating and
investment companies), and H.J. Heinz Company (packaged
foods and allied products); director or trustee, as the
case may be, of 21 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY,
Secretary of the United States Department of the Treasury
(1988-1993) and Chairman of the Board, Dillon, Read &
Co., Inc. (investment banking) prior to 1988.
- --------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (66) Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at director or trustee, as the case may be, of 51 of the
Morris County investment companies in the Franklin Templeton Group of Funds.
P.O. Box 1945
Morristown, NJ 07962-1945
- ------------------------------------------------------------------------------------------------------------------------
JOHN Wm. GALBRAITH (77) Trustee President, Galbraith Properties, Inc. (personal investment
360 Central Avenue company); Director Emeritus, Gulf West Banks, Inc. (bank
Suite 1300 holding company) (1995-present); director or trustee, as
St. Petersburg, FL 33701 the case may be, of 20 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director,
Mercantile Bank (1991-1995), Vice Chairman, Templeton,
Galbraith & Hansberger Ltd. (1986-1992), and Chairman,
Templeton Funds Management, Inc. (1974-1991).
- ------------------------------------------------------------------------------------------------------------------------
ANDREW H. HINES, JR. (75) Trustee Consultant for the Triangle Consulting Group;
150 Second Avenue N. Executive-in-Residence of Eckerd College (1991-present);
St. Petersburg, FL 33701 director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Chairman and Director, Precise Power
Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board
and Chief Executive Officer, Florida Progress Corporation
(holding company in the energy area) (1982-1990) and
director of various of its subsidiaries.
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
*CHARLES B. JOHNSON (65) Chairman of the President, Chief Executive Officer and Director, Franklin
777 Mariners Island Blvd. Board and Vice Resources, Inc.; Chairman of the Board and Director,
San Mateo, CA 94404 President Franklin Advisers, Inc., Franklin Advisory Services,
Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin
Templeton Services, Inc.; officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 50 of the
investment companies in the Franklin Templeton Group of
Funds.
- ------------------------------------------------------------------------------------------------------------------------
*RUPERT H. JOHNSON, JR.(58) Director and Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Vice President Resources, Inc. and Franklin Templeton Distributors,
San Mateo, CA 94404 Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services,
Inc.; Director, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------
BETTY P. KRAHMER (69) Director Director or trustee of various civic associations;
2201 Kentmere Parkway director or trustee, as the case may be, of 21 of the
Wilmington, DE 19806 investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Economic Analyst, U.S. government.
- ------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (70) Director Director, Fund American Enterprises Holdings, Inc., MCI
8212 Burning Tree Road WorldCom, MedImmune, Inc. (biotechnology), Spacehab, Inc.
Bethesda, MD 20817 (aerospace services) and Real 3D (software); director or
trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
services) and Hambrecht and Quist Group (investment
banking), and President, National Association of
Securities Dealers, Inc.
- --------------------------------------------------------------------------------------------------------------------------
FRED R. MILLSAPS (69) Director Manager of personal investments (1978-present); director
2665 N.E. 37th Drive of various business and nonprofit organizations; director
Fort Lauderdale, FL 33308 or trustee, as the case may be, of 22 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman and Chief Executive Officer, Landmark
Banking Corporation (1969-1978), Financial Vice
President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO (38) President President, Templeton Global Advisors Limited; Chief
Lyford Cay Investment Officer, Global Equity Group; Executive Vice
Nassau, Bahamas President and Director, Templeton Worldwide, Inc.; officer
of 21 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Investment Administrator,
RoyWest Trust Corporation (Bahamas) Limited (1984-1985).
- ------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (53) Vice President Executive Vice President and Director, Franklin Resources,
777 Mariners Island Blvd. Inc., Franklin Templeton Distributors, Inc. and Franklin
San Mateo, CA 94404 Templeton Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of
Funds.
- ------------------------------------------------------------------------------------------------------------------------
CHARLES E. JOHNSON (42) Vice President Senior Vice President and Director, Franklin Resources,
500 East Broward Blvd. Inc.; Senior Vice President, Franklin Templeton
Fort Lauderdale, FL 33394-3091 Distributors, Inc.; President and Director, Templeton
Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; Vice President, Franklin
Advisers, Inc.; officer and/or director of some of the
other subsidiaries of Franklin
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
Resources, Inc.; and officer and/or director or trustee,
as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
DEBORAH R. GATZEK (50) Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin Templeton
San Mateo, CA 94404 Services, Inc. and Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (38) Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, CA 94404 Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice
President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial
Officer, Franklin/Templeton Investor Services,
Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer
and/or director or trustee, as the case may be, of 53 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (58) Vice President Vice President and Treasurer, Templeton Worldwide, Inc.;
500 East Broward Blvd. Assistant Vice President, Franklin Templeton
Fort Lauderdale, FL 33394-3091 Distributors, Inc.; officer of 25 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Controller, Keystone Group,
Inc.
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT(34) Vice President Executive Vice President, Portfolio Management, Templeton
Lyford Cay Global Advisors Limited; officer of 2 of the investment
Nassau, Bahamas companies in the Franklin Templeton Group of Funds; and
FORMERLY, Investment Officer, First Pennsylvania
Investment Research (until 1989).
- --------------------------------------------------------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK (43) Vice President - General Counsel, Secretary and Senior Vice President,
500 East Broward Blvd. Compliance Templeton Investment Counsel, Inc.; Senior Vice
Fort Lauderdale, President, Templeton Global Investors, Inc.; officer of
FL 33394-3091 21 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Vice President and
Associate General Counsel, Kidder Peabody & Co. Inc.
(1989-1990), Assistant General Counsel, Gruntal & Co.,
Inc. (1988), Vice President and Associate General
Counsel, Shearson Lehman Hutton Inc. (1988), Vice
President and Assistant General Counsel, E.F. Hutton &
Co. Inc. (1986-1988), and Special Counsel of the Division
of Investment Management, U.S. Securities and Exchange
Commission (1984-1986).
- ------------------------------------------------------------------------------------------------------------------------
JAMES R. BAIO (44) Treasurer Certified Public Accountant; Treasurer, Franklin Mutual
500 East Broward Blvd. Advisers, Inc.; Senior Vice President, Templeton
Fort Lauderdale, FL 33394-3091 Worldwide, Inc., Templeton Global Investors, Inc. and
Templeton Funds Trust Company; officer of 22 of the
investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Senior Tax Manager, Ernst & Young
(certified public accountants) (1977-1989).
- --------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (51) Secretary Senior Vice President, Templeton Worldwide, Inc. and
500 East Broward Blvd. Templeton Global Investors, Inc.; officer of 21 of the
Fort Lauderdale, FL 33394-3091 investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director of the Division of
Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor 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).
- --------------------------------------------------------------------------------------------------------------------------
<FN>
- ---------------
*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and the manager. Mr. Brady and
Franklin Resources, Inc. are both limited partners of Darby Overseas Partners,
L.P. (Darby Overseas). In addition, Darby Overseas and the manager are limited
partners of Darby Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
</FN>
</TABLE>
The company pays noninterested board members and Mr. Brady an annual retainer of
$24,000 and a fee of $1,800 per board meeting attended. Board members who serve
on the audit committee of the Company and other funds in the Franklin Templeton
Group of Funds receive a flat fee of $2,000 per committee meeting attended, a
portion of which is allocated to the funds. Members of the nominating and
compensation committee are not compensated for any committee meeting that is
held in conjunction with a board meeting. Noninterested board members may also
serve as directors or trustees of other funds in the Franklin Templeton Group of
Funds and may receive fees from these funds for their services. The following
table provides the total fees paid to noninterested board members and Mr. Brady
by the Company and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME COMPANY(1) FUNDS(2) SERVES(3)
- --------------------- ---------- ------------------- -------------------
<S> <C> <C> <C>
Harris J. Ashton $25,425 $361,157 49
Nicholas F. Brady 25,425 140,975 21
S. Joseph Fortunato 25,425 367,835 51
John Wm. Galbraith 25,635 134,425 20
Andrew H. Hines, Jr. 26,585 208,075 22
Betty P. Krahmer 25,425 141,075 21
Gordon S. Macklin 25,425 361,157 49
Fred R. Millsaps 26,585 210,075 22
<FN>
- ---------------
(1)For the fiscal year ended August 31, 1998. During the period from September
1, 1997, through February 27, 1998, an annual retainer of $12,500 and fees at
the rate of $950 per meeting attended were in effect.
(2)For the calendar year ended December 31, 1998.
(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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
</FN>
</TABLE>
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
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 Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
PAGE
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED Each fund's manager is Templeton Global Advisors
Limited. The manager is wholly owned by Franklin Resources, Inc. (Resources), a
publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. The Templeton organization has been
investing globally since 1940. The manager and its affiliates have offices in
Argentina, Australia, Bahamas, Canada, France, Germany, Hong Kong, India, Italy,
Japan, Korea, Luxembourg, Poland, Russia, Singapore, South Africa, Taiwan,
United Kingdom, U.S., and Vietnam.
The manager provides investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance. The manager
renders its services to the funds from outside the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the funds. Similarly, with respect to the
funds, the manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the funds or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the funds' code of
ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES Each fund pays the manager a fee equal to a annual rate of:
PAGE
/bullet/ 0.75% of the value of net assets up to and including $200 million;
/bullet/ 0.675% of the value of net assets in excess of $200 million up to and
including $1.3 billion; and
/bullet/ 0.60% of the value of net assets in excess of $1.3 billion.
The fee is computed according to the terms of the management agreement. Each
class of the funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended August 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
------------------------
1998 1997 1996
----------------------------------------------------
World Fund 57,704,400 47,200,213 38,564,076
Foreign Fund 96,508,519 79,502,378 51,600,846
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the company to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The company pays FT Services a monthly fee equal to an
annual rate of:
/bullet/ 0.15% of the funds' combined average daily net assets up to $200
million;
/bullet/ 0.135% of average daily net assets over $200 million up to $700
million;
/bullet/ 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
/bullet/ 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended August 31, the company paid the
following administration fees:
ADMINISTRATION FEES PAID ($)
----------------------------------------
1998 19,570,686
1997 16,145,466
1996(1) 11,564,072
(1) Before October 1, 1996, Templeton Global Investors, Inc. provided
administrative services to the company.
PAGE
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the Company's shareholder servicing agent and acts
as the Company's transfer agent and dividend-paying agent. Investor Services is
located at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. Each fund
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the respective fund. The amount of
reimbursements for these services per benefit plan participant fund account per
year may not exceed the per account fee payable by each fund to Investor
Services in connection with maintaining shareholder accounts.
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. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
funds' independent auditor. The auditor gives an opinion on the financial
statements included in the fund's Annual Report to Shareholders and reviews each
fund's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
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
PAGE
being paid by other institutional investors of comparable size. The manager 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 the manager, a 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.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the funds. They
must, however, be of value to the manager 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 the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager 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, the sale
of fund 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 Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the funds,
any portfolio securities tendered by the funds will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of
PAGE
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 the funds and one or more other
investment companies or clients supervised by the manager 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 the manager, 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 the
funds are concerned. In other cases it is possible that the ability to
participate in volume transactions may improve execution and reduce transaction
costs to the funds.
Purchases and sales of securities, without the payment of brokerage commissions,
fees (except customary transfer fees) or other remuneration, may be effected
between the fund and one or more other investment companies or clients
supervised by the manager according to procedures adopted under the Investment
Company Act of 1940.
During the last three fiscal years ended August 31, the funds paid the following
brokerage commissions:
BROKERAGE COMMISSIONS PAID ($)
------------------------------
1998 1997 1996
---------------------------------------------
World Fund 13,950,298 12,702,676 5,691,000
Foreign Fund 34,773,217 20,265,126 10,641,000
As of August 31, 1998, World Fund owned securities issued by Merrill Lynch & Co.
Inc. and Morgan Stanley Dean Witter & Co. valued in aggregate at $4,963,200 and
$132,949,887, respectively. As of August 31, 1998, Foreign Fund owned securities
issued by Deutche Bank valued in aggregate at $260,391,267. Except as noted, the
funds did not own any securities issued by their regular broker dealers as of
the end of the fiscal year.
DISTRIBUTIONS AND TAXES
Each fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally due
to the difference in the distribution and service (Rule 12b-1) fees of each
class. Each fund does not pay "interest" or guarantee any fixed rate of return
on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME Each fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by each fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS Each fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by a fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by each fund (net
of any capital loss carryovers) generally will be distributed once each year,
and may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the respective fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by each
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
instruments are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce a fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce a fund's ordinary income
distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
Each fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of a fund's total assets at the end of
the fiscal year are invested in securities of foreign corporations, the fund may
elect to pass-through to you your pro rata share of foreign taxes paid by the
fund. If this election is made, the year-end statement you receive from a fund
will show more taxable income than was actually distributed to you. However, you
will be entitled to either deduct your share of such taxes in computing your
taxable income or claim a foreign tax credit for such taxes against your U.S.
federal income tax. Each fund will provide you with the information necessary to
complete your individual income tax return if such election is made.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS Each fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the tax code,
has qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. As a regulated investment company, a fund
generally pays no federal income tax on the income and gains it distributes to
you. The board reserves the right not to maintain the qualification of each fund
as a regulated investment company if it determines such course of action to be
beneficial to you. In such case, a fund will be subject to federal, and possibly
state, corporate taxes on its taxable income and gains, and distributions to you
will be taxed as ordinary dividend income to the extent of the fund's available
earnings and profits.
PAGE
EXCISE TAX DISTRIBUTION REQUIREMENTS The tax code requires each fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. Each fund intends to declare and pay sufficient dividends in December (or
in January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be sufficient
to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes that cause you to
recognize a gain or loss. If you hold your shares as a capital asset, the gain
or loss that you realize will be capital gain or loss. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the respective fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS All or a portion of the sales charge that you paid for your
shares in a fund will be excluded from your tax basis in any of the shares sold
within 90 days of their purchase (for the purpose of determining gain or loss
upon the sale of such shares) if you reinvest the sales proceeds in the fund or
in another of the Franklin Templeton Funds, and the sales charge that would
otherwise apply to your reinvestment is reduced or eliminated. The portion of
the sales charge excluded from your tax basis in the shares sold will equal the
amount that the sales charge is reduced on your reinvestment. Any portion of the
sales charge excluded from your tax basis in the shares sold will be added to
the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
PAGE
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS As a corporate shareholder of
World Fund, you should note that 13.84% of the dividends paid by World Fund for
the most recent fiscal year qualified for the dividends-received deduction. You
will be permitted in some circumstances to deduct these qualified dividends
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with respect
to dividends designated by the fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculations.
Because Foreign Fund's income is derived primarily from investments in foreign
rather than domestic U.S. securities, no portion of its distributions will
generally be eligible for the intercorporate dividends-received deduction. None
of the dividends paid by Foreign Fund for the most recent calendar year
qualified for such deduction, and it is anticipated that none of the current
year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES Each fund may invest in complex securities.
Such investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by a fund are treated as
ordinary income or capital gain, accelerate the recognition of income to the
fund or defer the fund's ability to recognize losses, and, in limited cases,
subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by each fund.
For more information, please call 1-800/ DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
Each fund is a diversified series of the Company, an open-end management
investment company, commonly called a mutual fund. The Company was organized as
a Maryland corporation on August 15, 1977, and is registered with the SEC.
The World Fund currently offers two classes of shares, Class I and Class II, and
the Foreign Fund currently offers three classes, Class I, Class II and Advisor
Class. The funds may offer additional classes of shares in the future. The full
title of each class is:
/bullet/ Templeton World Fund - Class I
/bullet/ Templeton World Fund - Class II
/bullet/ Templeton Foreign Fund - Class I
/bullet/ Templeton Foreign Fund - Class II
/bullet/ Templeton Foreign Fund - Advisor Class
PAGE
Shares of each class represent proportionate interests in the funds' assets. On
matters that affect a fund as a whole, each class has the same voting and other
rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the Company for matters that affect the Company as a whole. Additional series
may be offered in the future.
The Company has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The Company does not intend to hold annual shareholder meetings. The Company or
a series of the Company may hold special meetings, however, for matters
requiring shareholder approval. A meeting may be called by shareholders holding
at least 10% of the outstanding shares to consider the removal of a board
member. In certain circumstances, we are required to help you communicate with
other shareholders about the removal of a board member. A special meeting may
also be called by the board in its discretion.
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. To the
best knowledge of the funds, no other person holds beneficially or of record
more than 5% of the outstanding shares of any class.
As of October 2, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
The funds continuously offer their shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial
PAGE
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the funds 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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class I and
1% for Class II. The initial sales charge for Class I shares may be reduced for
certain large purchases, as described in the prospectus. We offer several ways
for you to combine your purchases in the Franklin Templeton Funds to take
advantage of the lower sales charges for large purchases. The Franklin Templeton
Funds include the U.S. registered mutual funds in the Franklin Group of Funds(R)
and the Templeton Group of Funds except Franklin Valuemark Funds, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class I shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company
PAGE
accounts, including retirement plan accounts. Companies with one or more
retirement plans may add together the total plan assets invested in the Franklin
Templeton Funds to determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class I shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
/bullet/ You authorize Distributors to reserve 5% of your total intended
purchase in Class I shares registered in your name until you fulfill
your LOI. Your periodic statements will include the reserved shares in
the total shares you own, and we will pay or reinvest dividend and
capital gain distributions on the reserved shares according to the
distribution option you have chosen.
/bullet/ You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
/bullet/ Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
/bullet/ Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the relavant fund, you may buy Class I shares at
the sales charge applicable to the amount specified in your LOI. 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. Any Class I purchases you made within 90 days before you filed
your LOI may also qualify for a retroactive reduction in the sales charge. If
you file your LOI with the relevant fund before a change in the fund's sales
charges, you may complete the LOI at the lower of the new sales charge or the
sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction 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
PAGE
purchases for purposes of determining whether the terms of the LOI have been
completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, 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, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class I
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
PAGE
/bullet/ Was formed at least six months ago,
/bullet/ Has a purpose other than buying fund shares at a discount,
/bullet/ Has more than 10 members,
/bullet/ Can arrange for meetings between our representatives and group members,
/bullet/ Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
/bullet/ Agrees to arrange for payroll deduction or other bulk transmission of
investments to a fund, and
/bullet/ Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased a fund's Class I
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class I shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
/bullet/ Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same class
of shares. Certain exceptions apply, however, to Class II shareholders
who chose to reinvest their distributions in Class I shares of the
funds before November 17, 1997, and to Advisor Class or Class Z
shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the funds' Class I shares. This waiver category also
applies to Class II shares.
/bullet/ Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
/bullet/ Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
PAGE
/bullet/ Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12
months.
If you immediately placed your redemption proceeds in a Franklin Bank
CD or a Franklin Templeton money fund, you may reinvest them as
described above. The proceeds must be reinvested within 365 days from
the date the CD matures, including any rollover, or the date you redeem
your money fund shares.
/bullet/ Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a
Templeton Global Strategy Fund, a new CDSC will apply to your purchase
of fund shares and the CDSC holding period will begin again. We will,
however, credit your fund account with additional shares based on the
CDSC you previously paid and the amount of the redemption proceeds that
you reinvest.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
/bullet/ Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class I shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expense, including:
/bullet/ Trust companies and bank trust departments agreeing to invest in
Franklin Templeton Funds over a 13 month period at least $1 million of
assets held in a fiduciary, agency, advisory, custodial or similar
capacity and over which the trust companies and bank trust departments
or other plan fiduciaries or participants, in the case of certain
retirement plans, have full or shared investment discretion. We will
accept orders for these accounts by mail accompanied by a check or by
telephone or other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds received by the
close of business on the next business day following the order.
PAGE
/bullet/ Any state or local government or any instrumentality, department,
authority or agency thereof that has determined a fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in a fund is permissible and suitable for
you and the effect, if any, of payments by the funds on arbitrage
rebate calculations.
/bullet/ Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs
/bullet/ Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors
/bullet/ Registered securities dealers and their affiliates, for their
investment accounts only
/bullet/ Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
/bullet/ Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies
/bullet/ Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
/bullet/ Accounts managed by the Franklin Templeton Group
/bullet/ Certain unit investment trusts and their holders reinvesting
distributions from the trusts
/bullet/ Group annuity separate accounts offered to retirement plans
/bullet/ Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class I shares without an initial sales charge.
Retirement plans that are not qualified retirement
PAGE
plans (employer sponsored pension or profit-sharing plans that qualify under
section 401 of the tax code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans for
employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the tax code) must also meet the group
purchase requirements described above to be able to buy Class I shares without
an initial sales charge. We may enter into a special arrangement with a
securities dealer, based on criteria established by the funds, to add together
certain small qualified retirement plan accounts for the purpose of meeting
these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
Any retirement plan that does not meet the requirements to buy Class I shares
without an initial sales charge and that was a shareholder of a fund on or
before February 1, 1995, may buy shares of the funds subject to a maximum
initial sales charge of 4% of the offering price, 3.2% of which will be retained
by securities dealers.
SALES IN TAIWAN. 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.
The funds' Class I shares 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:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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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
PAGE
DEALER COMPENSATION 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 Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in each fund's
prospectus.
Distributors may 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 without an initial sales
charge: 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 primarily on the amount of sales of 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, from 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
PAGE
commissions generated by fund portfolio transactions in accordance with the
rules of the National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class I shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class II shares, a CDSC may apply if you sell your
shares within 18 months of purchase. The CDSC is 1% of the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without an initial sales charge may also be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
CDSC WAIVERS. The CDSC for either share class will generally be waived for:
/bullet/ Account fees
/bullet/ Sales of shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1,
1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer
of record has entered into a supplemental agreement with Distributors
/bullet/ Redemptions by a fund when an account falls below the minimum required
account size
/bullet/ Redemptions following the death of the shareholder or beneficial owner
PAGE
/bullet/ Redemptions through a systematic withdrawal plan set up before February
1, 1995
/bullet/ Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, at a rate of up to 1% a month of an account's net
asset value. For example, if you maintain an annual balance of $1
million in Class I shares, you can redeem up to $120,000 annually
through a systematic withdrawal plan free of charge. Likewise, if you
maintain an annual balance of $10,000 in Class II shares, $1,200 may be
redeemed annually free of charge.
/bullet/ Distributions from individual retirement accounts (IRAs) due to death
or disability or upon periodic distributions based on life expectancy
/bullet/ Returns of excess contributions from employee benefit plans
/bullet/ Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R)
/bullet/ Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE 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 invested at net asset value. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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
the funds' 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 the funds' investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange
PAGE
until that seventh day. The sale of fund 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.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. 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. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The funds 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 the funds
receive notification of the shareholder's death or incapacity.
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
PAGE
the value of each fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the Securities and
Exchange Commission (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 the funds, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the existing
shareholders of the funds. In these circumstances, the securities distributed
would be valued at the price used to compute the funds' net assets and you may
incur brokerage fees in converting the securities to cash. The funds do 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.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the funds if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the funds 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.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the
PAGE
account when a search company charges a percentage fee in exchange for its
location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to your, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither a fund nor its agents shall be liable to you or any other person if, for
any reason, a redemption request by wire is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (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 the
funds normally pay Investor Services. These financial institutions may also
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the funds. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the funds in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the funds in a timely fashion must be settled between you
and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the funds have the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the funds to have a potential property interest in the account, before 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.
PAGE
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) plus any applicable sales charge, calculated to two decimal
places using standard rounding criteria. When you sell shares, you receive the
NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting a 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 a fund by the number of shares outstanding.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the NYSE (normally 1:00 p.m. pacific time). Each fund does
not calculate the NAV on days the NYSE is closed for trading, which include New
Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the funds value cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the funds value those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The funds value over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the funds
value them according to the broadest and most representative market as
determined by the manager.
World Fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the World Fund holds is its last sale price on the relevant exchange
before the World Fund values its assets. If there are no sales that day or if
the last sale price is outside the bid and ask prices, the World Fund values
options within the range of the current closing bid and ask prices if the funds
believe the valuation fairly reflects the contract's market value.
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
PAGE
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 funds' NAV is not calculated. Thus, the calculation of
the funds' NAV 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 close of the NYSE. The value of these securities used in computing the NAV
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 close of the NYSE that will not be reflected in the computation of the NAV.
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, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares throughout
the world except for Hong Kong and other parts of Asia. Templeton Franklin
Investment Services (Asia) Limited (Templeton Investment Services) acts as the
principal underwriter in Hong Kong and other parts of Asia. The terms of the
underwriting agreement between each fund and the foreign underwriter are
substantially similar to those of the agreement with Distributors. In addition
to the compensation listed in the following tables, each of the underwriters may
be entitled to reimbursement under the Rule 12b-1 plans, as discussed below.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each 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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of each fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended August 31:
AMOUNT RECEIVED IN
TOTAL CONNECTION WITH
COMMISSIONS AMOUNT RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
----------- ------------------ ------------------
1998
World Fund 19,623,516 2,520,423 208,313
Foreign Fund 29,806,258 63,246 784,591
1997
World Fund 13,309,479 2,081,327 40,118
Foreign Fund 44,743,259 1,528,144 372,630
1996
World Fund 10,048,765 1,549,642 22,962
Foreign Fund 42,994,326 3,233,516 105,779
Except as noted, Distributors received no other compensation from the funds for
acting as underwriter.
TEMPLETON INVESTMENT SERVICES is located at 2701 Shui On Centre, Hong Kong. The
table below shows the aggregate underwriting commissions Templeton Investment
Services received in connection with the offering of fund shares, the net
underwriting discounts and commissions Templeton Investment Services retained
after allowances to dealers, and the amounts Templeton Investment Services
received in connection with redemptions or repurchases of shares for the last
three fiscal years ended August 31:
AMOUNT RECEIVED IN
TOTAL AMOUNT RETAINED BY CONNECTION WITH
COMMISSIONS TEMPLETON INVESTMENT REDEMPTIONS AND
RECEIVED ($) SERVICES ($) REPURCHASES ($)
----------- ------------------ ------------------
1998
World Fund
Foreign Fund
1997
World Fund 933 187 0
Foreign Fund 1,568 304 0
1996
World Fund 237 47 0
Foreign Fund 0 0 0
Except as noted, Templeton Investment Services received no other compensation
from the funds for acting as underwriter.
PAGE
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under the plan, each class may pay or reimburse Distributors
or others for the expenses of activities that are primarily intended to sell its
shares. These expenses may include, among others, distribution or service fees
paid to securities dealers or others who have executed a servicing agreement
with the funds, Distributors or its affiliates; a prorated portion of
Distributors' overhead expenses; and the expenses of printing prospectuses and
reports used for sales purposes, and preparing and distributing sales literature
and advertisements.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS I PLAN. Payments by the funds under the Class I plan may not exceed
0.25% per year of Class I's average daily net assets, payable quarterly.
Expenses not reimbursed in any quarter may be reimbursed in future quarters or
years. This includes expenses not reimbursed because they exceeded the
applicable limit under the plan. As of August 31, 1998, there were no
unreimbursed expenses under World Fund's Class I plan. As of August 31, 1998,
expenses under Foreign Fund's Class I plan that may be reimbursable in future
quarters or years totaled $3,324,768 or 0.31% of Class I's net assets.
THE CLASS II PLAN. Under the Class II plan, the funds may pay Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them. The funds may also pay a
servicing fee of up to 0.25% per year of Class II's average daily net assets,
payable quarterly, under the Class II plan. This fee may be used to pay
securities dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering
PAGE
correspondence, monitoring dividend payments from the funds on behalf of
customers, and similar servicing and account maintenance activities.
THE CLASS I AND CLASS II PLANS. The terms and provisions of each plan relating
to required reports, term, and approval are consistent with Rule 12b-1.
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 National Association of Securities Dealers, Inc.
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 the funds, 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 funds 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 noninterested
members of the funds' board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested 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 the management agreement with the manager 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
PAGE
amendments to the plans or any related agreements shall be approved by a vote of
the noninterested board members, 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, 1998, the amounts paid by each fund
pursuant to the plans were:
World Fund
CLASS I ($) CLASS II ($)
----------------- ---------------------
Advertising 1,174,123 36,314
Printing and mailing prospectuses 278,492 8,613
other than to current shareholders
Payments to underwriters 2,123,158 1,037,310
Payments to broker-dealers 17,934,768 2,013,194
Other 0 0
----------------- ---------------------
Total 21,510,541 3,095,431
================= =====================
Foreign Fund
CLASS I ($) CLASS II ($)
----------------- ---------------------
Advertising 1,910,374 188,938
Printing and mailing prospectuses 570,631 56,436
other than to current shareholders
Payments to underwriters 2,153,918 5,958,894
Payments to broker-dealers 31,112,950 8,165,955
Other 0 0
----------------- ---------------------
Total 35,747,873 14,370,223
================= =====================
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 the funds be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the funds 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 the
funds to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
PAGE
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial 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 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 initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial 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 funds. The average
annual total returns for the indicated periods ended August 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
----------- -------------------------- --------------
Class I
World Fund -13.11% 10.97% 11.54%
Foreign Fund -22.64% 4.50% 9.80%
1 YEAR SINCE INCEPTION (5/1/95)
----------- ------------------------
Class II
World Fund -10.33% 11.49%
Foreign Fund -20.06% 2.96%
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 each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
PAGE
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated periods
ended August 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
----------- -------------------------- --------------
Class I
World Fund -13.11% 68.29% 197.95%
Foreign Fund -22.64% 24.62% 154.61%
1 YEAR SINCE INCEPTION (5/1/95)
----------- ------------------------
Class II
World Fund -10.33% 43.75%
Foreign Fund -20.06% 10.22%
VOLATILITY Occasionally statistics may be used to show the funds' volatility or
risk. Measures of volatility or risk are generally used to compare the funds'
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 funds invest. 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 The funds may also quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of the funds as a potential investment for
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.
The funds may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the
PAGE
parent company of the advisors and underwriter of the Franklin Templeton Group
of Funds.
COMPARISONS To help you better evaluate how an investment in the funds may
satisfy your investment goal, advertisements and other materials about the funds
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you may compare the funds' 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
that ranks mutual funds by overall performance, investment goals 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.
From time to time, the funds and the manager may also refer to the following
information:
/bullet/ The manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic
Insight or a similar statistical organization.
/bullet/ The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.
/bullet/ The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International(R) or a similar financial organization.
/bullet/ The geographic and industry distribution of the funds' portfolio and
the funds' top ten holdings.
/bullet/ 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
PAGE
controls, and improving communication technology, of various countries
as published by various statistical organizations.
/bullet/ To assist investors in understanding the different returns and risk
characteristics of various investments, the funds may show historical
returns of various investments and published indices (E.G., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).
/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
/bullet/ Allegorical stories illustrating the importance of persistent long-term
investing.
/bullet/ The funds' portfolio turnover rate and its ranking relative to industry
standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
/bullet/ 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.
/bullet/ The number of shareholders in a 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.
/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
/bullet/ Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
/bullet/ "Never follow the crowd. Superior performance is possible
only if you invest differently from the crowd."
- --------------------
* Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the board on
April 16, 1995. He is no longer involved with the investment
management process.
PAGE
/bullet/ "Diversify by company, by industry and by country."
/bullet/ "Always maintain a long-term perspective."
/bullet/ "Invest for maximum total real return."
/bullet/ "Invest - don't trade or speculate."
/bullet/ "Remain flexible and open-minded about types of investment."
/bullet/ "Buy low."
/bullet/ "When buying stocks, search for bargains among quality
stocks."
/bullet/ "Buy value, not market trends or the economic outlook."
/bullet/ "Diversify. In stocks and bonds, as in much else, there is
safety in numbers."
/bullet/ "Do your homework or hire wise experts to help you."
/bullet/ "Aggressively monitor your investments."
/bullet/ "Don't panic."
/bullet/ "Learn from your mistakes."
/bullet/ "Outperforming the market is a difficult task."
/bullet/ "An investor who has all the answers doesn't even understand
all the questions."
/bullet/ "There's no free lunch."
/bullet/ "And now the last principle: Do not be fearful or negative
too often."
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment in
the funds. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
PAGE
Advertisements or information may also compare the funds' performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the funds involve 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 the funds' 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 the
funds' shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the funds 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 the funds' 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 the funds to calculate its figures. In
addition, there can be no assurance that the funds will continue its performance
as compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The funds 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 the
funds cannot guarantee that these goals will be met.
Each fund 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 is one of the
oldest mutual fund organizations and now services more than 3 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, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $207 billion in assets under management
PAGE
for more than 6 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 117 U.S. based open-end investment
companies to the public. Each fund may identify itself by its NASDAQ symbol or
CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike.
Shares of the funds are generally sold through securities dealers, whose
investment representatives are experienced professionals who can offer advice on
the type of investments suitable to your unique goals and needs, as well as the
risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and their shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests have been planned to verify
their effectiveness. Resources continues to seek reasonable assurances from all
major hardware, software or data-services suppliers that they will be Year 2000
compliant on a timely basis. Resources is also in the process of developing
contingency plans for Year 2000 failures. In an operation as complex and
geographically distributed as Resources' business, however, this means
identifying only those mission critical systems for which it is practical to
develop a contingency plan.
DESCRIPTION OF BOND RATINGS
- --------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
PAGE
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
PAGE
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PAGE
PART B
TEMPLETON FOREIGN FUND
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
PAGE
TEMPLETON FOREIGN FUND
TEMPLETON FUNDS, INC.
ADVISOR CLASS
STATEMENT OF
ADDITIONAL INFORMATION
JANUARY 1, 1999
100 FOUNTAIN PARKWAY, P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated January 1, 1999, which we may amend from time to time,
contains the basic information you should know before investing in the fund. You
should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the fund's Annual
Report to Shareholders, for the fiscal year ended August 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
PAGE
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
/bullet/ ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT;
/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's investment goal is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
The fund tries to achieve its goal by investing in the equity and debt
securities of companies and governments outside the U.S.
The fund may invest up to 5% of its total assets in securities issued by any one
company or foreign government. It may invest any amount of its assets in U.S.
government securities. It may invest in any industry although it will not
concentrate (invest more than 25% of its total assets) in any one industry. It
may invest up to 15% of its total assets in foreign securities that are not
listed on a recognized U.S. or foreign securities exchange, including up to 10%
of its total assets in securities with a limited trading market.
The fund's principal investments are in common stocks. It also invests in
American, European and Global Depositary Receipts. Depending upon current market
conditions, it invests a portion of its assets in rated and unrated debt
securities. Independent rating organizations rate debt securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. The fund may buy debt securities which are rated
Caa by Moody's Investors Service, Inc. (Moody's) or CCC by Standard & Poor's
Corporation (S&P) or better; or unrated debt which it determines to be of
comparable quality. At present, the fund does not intend to invest more than 5%
of its total assets in non-investment grade securities (rated lower than Baa by
Moody's or BBB by S&P).
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
convertible securities; warrants or rights. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive less
appreciation than common stockholders and may have greater voting rights as
well. Equity securities may also include convertible securities, warrants or
rights. Convertible securities typically are debt securities or preferred stocks
which are convertible into common stock after certain time periods or under
certain circumstances. Warrants or rights give the holder the right to purchase
a common stock at a given time for a specified price.
DEBT SECURITIES represent an obligation of the issuer to repay a loan of money
to it, and generally, provide for the payment of interest. These include bonds,
notes and debentures; commercial paper; time deposits; bankers' acceptances; and
structured investments. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
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 the fund's net asset value.
STRUCTURED INVESTMENTS Included among the issuers of debt securities in which
the fund 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 fund anticipates 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 Investment Company Act of 1940, as amended (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.
DEPOSITARY RECEIPTS are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary Receipts,
"GDRs" or European Depositary Receipts, "EDRs").
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers. Under a repurchase agreement, the fund agrees
to buy a U.S. government security from one of these issuers and then to sell the
security back to the issuer after a short period of time (generally, less than
seven days) at a higher price. The bank or broker-dealer must transfer to the
fund's custodian, securities with an initial value of at least 102% of the
dollar amount invested by the fund in each repurchase agreement. Repurchase
agreements may involve risks in the event of default or insolvency of the
seller, including possible delays or restrictions upon the fund's ability to
dispose of the underlying securities. The 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 the manager
to present no serious risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the repurchase transaction.
TEMPORARY INVESTMENTS When the fund's manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, it may invest the
fund's portfolio in a temporary defensive manner. Under such circumstances, the
fund may invest up to 100% of its assets in: (1) U.S. government securities; (2)
bank time deposits denominated in the currency of any major nation; (3)
commercial paper rated A-1 by S&P or Prime-1 by Moody's or, if unrated, issued
by a company which, at the date of investment, had an outstanding debt issue
rated AAA or AA by S&P or Aaa or Aa by Moody's; and (4) repurchase agreements
with banks and broker-dealers.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The fund may not:
1. Invest in real estate or mortgages on real estate (although the 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.
2. Purchase or retain securities of any company in which directors or
officers of Templeton Funds, Inc. (the company) or of the fund's
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.
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 fund may buy from a bank or broker-dealer
U.S. 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 board may by
resolution approve. As an operating policy approved by the board, the
fund will not 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 the
fund.
PAGE
7. Invest more than 5% of the value of the fund's total assets in
securities of issuers which have been in continuous operation less
than three years.
8. Invest more than 5% of the fund's total assets in warrants, whether or
not listed on the New York Stock Exchange (NYSE) or American Stock
Exchange, including no more than 2% of its total assets which may be
invested in warrants that are not listed on those exchanges. Warrants
acquired by the 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 the 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. The fund's position in the latter type of securities
may be of such size as to affect adversely their liquidity and
marketability and the fund may not be able to dispose of its holdings
in these securities at the current market price.
10. Invest more than 25% of the 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 "Portfolios Transactions" 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.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders. Nothing in the investment policy or investment
restrictions (except restrictions 9 and 10) shall be deemed to prohibit the fund
from purchasing securities pursuant to subscription rights distributed to the
fund by any issuer of securities held at the time in its portfolio (as long as
such purchase is not contrary to the fund's status as a diversified investment
company under the 1940 Act).
PAGE
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
RISKS
- -------------------------------------------------------------------------------
FOREIGN SECURITIES The 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. You 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. The 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 the fund may invest up to 15% of its total assets in unlisted foreign
securities, including up to 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.
The fund may invest up to 100% of its total assets in emerging markets.
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 the
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 the 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, the fund could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist in
certain 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 the fund's
shareholders.
The fund may invest up to 5% of its total assets in Russian securities.
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,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's system
of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the fund's
ability to exchange local currencies for U.S. dollars; (g) 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, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term 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 nor are they licensed with any
governmental entity and it is possible for the fund to lose its registration
through fraud, negligence or even mere oversight. While the 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 the 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
500 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. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the fund from
investing in the securities of certain Russian companies deemed suitable by
the manager. Further, this also could cause a delay in the sale of Russian
company securities by the fund if a potential purchaser is deemed unsuitable,
which may expose the fund to potential loss on the investment.
CURRENCY RISK The fund's management 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 the 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 the 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.
The 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 the 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 the fund's
portfolio securities are denominated may have a detrimental impact on the fund.
Through the fund's flexible policy, management 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 the 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 board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the 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 board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories. However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the manager, any losses resulting from
the holding of the 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 board's appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign governments
might not occur.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. The transition and the elimination
of currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
Euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the fund, the fund's manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
INTEREST RATE RISK To the extent the fund invests in debt securities, changes
in interest rates in any country where the fund is invested will affect the
value of the its portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
LOWER-RATED SECURITIES. Bonds rated Caa by Moody's are of poor standing. Such
securities may be in default or there may be present elements of danger with
respect to principal or interest. Bonds rated CCC by S&P are regarded, on
balance, as speculative. Such securities will have some quality and protective
characteristics, but these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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 to principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. The fund may invest up to 10% of
its total assets in defaulted debt securities. The purchase of defaulted debt
securities involves risks such as the possibility of complete loss of the
investment in the event the issuer does not restructure or reorganize to enable
it to resume paying interest and principal to holders.
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 the 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 the
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 the fund to achieve its investment
goal may, to the extent of investment in low rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the 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, the fund may incur additional expenses to seek
recovery.
The 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, the fund must
distribute substantially all of its income to shareholders. Thus, the fund may
have to dispose of its portfolio securities under disadvantageous circumstances
to generate cash in order to satisfy the distribution requirement.
OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
The company has a board of directors. The board is responsible for the overall
management of the fund, including general supervision and review of the fund's
investment activities. The board, in turn, elects the officers of the company
who are responsible for administering the fund's day-to-day operations. The
board also monitors the fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME, AGE AND ADDRESS WITH THE COMPANY PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (66) Director Director, RBC Holdings, Inc. (a bank holding company) and
191 Clapboard Ridge Road Bar-S Foods (a meat packing company); director or trustee,
Greenwich, CT 06830 as the case may be, of 49 of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the
Board, General Host Corporation (nursery and craft centers).
- ------------------------------------------------------------------------------------------------------------------------
*NICHOLAS F. BRADY (68) Director Chairman, Templeton Emerging Markets Investment Trust PLC,
The Bullitt House Templeton Latin America Investment Trust PLC, Darby
102 East Dover Street Overseas Investments, Ltd. and Darby Emerging Markets
Easton, MD 21601 Investments LDC (investment firms) (1994-present);
PAGE
- --------------------------------------------------------------------------------------------------------------------------
Director, Templeton Global Strategy Funds,
Amerada Hess Corporation (exploration and refining of
natural gas), Christiana Companies, Inc. (operating and
investment companies), and H.J. Heinz Company (packaged
foods and allied products); director or trustee, as the
case may be, of 21 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY,
Secretary of the United States Department of the Treasury
(1988-1993) and Chairman of the Board, Dillon, Read &
Co., Inc. (investment banking) prior to 1988.
- --------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (66) Trustee Member of the law firm of Pitney, Hardin, Kipp & Szuch;
Park Avenue at director or trustee, as the case may be, of 51 of the
Morris County investment companies in the Franklin Templeton Group of Funds.
P.O. Box 1945
Morristown, NJ 07962-1945
- ------------------------------------------------------------------------------------------------------------------------
JOHN Wm. GALBRAITH (77) Trustee President, Galbraith Properties, Inc. (personal investment
360 Central Avenue company); Director Emeritus, Gulf West Banks, Inc. (bank
Suite 1300 holding company) (1995-present); director or trustee, as
St. Petersburg, FL 33701 the case may be, of 20 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director,
Mercantile Bank (1991-1995), Vice Chairman, Templeton,
Galbraith & Hansberger Ltd. (1986-1992), and Chairman,
Templeton Funds Management, Inc. (1974-1991).
- ------------------------------------------------------------------------------------------------------------------------
ANDREW H. HINES, JR. (75) Trustee Consultant for the Triangle Consulting Group;
150 Second Avenue N. Executive-in-Residence of Eckerd College (1991-present);
St. Petersburg, FL 33701 director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Chairman and Director, Precise Power
Corporation (1990-1997), Director, Checkers Drive-In
Restaurant, Inc. (1994-1997), and Chairman of the Board
and Chief Executive Officer, Florida Progress Corporation
(holding company in the energy area) (1982-1990) and
director of various of its subsidiaries.
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
*CHARLES B. JOHNSON (65) Chairman of the President, Chief Executive Officer and Director, Franklin
777 Mariners Island Blvd. Board and Vice Resources, Inc.; Chairman of the Board and Director,
San Mateo, CA 94404 President Franklin Advisers, Inc., Franklin Advisory Services,
Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and Franklin
Templeton Services, Inc.; officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 50 of the
investment companies in the Franklin Templeton Group of
Funds.
- ------------------------------------------------------------------------------------------------------------------------
*RUPERT H. JOHNSON, JR.(58) Director and Executive Vice President and Director, Franklin
777 Mariners Island Blvd. Vice President Resources, Inc. and Franklin Templeton Distributors,
San Mateo, CA 94404 Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services,
Inc.; Director, Franklin/Templeton Investor Services,
Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 53 of the investment companies in
the Franklin Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------
BETTY P. KRAHMER (69) Director Director or trustee of various civic associations;
2201 Kentmere Parkway director or trustee, as the case may be, of 21 of the
Wilmington, DE 19806 investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Economic Analyst, U.S. government.
- ------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (70) Director Director, Fund American Enterprises Holdings, Inc., MCI
8212 Burning Tree Road WorldCom, MedImmune, Inc. (biotechnology), Spacehab, Inc.
Bethesda, MD 20817 (aerospace services) and Real 3D (software); director or
trustee, as the case may be, of 49 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
services) and Hambrecht and Quist Group (investment
banking), and President, National Association of
Securities Dealers, Inc.
- --------------------------------------------------------------------------------------------------------------------------
FRED R. MILLSAPS (69) Director Manager of personal investments (1978-present); director
2665 N.E. 37th Drive of various business and nonprofit organizations; director
Fort Lauderdale, FL 33308 or trustee, as the case may be, of 22 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman and Chief Executive Officer, Landmark
Banking Corporation (1969-1978), Financial Vice
President, Florida Power and Light (1965-1969), and Vice
President, Federal Reserve Bank of Atlanta (1958-1965).
- ------------------------------------------------------------------------------------------------------------------------
MARK G. HOLOWESKO (38) President President, Templeton Global Advisors Limited; Chief
Lyford Cay Investment Officer, Global Equity Group; Executive Vice
Nassau, Bahamas President and Director, Templeton Worldwide, Inc.; officer
of 21 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Investment Administrator,
RoyWest Trust Corporation (Bahamas) Limited (1984-1985).
- ------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (53) Vice President Executive Vice President and Director, Franklin Resources,
777 Mariners Island Blvd. Inc., Franklin Templeton Distributors, Inc. and Franklin
San Mateo, CA 94404 Templeton Services, Inc.; Executive Vice President,
Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of
Funds.
- ------------------------------------------------------------------------------------------------------------------------
CHARLES E. JOHNSON (42) Vice President Senior Vice President and Director, Franklin Resources,
500 East Broward Blvd. Inc.; Senior Vice President, Franklin Templeton
Fort Lauderdale, FL 33394-3091 Distributors, Inc.; President and Director, Templeton
Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; Vice President, Franklin
Advisers, Inc.; officer and/or director of some of the
other subsidiaries of Franklin
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
Resources, Inc.; and officer and/or director or trustee,
as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
- --------------------------------------------------------------------------------------------------------------------------
DEBORAH R. GATZEK (50) Vice President Senior Vice President and General Counsel, Franklin
777 Mariners Island Blvd. Resources, Inc.; Senior Vice President, Franklin Templeton
San Mateo, CA 94404 Services, Inc. and Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice
President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and
officer of 53 of the investment companies in the Franklin
Templeton Group of Funds.
- ------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (38) Vice President Senior Vice President and Chief Financial Officer,
777 Mariners Island Blvd. Franklin Resources, Inc.; Executive Vice President and
San Mateo, CA 94404 Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director,
Templeton Investment Counsel, Inc.; Executive Vice
President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory
Services, Inc. and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton
Services, Inc.; Senior Vice President and Chief Financial
Officer, Franklin/Templeton Investor Services,
Inc.; officer and/or director of some of the other
subsidiaries of Franklin Resources, Inc.; and officer
and/or director or trustee, as the case may be, of 53 of
the investment companies in the Franklin Templeton Group
of Funds.
- ------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (58) Vice President Vice President and Treasurer, Templeton Worldwide, Inc.;
500 East Broward Blvd. Assistant Vice President, Franklin Templeton
Fort Lauderdale, FL 33394-3091 Distributors, Inc.; officer of 25 of the investment
companies in the Franklin Templeton Group of Funds; and
FORMERLY, Vice President and Controller, Keystone Group,
Inc.
- --------------------------------------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT(34) Vice President Executive Vice President, Portfolio Management, Templeton
Lyford Cay Global Advisors Limited; officer of 2 of the investment
Nassau, Bahamas companies in the Franklin Templeton Group of Funds; and
FORMERLY, Investment Officer, First Pennsylvania
Investment Research (until 1989).
- --------------------------------------------------------------------------------------------------------------------------
ELIZABETH M. KNOBLOCK (43) Vice President - General Counsel, Secretary and Senior Vice President,
500 East Broward Blvd. Compliance Templeton Investment Counsel, Inc.; Senior Vice
Fort Lauderdale, President, Templeton Global Investors, Inc.; officer of
FL 33394-3091 21 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Vice President and
Associate General Counsel, Kidder Peabody & Co. Inc.
(1989-1990), Assistant General Counsel, Gruntal & Co.,
Inc. (1988), Vice President and Associate General
Counsel, Shearson Lehman Hutton Inc. (1988), Vice
President and Assistant General Counsel, E.F. Hutton &
Co. Inc. (1986-1988), and Special Counsel of the Division
of Investment Management, U.S. Securities and Exchange
Commission (1984-1986).
- ------------------------------------------------------------------------------------------------------------------------
JAMES R. BAIO (44) Treasurer Certified Public Accountant; Treasurer, Franklin Mutual
500 East Broward Blvd. Advisers, Inc.; Senior Vice President, Templeton
Fort Lauderdale, FL 33394-3091 Worldwide, Inc., Templeton Global Investors, Inc. and
Templeton Funds Trust Company; officer of 22 of the
investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Senior Tax Manager, Ernst & Young
(certified public accountants) (1977-1989).
- --------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (51) Secretary Senior Vice President, Templeton Worldwide, Inc. and
500 East Broward Blvd. Templeton Global Investors, Inc.; officer of 21 of the
Fort Lauderdale, FL 33394-3091 investment companies in the Franklin Templeton Group of
Funds; and FORMERLY,
Deputy Director of the Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman,
Counselor 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).
- --------------------------------------------------------------------------------------------------------------------------
<FN>
- ---------------
*This board member is considered an "interested person" under federal securities
laws. Mr. Brady's status as an interested person results from his business
affiliations with Franklin Resources, Inc. and the manager. Mr. Brady and
Franklin Resources, Inc. are both limited partners of Darby Overseas Partners,
L.P. (Darby Overseas). In addition, Darby Overseas and the manager are limited
partners of Darby Emerging Markets Fund, L.P.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
</FN>
</TABLE>
The company pays noninterested board members and Mr. Brady an annual retainer of
$24,000 and a fee of $1,800 per board meeting attended. Board members who serve
on the audit committee of the fund and other funds in the Franklin Templeton
Group of Funds receive a flat fee of $2,000 per committee meeting attended, a
portion of which is allocated to the fund. Members of the nominating and
compensation committee are not compensated for any committee meeting that is
held in conjunction with a board meeting. Noninterested board members may also
serve as directors or trustees of other funds in the Franklin Templeton Group of
Funds and may receive fees from these funds for their services. The following
table provides the total fees paid to noninterested board members and Mr. Brady
by the company and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN TEMPLETON
TOTAL FEES FROM THE FRANKLIN GROUP OF FUNDS ON
RECEIVED TEMPLETON GROUP OF WHICH EACH
NAME FROM THE FUND(1) FUNDS(2) SERVES(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harris J. Ashton $25,425 $361,157 49
Nicholas F. Brady 25,425 140,975 21
S. Joseph Fortunato 25,425 367,835 51
John Wm. Galbraith 25,635 134,425 20
Andrew H. Hines, Jr. 26,585 208,075 22
Betty P. Krahmer 25,425 141,075 21
Gordon S. Macklin 25,425 361,157 49
Fred R. Millsaps 26,585 210,075 22
</TABLE>
(1) For the fiscal year ended August 31, 1998. During the period from September
1, 1997 through February 27, 1998, an annual retainer of $12,500 and fees at
the rate of $950 per meeting attended were in effect.
(2) For the calendar year ended December 31, 1998.
(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 54 registered investment companies, with approximately 168 U.S. based
funds or series.
Noninterested board members and Mr. Brady are reimbursed for expenses incurred
in connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or board members who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
PAGE
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Templeton Global Advisors
Limited. is The manager is wholly owned by Franklin Resources, Inc. (Resources),
a publicly owned company engaged in the financial services industry through its
subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal
shareholders of Resources. The Templeton organization has been investing
globally since 1940. The manager and its affiliates have offices in Argentina,
Australia, Bahamas, Canada, France, Germany, Hong Kong, India, Italy, Japan,
Korea, Luxembourg, Poland, Russia, Singapore, South Africa, Taiwan, United
Kingdom, U.S. and Vietnam.
The manager provides investment research and portfolio management services, and
selects the securities for the fund to buy, hold or sell. The manager also
selects the brokers who execute the fund's portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance. The manager
renders its services to the fund from outside the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group who
are access persons may 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 by the close
of the business
PAGE
day following the day clearance is granted; (ii) copies of all brokerage
confirmations and statements must be sent to a compliance officer; (iii) all
brokerage accounts must be disclosed on an annual basis; and (iv) access persons
involved in preparing and making investment decisions must, in addition to (i),
(ii) and (iii) 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.
MANAGEMENT FEES The fund pays the manager a fee equal to a annual rate of:
/bullet/ 0.75% of the value of net assets up to and including $200 million;
/bullet/ 0.675% of the value of net assets in excess of $200 million up to and
including $1.3 billion; and
/bullet/ 0.60% of the value of net assets in excess of $1.3 billion.
The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended August 31, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
- ----------------------------------------------------
1998 96,508,519
1997 79,502,378
1996 51,600,846
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the company to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The company pays FT Services a monthly fee equal to an
annual rate of:
PAGE
/bullet/ 0.15% of the funds' combined average daily net assets up to $200
million;
/bullet/ 0.135% of average daily net assets over $200 million up to $700
million;
/bullet/ 0.10% of average daily net assets over $700 million up to $1.2
billion; and
/bullet/ 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended August 31, the company paid the
following administration fees:
ADMINISTRATION FEES PAID ($)
----------------------------------------------------
1998 16,570,686
1997 16,145,466
1996 (1) 11,564,072
(1) Before October 1, 1996, Templeton Global Investors, Inc. provided
administrative services to the company.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located atat 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL
33733-8030.
For its services, Investor Services receives a fixed fee per account. The fund
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
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 fund's assets. As foreign custody manager,
the bank selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
AUDITOR McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, is the
fund's independent auditor. The auditor gives an opinion on the financial
statements included in the fund's Annual Report to Shareholders and reviews the
fund's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PAGE
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
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. The manager 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 the
manager, a 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.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager 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 the manager receives from dealers effecting
PAGE
transactions in portfolio securities. The allocation of transactions in order to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager 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, the
sale of fund 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 the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager 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 the fund and one or more other investment
companies or clients supervised by the manager 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 the
manager, 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 the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
Purchases and sales of securities, without the payment of brokerage commissions,
fees (except customary transfer fees) or other remuneration, may be effected
between the fund and one or more other investment companies or clients
supervised by the manager according to procedures adopted under the Investment
Company Act of 1940.
During the last three fiscal years ended August 31, the fund paid the following
brokerage commissions:
BROKERAGE COMMISSIONS ($)
----------------------------------------------------
1998 34,773,217
1997 20,265,126
1996 10,641,000
PAGE
As of August 31, 1998, the fund owned securities issued by Deutche Bank valued
in aggregate at $260,391,267. Except as noted, the funds did not own any
securities issued by their regular broker dealers as of the end of the fiscal
year.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitute its net investment income from
which dividends may be paid to you. Any distributions by the fund from such
income will be taxable to you as ordinary income, whether you take them in cash
or in additional shares. The fund does not pay "interest" or guarantee any fixed
rate of return on an investment in its shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
fund. Any net short-term or long-term capital gains realized by the fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt instruments are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the fund's total assets at the end
of the fiscal year are invested in securities of foreign corporations, the fund
may elect to pass-through to you your pro rata share of foreign taxes paid by
the fund. If this election is made, the year-end statement you receive from the
fund will show more taxable income than was actually distributed to you.
However, you will be entitled to either deduct your share of such taxes in
computing your taxable income or claim a foreign tax credit for such taxes
against your U.S. federal income tax. The fund will provide you with the
information necessary to complete your individual income tax return if such
election is made.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected to
be treated as a regulated investment company under Subchapter M of the tax code,
has qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. As a regulated investment company, the fund
generally pays no federal income tax on the income and gains it distributes to
you. The board reserves the right not to maintain the qualification of the fund
as a regulated investment company if it determines such course of action to be
beneficial to you. In such case, the fund will be subject to federal, and
possibly state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent of
the fund's available earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS The tax code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal excise
taxes. The fund intends to declare and pay sufficient dividends in December (or
in January that are treated by you as received in December) but does not
guarantee and can give no assurances that its distributions will be sufficient
to eliminate all such taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes that cause you to
recognize a gain or loss. If you hold your shares as a capital asset, the gain
or loss that you realize will be capital gain or loss. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you purchase other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS All or a portion of the sales charge that you paid for your
shares in the fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated. The portion
of the sales charge excluded from your tax basis in the shares sold will equal
the amount that the sales charge is reduced on your reinvestment. Any portion of
the sales charge excluded from your tax basis in the shares sold will be added
to the tax basis of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. The rules on exclusion of this
income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the fund's income is
derived primarily from investments in foreign rather than domestic U.S.
securities, no portion of its distributions will generally be eligible for the
intercorporate dividends-received deduction. None of the dividends paid by the
fund for the most recent calendar year qualified for such deduction, and it is
anticipated that none of the current year's dividends will so qualify.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities. Such
investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by the fund are treated
as ordinary income or capital gain, accelerate the recognition of income to the
fund or defer the fund's ability to recognize losses, and, in limited cases,
subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
PAGE
For more information, please call 1-800/ DIAL BEN to request a free copy of the
Franklin Templeton Tax Information Handbook.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
The fund is a diversified series of the company, an open-end management
investment company, commonly called a mutual fund. The company was organized as
a Maryland corporation on August 15, 1977, and is registered with the SEC.
The fund currently offers three classes of shares, Class I, Class II and Advisor
Class. The fund may offer additional classes of shares in the future. The full
title of each class is:
/bullet/ Templeton Foreign Fund - Class I
/bullet/ Templeton Foreign Fund - Class II
/bullet/ Templeton Foreign Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect the fund as a whole, each class has the same voting and
other rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the company for matters that affect the company as a whole. Additional series
may be offered in the future.
The company has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The company does not intend to hold annual shareholder meetings. The company or
a series of the company may hold special meetings, however, for matters
requiring shareholder approval. A meeting may be called by shareholders holding
at least 10% of the outstanding shares to consider the removal of a board
member. In certain circumstances, we are required to help you communicate with
other shareholders about the removal of a board member. A special meeting may
also be called by the board in its discretion.
PAGE
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. To the
best knowledge of the fund, no other person holds beneficially or of record more
than 5% of the outstanding shares of any class.
As of October 2, 1998, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the 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.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
PAGE
If you buy shares through the reinvestment of dividends, the shares 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.
DEALER COMPENSATION 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 primarily on the amount of sales of 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, from 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 commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
EXCHANGE PRIVILEGE 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 invested at net asset value. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand,
PAGE
increased use of the exchange privilege may result in periodic large inflows of
money. If this occurs, it is the 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 the fund's
investment goals exist immediately. This money will then be withdrawn from the
short-term, interest-bearing 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 seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund 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.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the 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. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the 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.
PAGE
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The 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 the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The 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 Securities and Exchange
Commission (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 the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The 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.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the 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
PAGE
distributions. The proceeds will be reinvested in additional shares at net asset
value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to your, the fund is not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person if,
for any reason, a redemption request by wire is not processed as described in
the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions may also
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
PAGE
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the 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, before 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.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The fund calculates the NAV per share each business day at the close of trading
on the NYSE (normally 1:00 p.m. pacific time). The fund does not calculate the
NAV on days the NYSE is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager.
PAGE
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 fund's NAV is not calculated. Thus, the calculation of the fund's NAV
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 close of the NYSE. The value of these securities used in computing the NAV
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 close of the NYSE that will not be reflected in the computation of the NAV.
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, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
PAGE
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.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
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 the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total returnreturn quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.
For periods before January 2, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class I performance for the relevant
time period, excluding the effect of Class I's maximum initial sales charge, and
including the effect of the distribution and service (Rule 12b-1) fees
applicable to the fund's Class I shares. For periods after January 2, 1997,
Advisor Class standardized performance quotations are calculated as described
below.
An explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes 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 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 initial sales
charge currently in effect.
PAGE
The average annual total returns for the indicated periods ended August 31,
1998, were:
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Advisor Class -17.75% 5.82% 10.49%
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 each period at the end of
each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
net asset value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total returns for the indicated periods ended
August 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Advisor Class -17.75% 32.67% 171.12%
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the 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.
PAGE
OTHER PERFORMANCE quotations Sales literature referring to the use of the fund
as a potential investment for 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.
The fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in the fund may
satisfy your investment goal, advertisements and other materials about the fund
may discuss certain measures of fund performance as reported by various
financial publications. Materials may also compare performance (as calculated
above) to performance as reported by other investments, indices, and averages.
These comparisons may include, but are not limited to, the following examples:
(i) unmanaged indices so that you 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 that
ranks mutual funds by overall performance, investment goals 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 the fund. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, the fund and the manager may also refer to the following
information:
/bullet/ The manager's and its affiliates' market share of international
equities managed in mutual funds prepared or published by Strategic
Insight or a similar statistical organization.
/bullet/ The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital
International(R) or a similar financial organization.
PAGE
/bullet/ The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International(R) or a similar financial organization.
/bullet/ The geographic and industry distribution of the fund's portfolio and
the fund's top ten holdings.
/bullet/ 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.
/bullet/ To assist investors in understanding the different returns and risk
characteristics of various investments, the fund may show historical
returns of various investments and published indices (E.G., Ibbotson
Associates, Inc. Charts and Morgan Stanley EAFE - Index).
/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
/bullet/ Allegorical stories illustrating the importance of persistent
long-term investing.
/bullet/ The fund's portfolio turnover rate and its ranking relative to
industry standards as published by Lipper Analytical Services, Inc. or
Morningstar, Inc.
/bullet/ 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.
/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
/bullet/ Quotations from the Templeton organization's founder, Sir John
PAGE
Templeton,* advocating the virtues of diversification and long-term investing,
including the following:
/bullet/ "Never follow the crowd. Superior performance is possible
only if you invest differently from the crowd."
/bullet/ "Diversify by company, by industry and by country."
/bullet/ "Always maintain a long-term perspective."
/bullet/ "Invest for maximum total real return."
/bullet/ "Invest - don't trade or speculate."
/bullet/ "Remain flexible and open-minded about types of investment."
/bullet/ "Buy low."
/bullet/ "When buying stocks, search for bargains among quality
stocks."
/bullet/ "Buy value, not market trends or the economic outlook."
/bullet/ "Diversify. In stocks and bonds, as in much else, there is
safety in numbers."
/bullet/ "Do your homework or hire wise experts to help you."
/bullet/ "Aggressively monitor your investments."
/bullet/ "Don't panic."
/bullet/ "Learn from your mistakes."
/bullet/ "Outperforming the market is a difficult task."
/bullet/ "An investor who has all the answers doesn't even understand
all the questions."
/bullet/ "There's no free lunch."
- -----------------
* Sir John Templeton sold the Templeton organization to Franklin Resources,
Inc. in October 1992 and resigned from the board on April 16, 1995. He
is no longer involved with the investment management process.
PAGE
/bullet/ "And now the last principle: Do not be fearful or negative
too often."
From time to time, advertisements or information for the 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 the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the 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 the 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 the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the 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 the 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 the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The 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
PAGE
program. Of course, an investment in the fund cannot guarantee that these goals
will be met.
The fund 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 is one of the
oldest mutual fund organizations and now services more than 3 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, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $207 billion in assets under management for more than 6 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 117 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment goals, no two are exactly alike.
Shares of the fund are generally sold through securities dealers, whose
investment representatives are experienced professionals who can offer advice on
the type of investments suitable to your unique goals and needs, as well as the
risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the fund and their shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests have been planned to verify
their effectiveness. Resources continues to seek reasonable assurances from all
major hardware, software or data-services suppliers that they will be Year 2000
compliant on a timely basis. Resources is also in the process of developing
contingency plans for Year 2000 failures. In an operation as complex and
geographically distributed as Resources' business, however, this means
identifying only those mission critical systems for which it is practical to
develop a contingency plan.
DESCRIPTION OF BOND RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because
PAGE
margins of protection may not be as large, fluctuation of protective elements
may be of greater amplitude, or there may be other elements present that make
the long-term risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking;
PAGE
and modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PAGE
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
PAGE
TEMPLETON FUNDS, INC.
File Nos. 2-60067 and 811-2781
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference to the previously filed
document indicated below, except as noted:
(a) ARTICLES OF INCORPORATION
(i) Restated Articles of Incorporation/2/
(ii) Articles of Amendment dated October 24, 1990 /2/
(iii) Articles Supplementary dated October 16, 1993 /2/
(iv) Articles of Amendment dated February 16, 1994 /2/
(v) Articles Supplementary dated April 13, 1995 /1/
(vi) Articles of Amendment dated April 17, 1995 /1/
(vii) Articles Supplementary dated October 25, 1995 /2/
(viii) Articles Supplementary dated December 27, 1996 /4/
(ix) Articles Supplementary dated April 10, 1997
(B) BY-LAWS
(i) Amended and Restated By-Laws of Templeton Funds, Inc. dated
October 19, 1996 /3/
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Amended and Restated Management Agreement between Templeton
World Fund and Templeton Galbraith and Hansberger Ltd. dated
December 6, 1994 /1/
(ii) Amended and Restated Management Agreement between Templeton
Foreign Fund and Templeton Galbraith and Hansberger Ltd. dated
December 6, 1994 /1/
PAGE
(E) UNDERWRITING CONTRACTS
(i) Amended and Restated Distribution Agreement between
Registrant and Franklin Templeton Distributors, Inc.,
dated May 1, 1995 /2/
(ii) Form of Dealer Agreement between Registrant and
Franklin/Templeton Distributors, Inc. and Securities
Dealers
(iii) Amendment of Dealer Agreement dated May 15, 1998
(iv) Non-Exclusive Underwriting Agreement between the
Registrant and Templeton Franklin Investment Services
(Asia) Limited dated September 18, 1995 /5/
(F) BONUS OR PROFIT SHARING CONTRACTS
Not applicable
(G) CUSTODIAN AGREEMENTS
(i) Restated Custody Agreement between Registrant on behalf of
Templeton World Fund and The Chase Manhattan Bank dated
February 11, 1986 /2/
(ii) Restated Custody Agreement between Registrant on behalf of
Templeton Foreign Fund and The Chase Manhattan Bank dated
February 11, 1986 /2/
(iii) Amendment dated March 3, 1998 to the Custody Agreement
(iv) Amendment No. 2 dated July 23, 1998 to the Custody
Agreement
(h) OTHER MATERIAL CONTRACTS
(i) Fund Administration Agreement between the Registrant and Franklin
Templeton Services, Inc. dated June 1, 1997 /5/
(ii) Amended and Restated Transfer Agent Agreement between the
Registrant and Franklin/Templeton Investor Services Inc.,
dated July 1, 1996 /5/
PAGE
(iii) Sub-Transfer Agent Agreement between the Registrant, Templeton
Funds Trust Company and The Shareholder Services Group, Inc.
dated March 1, 1992 /2/
(iv) Sub-Accounting Services Agreement between the Registrant,
Templeton Funds Trust Company, Financial Data Services, Inc.,
and Merrill Lynch, Pierce, Fenner and Smith Inc. dated May 1,
1991 /2/
(v) Sub-Transfer Agent Agreement between the Registrant on behalf of
Templeton Foreign Fund and Fidelity Investments Institutional
Operations Company dated July 1, 1993 /2/
(vi) Shareholder Services Agreement between Franklin/Templeton
Investor Services, Inc. and Templeton Franklin Investment
Services, Limited dated September 18, 1995 /5/
(I) LEGAL OPINION
(i) Opinion and consent of counsel dated October 29, 1998
(J) OTHER OPINIONS
(i) Consent of Independent Accountants
(k) OMITTED FINANCIAL STATEMENTS
Not applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Letter of Understanding dated April 28, 1995 /1/
(m) RULE 12B-1 PLAN
(i) Templeton World Fund Plan of Distribution pursuant to Rule 12b-1
dated May 1, 1995 /1/
(ii) Templeton World Fund Class II Distribution Plan pursuant to Rule
12b-1 dated May 1, 1995 /1/
(iii) Templeton Foreign Fund Plan of Distribution pursuant to Rule
12b-1 dated May 1, 1995 /1/
(iv) Templeton Foreign Fund Class II Distribution Plan pursuant to
Rule 12b-1 dated May 1, 1995 /1/
PAGE
(O) RULE 18F-3 PLAN
(i) Multiple Class Plan, Templeton Foreign Fund - Advisor Class/5/
(p) POWER OF ATTORNEY
(i) Power of Attorney dated December 12, 1996 /3/
(27) FINANCIAL DATA SCHEDULE
(i) Financial Data Schedule for Templeton World Fund - Class I
(ii) Financial Data Schedule for Templeton World Fund - Class II
(iii) Financial Data Schedule for Templeton Foreign Fund - Class I
(iv) Financial Data Schedule for Templeton Foreign Fund - Class II
(v) Financial Data Schedule for Templeton Foreign Fund - Advisor
Class
- ---------------------
1 Previously filed with Post Effective Amendment No. 26 to the Registration
Statement on April 28, 1995
2 Previously filed with Post Effective Amendment No. 27 to the Registration
Statement on December 29, 1995
3 Previously filed with Post Effective Amendment No. 28 to the Registration
Statement on December 27, 1996
4 Previously filed with Post Effective Amendment No. 29 to the Registration
Statement on December 31, 1996
5 Previously filed with Post Effective Amendment No. 30 to the Registration
Statement on December 24, 1997
PAGE
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 25. INDEMNIFICATION
All officers, directors, employees and agents of the Registrant are to be
indemnified to the fullest extent permitted by law for any liabilities of any
nature whatsoever incurred in connection with the affairs of the Registrant,
except in cases where willful misfeasance, bad faith, gross negligence or
reckless disregard of duties to the Registrant are established. See Article 5.1
of the By-Laws of the Registrant, filed as Exhibit 2 to the Registration
Statement, which is incorporated herein by reference, for a more complete
description of matters relating to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the By-Laws or otherwise, the Registrant is aware that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by directors,
officers or controlling persons of the Registrant in connection with the
successfully defense of any act, suit or proceeding) is asserted by such
directors, officers or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group of
Funds. For additional information please see Part B and Schedules A and D of
Form ADV of the Fund's investment manager (SEC File 801-42343), incorporated
herein by reference, which sets forth the officers and directors of the
investment manager and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
PAGE
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this Form N-1A
and Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books and other documents required to be maintained by the
Registrant pursuant to Section 31 (a) of the Investment Company Act and the
rules thereunder are located at 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394. Other records are maintained at the offices of Franklin/Templeton
Investor Services, Inc., 100 Fountain Parkway, St. Petersburg, Florida
33716-1205 and Franklin Resources, Inc., 777 Mariners Island Blvd., San Mateo,
CA 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
(i) Registrant undertakes to furnish to each person to whom a Prospectus for
Templeton World Fund or Templeton Foreign Fund is provided a copy of such Fund's
latest Annual Report, upon request and without charge.
PAGE
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Fort Lauderdale and the State of Florida, on the 29th day of October,
1998.
TEMPLETON FUNDS, INC.
(Registrant)
By:
Mark G. Holowesko *
President
* By: /s/BARBARA J. GREEN
- -----------------------------
Barbara J. Green
Attorney-in-Fact**
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Principal Executive Officer
- --------------------------
Mark G. Holowesko* Dated: October 29, 1998
Principal Financial and
- --------------------------
James R. Baio * Accounting Officer
Dated: October 29, 1998
Director
- --------------------------
Betty P. Krahmer * Dated: October 29, 1998
Director
- --------------------------
Harris J. Ashton * Dated: October 29, 1998
Director
- --------------------------
S. Joseph Fortunato* Dated: October 29, 1998
Director and Vice President
- --------------------------
Rupert H. Johnson, Jr.* Dated: October 29, 1998
PAGE
Director, Chairman and
- -------------------------- Vice President
Charles B. Johnson * Dated: October 29, 1998
Director
- --------------------------
Fred R. Millsaps * Dated: October 29, 1998
Director
- --------------------------
John Wm. Galbraith * Dated: October 29, 1998
Director
- --------------------------
Gordon S. Macklin * Dated: October 29, 1998
Director
- --------------------------
Andrew H. Hines, Jr. * Dated: October 29, 1998
Director
- --------------------------
Nicholas F. Brady * Dated: October 29, 1998
*By /s/BARBARA J. GREEN
- --------------------------
Barbara J. Green
Attorney-in-Fact**
** Powers of Attorney were previously filed with Post-Effective Amendment No. 28
to the Registration Statement on Form N-1A of Templeton Funds, Inc. (File Nos.
2-60067 and 811-2781) filed on December 27, 1996.
PAGE
TEMPLETON FUNDS, INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
EX-99.(a)(ix) Articles Supplementary dated April 10, 1997 Attached
EX-99.(e)(ii) Form of Dealer Agreement between the Registrant, Attached
Franklin Templeton Distributors, Inc., and
Securities Dealers
EX-99.(e)(iii) Amendment of Dealer Agreement dated May 15, 1998 Attached
EX-99.(g)(iii) Amendment dated March 3, 1998 to the Custody Agreement Attached
EX-99.(g)(iv) Amendment No. 2 dated July 23, 1998 to the Custody Attached
Agreement
EX-99.(e)(iii) Amendment of Dealer Agreement dated May 15, 1998 Attached
EX-99.(i)(i) Opinion and consent of counsel dated October 27, 1998 Attached
EX-99.(j)(i) Consent of Independent Accountants Attached
EX-27.(i) Financial Data Schedule for Templeton World Fund - Class I Attached
EX-27.(ii) Financial Data Schedule for Templeton World Fund - Class II Attached
EX-27.(iii) Financial Data Schedule for Templeton Foreign Fund - Class I Attached
EX-27.(iv) Financial Data Schedule for Templeton Foreign Fund - Class II Attached
EX-27.(v) Financial Data Schedule for Templeton Foreign Fund - Attached
Advisor Class
</TABLE>
TEMPLETON FUNDS, INC.
ARTICLES SUPPLEMENTARY
TEMPLETON FUNDS, INC., a Maryland corporation registered under
the Investment Company Act of 1940 and having its principal office in the State
of Maryland in Baltimore City, Maryland (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: The Board of Directors of the Corporation, at a
meeting duly convened and held on February 21, 1997, adopted a resolution to
increase the total number of Shares of Common Stock which the Corporation shall
have the authority to issue to THREE BILLION SEVEN HUNDRED MILLION
(3,700,000,000) Shares of Common Stock of the par value of ONE DOLLAR ($1.00)
per Share and of the aggregate par value of THREE BILLION SEVEN HUNDRED MILLION
DOLLARS ($3,700,000,000).
SECOND: Immediately prior to the effectiveness of the
Articles Supplementary of the Corporation as hereinabove set forth, the
Corporation had authority to issue THREE BILLION TWO HUNDRED MILLION
(3,200,000,000) shares of Common Stock, of the par value $1.00 per share, and of
the aggregate par value of THREE BILLION TWO HUNDRED MILLION ($3,200,000,000)
dollars of which the Board of Directors had (i) classified EIGHT HUNDRED MILLION
(800,000,000) Shares as Templeton World Fund Class I shares of Common Stock and
classified FOUR HUNDRED MILLION (400,000,000) Shares as Templeton World Fund
Class II shares of Common Stock, and (ii) classified ONE BILLION FIVE HUNDRED
MILLION (1,500,000,000) Shares as Templeton Foreign Fund Class I shares of
Common Stock, classified THREE HUNDRED MILLION (300,000,000) Shares as Templeton
Foreign Fund Class II shares of Common Stock and classified TWO HUNDRED MILLION
(200,000,000) Shares as Templeton Foreign Fund Advisor Class shares of Common
Stock. As amended hereby, the Corporation's Articles of Incorporation authorize
the issuance of THREE BILLION SEVEN HUNDRED MILLION (3,700,000,000) Shares of
PAGE
Common Stock of the par value of $1.00 per Share and having an aggregate par
value of THREE BILLION SEVEN HUNDRED MILLION ($3,700,000,000) dollars, of which
the Board of Directors has (i) classified EIGHT HUNDRED MILLION (800,000,000)
Shares as Templeton World Fund Class I shares of Common Stock and classified
FOUR HUNDRED MILLION (400,000,000) Shares as Templeton World Fund Class II
shares of Common Stock and (ii) classified TWO BILLION (2,000,000,000) Shares as
Templeton Foreign Fund Class I shares of Common Stock, classified THREE HUNDRED
MILLION (300,000,000) Shares as Templeton Foreign Fund Class II shares of Common
Stock and classified TWO HUNDRED MILLION (200,000,000) Shares as Templeton
Foreign Fund Advisor Class shares of Common Stock. The preferences, rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the classes of shares, as set forth in the
Articles of Incorporation of the Corporation as heretofore amended and
supplemented, are not changed by these Articles Supplementary.
THIRD: The Shares of Common Stock of the Corporation
authorized and classified pursuant to Articles First and Second of these
Articles Supplementary have been so authorized and classified by the Board of
Directors under the authority contained in the Charter of the Corporation. The
total number of Shares of Common Stock of the various classes that the
Corporation has authority to issue has been increased by the Board of Directors
in accordance with Section 2-105(c) of the Maryland General Corporation Law.
PAGE
IN WITNESS WHEREOF, Templeton Funds, Inc. has caused these
Articles Supplementary to be signed in its name on its behalf by its authorized
officers who acknowledge that these Articles Supplementary are the act of the
Corporation, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the authorization and approval of
these Articles Supplementary are true in all material respects and that this
statement is made under the penalties of perjury.
Date: April 10, 1997
TEMPLETON FUNDS, INC.
[CORPORATE SEAL]
By: /s/JOHN R. KAY
---------------------
John R. Kay
Vice President
Attest: /s/JEFFREY L. STEELE
----------------------
Jeffrey L. Steele
Assistant Secretary
DEALER AGREEMENT
Effective: March 1, 1998
Dear Securities Dealer:
Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to participate
in the distribution of shares of the Franklin Templeton investment companies
(the "Funds") for which we now or in the future serve as principal underwriter,
subject to the terms of this Agreement. We will notify you from time to time of
the Funds which are eligible for distribution and the terms of compensation
under this Agreement. This Agreement supersedes any prior dealer agreements
between us, as stated in Section 18, below.
1. LICENSING.
(a) You represent that you are (i) a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD") and
are presently licensed to the extent necessary by the appropriate regulatory
agency of each jurisdiction in which you will offer and sell shares of the
Funds, or (ii) a broker, dealer or other company licensed, registered or
otherwise qualified to effect transactions in securities in a country (a
"foreign country") other than the United States of America (the "U.S.") where
you will offer or sell shares of the Funds. You agree that termination or
suspension of such membership with the NASD, or of your license to do business
by any regulatory agency having jurisdiction, at any time shall terminate or
suspend this Agreement forthwith and shall require you to notify us in writing
of such action. If you are not a member of the NASD but are a broker, dealer or
other company subject to the laws of a foreign country, you agree to conform to
the Conduct Rules of the NASD. This Agreement is in all respects subject to the
Conduct Rules of the NASD, particularly Conduct Rule 2830 of the NASD, which
shall control any provision to the contrary in this Agreement.
(b) You agree to notify us immediately in writing if at
any time you are not a member in good standing of the Securities Investor
Protection Corporation ("SIPC").
2. SALES OF FUND SHARES. You may offer and sell shares of each
Fund and class of each Fund only at the public offering price which shall be
applicable to, and in effect at the time of, each transaction. The procedures
relating to all orders and the handling of them shall be subject to the terms of
the applicable then current prospectus and statement of additional information
(hereafter, the "prospectus") and new account application, including amendments,
for each such Fund and each class of such Fund, and our written instructions
from time to time. This Agreement is not exclusive, and either party may enter
into similar agreements with third parties.
3. DUTIES OF DEALER: You agree:
(a) To act as principal, or as agent on behalf of your
customers, in all transactions in shares of the Funds except as provided in
Section 4 hereof. You shall not have any authority to act as agent for the
issuer (the Funds), for the Principal Underwriter, or for any other dealer in
any respect, nor will you represent to any third party that you have such
authority or are acting in such capacity.
(b) To purchase shares only from us or from your
customers.
(c) To enter orders for the purchase of shares of the
Funds only from us and only for the purpose of covering purchase orders you have
already received from your customers or for your own bona fide investment.
(d) To maintain records of all sales, redemptions and
repurchases of shares made through you and to furnish us with copies of such
records on request.
(e) To distribute prospectuses and reports to your
customers in compliance with applicable legal requirements, except to the extent
that we expressly undertake to do so on your behalf.
PAGE
(f) That you will not withhold placing customers'
orders for shares so as to profit yourself as a result of such withholding or
place orders for shares in amounts just below the point at which sales charges
are reduced so as to benefit from a higher sales charge applicable to an amount
below the breakpoint.
(g) That if any shares confirmed to you hereunder are
repurchased or redeemed by any of the Funds within seven business days after
such confirmation of your original order, you shall forthwith refund to us the
full concession, allowed to you on such orders, including any payments we made
to you from our own resources as provided in Section 6(b) hereof with respect to
such orders. We shall forthwith pay to the appropriate Fund the share, if any,
of the sales charge we retained on such order and shall also pay to such Fund
the refund of the concession we receive from you as herein provided (other than
the portion of such concession we paid to you from our own resources as provided
in Section 6(b) hereof). We shall notify you of such repurchase or redemption
within a reasonable time after settlement. Termination or suspension of this
Agreement shall not relieve you or us from the requirements of this subsection.
(h) That if payment for the shares purchased is not
received within the time customary or the time required by law for such payment,
the sale may be canceled without notice or demand and without any responsibility
or liability on our part or on the part of the Funds, or at our option, we may
sell the shares which you ordered back to the Funds, in which latter case we may
hold you responsible for any loss to the Funds or loss of profit suffered by us
resulting from your failure to make payment as aforesaid. We shall have no
liability for any check or other item returned unpaid to you after you have paid
us on behalf of a purchaser. We may refuse to liquidate the investment unless we
receive the purchaser's signed authorization for the liquidation.
(i) That you shall assume responsibility for any loss
to the Funds caused by a correction made subsequent to trade date, provided such
correction was not based on any error, omission or negligence on our part, and
that you will immediately pay such loss to the Funds upon notification.
(j) That if on a redemption which you have ordered,
instructions in proper form, including outstanding certificates, are not
received within the time customary or the time required by law, the redemption
may be canceled forthwith without any responsibility or liability on our part or
on the part of any Fund, or at our option, we may buy the shares redeemed on
behalf of the Fund, in which latter case we may hold you responsible for any
loss to the Fund or loss of profit suffered by us resulting from your failure to
settle the redemption.
(k) To obtain from your customers all consents required
by applicable privacy laws to permit us, any of our affiliates or the Funds to
provide you either directly or through a service established for that purpose
with confirmations, account statements and other information about your
customers' investments in the Funds.
4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with
orders for the purchase of shares on behalf of an Individual Retirement Account,
Self-Employed Retirement Plan or other retirement accounts, by mail, telephone,
or wire, you shall act as agent for the custodian or trustee of such plans
(solely with respect to the time of receipt of the application and payments),
and you shall not place such an order until you have received from your customer
payment for such purchase and, if such purchase represents the first
contribution to such a plan, the completed documents necessary to establish the
plan and enrollment in the plan. You agree to indemnify us and Franklin
Templeton Trust Company and/or Templeton Funds Trust Company as applicable for
any claim, loss, or liability resulting from incorrect investment instructions
received from you which cause a tax liability or other tax penalty.
5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from
you any conditional orders for shares of any of the Funds. Delivery of
certificates or confirmations for shares purchased shall be made by the Funds
only against constructive receipt of the purchase price, subject to deduction
for your concession and our portion of the sales charge, if any, on such sale.
No certificates for shares of the Funds will be issued unless specifically
requested.
PAGE
6. DEALER COMPENSATION.
(a) On each purchase of shares by you from us, the
total sales charges and your dealer concessions shall be as stated in each
Fund's then current prospectus, subject to NASD rules and applicable laws. Such
sales charges and dealer concessions are subject to reductions under a variety
of circumstances as described in the Funds' prospectuses. For an investor to
obtain these reductions, we must be notified at the time of the sale that the
sale qualifies for the reduced charge. If you fail to notify us of the
applicability of a reduction in the sales charge at the time the trade is
placed, neither we nor any of the Funds will be liable for amounts necessary to
reimburse any investor for the reduction which should have been effected.
(b) In accordance with the Funds' prospectuses, we or
our affiliates may, but are not obligated to, make payments to you from our own
resources as compensation for certain sales which are made at net asset value
("Qualifying Sales"). If you notify us of a Qualifying Sale, we may make a
contingent advance payment up to the maximum amount available for payment on the
sale. If any of the shares purchased in a Qualifying Sale are repurchased or
redeemed within twelve months of the month of purchase, we shall be entitled to
recover any advance payment attributable to the repurchased or redeemed shares
by reducing any account payable or other monetary obligation we may owe to you
or by making demand upon you for repayment in cash. We reserve the right to
withhold advances to you, if for any reason we believe that we may not be able
to recover unearned advances from you. Termination or suspension of this
Agreement shall not relieve you or us from the requirements of this subsection.
7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of
shares of the Funds will be made at the net asset value of such shares, less any
applicable deferred sales or redemption charges, in accordance with the
applicable prospectuses. Except as permitted by applicable law, you agree not to
purchase any shares from your customers at a price lower than the net asset
value of such shares next computed by the Funds after the purchase (the
"Redemption/Repurchase Price"). You shall, however, be permitted to sell shares
of the Funds for the account of the record owner to the Funds at the
Redemption/Repurchase Price for such shares.
8. EXCHANGES. Telephone exchange orders will be effective only
for uncertificated shares or for which share certificates have been previously
deposited and may be subject to any fees or other restrictions set forth in the
applicable prospectuses. Exchanges from a Fund sold with no sales charge to a
Fund which carries a sales charge, and exchanges from a Fund sold with a sales
charge to a Fund which carries a higher sales charge may be subject to a sales
charge in accordance with the terms of the applicable Fund's prospectus. You
will be obligated to comply with any additional exchange policies described in
the applicable Fund's prospectus, including without limitation any policy
restricting or prohibiting "Timing Accounts" as therein defined.
9. TRANSACTION PROCESSING. All orders are subject to acceptance
by us and by the Fund or its transfer agent, and become effective only upon
confirmation by us. If required by law, each transaction shall be confirmed in
writing on a fully disclosed basis and if confirmed by us, a copy of each
confirmation shall be sent simultaneously to you if you so request. All sales
are made subject to receipt of shares by us from the Funds. We reserve the right
in our discretion, without notice, to suspend the sale of shares of the Funds or
withdraw the offering of shares of the Funds entirely. Orders will be effected
at the price(s) next computed on the day they are received if, as set forth in
the applicable Fund's current prospectus, the orders are received by us, an
agent appointed by us or the Funds prior to the time the price of the Fund's
shares is calculated. Orders received after that time will be effected at the
price(s) computed on the next business day. All orders must be accompanied by
payment in U.S. Dollars. Orders payable by check must be drawn payable in U.S.
Dollars on a U.S. bank, for the full amount of the investment.
10. MULTIPLE CLASSES. We may from time to time provide to you
written compliance guidelines or standards relating to the sale or distribution
of Funds offering multiple classes of shares (each, a "Class") with different
sales charges and distribution related operating expenses. In addition, you will
PAGE
be bound by any applicable rules or regulations of government agencies or
self-regulatory organizations generally affecting the sale or distribution of
shares of investment companies offering multiple classes of shares.
11. RULE 12B-1 PLANS. You are invited to participate in all
distribution plans (each, a "Plan") adopted for a Class of a Fund or for a Fund
that has only a single Class (each, a "Plan Class") pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act").
To the extent you provide administrative and other services,
including, but not limited to, furnishing personal and other services and
assistance to your customers who own shares of a Plan Class, answering routine
inquiries regarding a Fund or Class, assisting in changing account designations
and addresses, maintaining such accounts or such other services as a Fund may
require, to the extent permitted by applicable statutes, rules, or regulations,
we shall pay you a Rule 12b-1 servicing fee. To the extent that you participate
in the distribution of Fund shares that are eligible for a Rule 12b-1
distribution fee, we shall also pay you a Rule 12b-1 distribution fee. All Rule
12b-1 servicing and distribution fees shall be based on the value of shares
attributable to customers of your firm and eligible for such payment, and shall
be calculated on the basis and at the rates set forth in the compensation
schedule then in effect for the applicable Plan (the "Schedule"). Without prior
approval by a majority of the outstanding shares of a particular Class of a Fund
which has a Plan, the aggregate annual fees paid to you pursuant to such Plan
shall not exceed the amounts stated as the "annual maximums" in such Plan Class'
prospectus, which amount shall be a specified percent of the value of such Plan
Class' net assets held in your customers' accounts which are eligible for
payment pursuant to this Agreement (determined in the same manner as such Plan
Class uses to compute its net assets as set forth in its effective prospectus).
You shall furnish us and each Fund that has a Plan Class
(each, a "Plan Fund") with such information as shall reasonably be requested by
the Board of Directors, Trustees or Managing General Partners (hereinafter
referred to as "Directors") of such Plan Fund with respect to the fees paid to
you pursuant to the Schedule of such Plan Fund. We shall furnish to the Boards
of Directors of the Plan Funds, for their review on a quarterly basis, a written
report of the amounts expended under the Plans and the purposes for which such
expenditures were made.
Each Plan and the provisions of any agreement relating to such
Plan must be approved annually by a vote of the Directors of the Fund that has
such Plan, including such persons who are not interested persons of such Plan
Fund and who have no financial interest in such Plan or any related agreement
("Rule 12b-1 Directors"). Each Plan or the provisions of this Agreement relating
to such Plan may be terminated at any time by the vote of a majority of the Rule
12b-1 Directors, or by a vote of a majority of the outstanding shares of the
Class that has such Plan, on sixty (60) days' written notice, without payment of
any penalty. A Plan or the provisions of this Agreement may also be terminated
by any act that terminates the Underwriting Agreement between us and the Fund
that has such Plan, and/or the management or administration agreement between
Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their
affiliates and such Plan Fund. In the event of the termination of a Plan for any
reason, the provisions of this Agreement relating to such Plan will also
terminate.
Continuation of a Plan and provisions of this Agreement
relating to such Plan are conditioned on Rule 12b-1 Directors being ultimately
responsible for selecting and nominating any new Rule 12b-1 Directors. Under
Rule 12b-1, Directors of any of the Plan Funds have a duty to request and
evaluate, and persons who are party to any agreement related to a Plan have a
duty to furnish, such information as may reasonably be necessary to an informed
determination of whether the Plan or any agreement should be implemented or
continued. Under Rule 12b-1, a Plan Fund is permitted to implement or continue a
Plan or the provisions of this Agreement relating to such Plan from year-to-year
only if, based on certain legal considerations, the Board of Directors of such
Plan Fund is able to conclude that such Plan will benefit the Plan Class. Absent
such yearly determination, such Plan and the provisions of this Agreement
relating to such Plan must be terminated as set forth above. In addition, any
obligation assumed by a Fund pursuant to this Agreement shall be limited in all
cases to the assets of such Fund and no person shall seek satisfaction thereof
from shareholders of a Fund. You agree to waive payment of any amounts payable
PAGE
to you by us under a Fund's Plan until such time as we are in receipt of such
fee from the Fund.
The provisions of the Plans between the Plan Funds and us
shall control over the provisions of this Agreement in the event of any
inconsistency.
12. REGISTRATION OF SHARES. Upon request, we shall notify you of
the states or other jurisdictions in which each Fund's shares are currently
noticed, registered or qualified for offer or sale to the public. We shall have
no obligation to make notice filings of, register or qualify, or to maintain
notice filings of, registration of or qualification of, Fund shares in any state
or other jurisdiction. We shall have no responsibility, under the laws
regulating the sale of securities in any U.S. or foreign jurisdiction, for the
registration, qualification or licensed status of persons offering or selling
Fund shares or for the manner of offering or sale of Fund shares. If it is
necessary to file notice of, register or qualify Fund shares in any foreign
jurisdictions in which you intend to offer the shares of any Funds, it will be
your responsibility to arrange for and to pay the costs of such notice filing,
registration or qualification; prior to any such notice filing, registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Funds, and you agree not to proceed with such notice
filing, registration or qualification without the written consent of the
applicable Funds and of ourselves. Except as stated in this section, we shall
not, in any event, be liable or responsible for the issue, form, validity,
enforceability and value of such shares or for any matter in connection
therewith, and no obligation not expressly assumed by us in this Agreement shall
be implied. Nothing in this Agreement shall be deemed to be a condition,
stipulation or provision binding any person acquiring any security to waive
compliance with any provision of the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations of the U.S. Securities and Exchange
Commission, or any applicable laws or regulations of any government or
authorized agency in the U.S. or any other country having jurisdiction over the
offer or sale of shares of the Funds, or to relieve the parties hereto from any
liability arising under such laws, rules and regulations.
13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13
relates solely to shares of Funds that represent a beneficial interest in the
Franklin Floating Rate Trust and shares issued by any other continuously offered
closed-end investment company registered under the 1940 Act for which we or an
affiliate of ours serve as principal underwriter and that periodically
repurchases its shares (each, a "Trust"). Shares of a Trust that are offered to
the public will be registered under the 1933 Act, and are expected to be offered
during an offering period that may continue indefinitely ("Continuous Offering
Period"). There is no guarantee that such a continuous offering will be
maintained by a Trust. The Continuous Offering Period, shares of a Trust and
certain of the terms on which such shares are offered shall be as described in
the prospectus of the Trust.
As set forth in a Trust's then current prospectus, we may, but
are not obligated to, provide you with appropriate compensation for selling
shares of the Trust. In addition, you may be entitled to a fee for servicing
your clients who are shareholders in a Trust, subject to applicable law and NASD
Conduct Rules. You agree that any repurchases of shares of a Trust that were
originally purchased as Qualifying Sales shall be subject to Subsection 6(b)
hereof.
You expressly acknowledge and understand that, notwithstanding
anything to the contrary in this Agreement:
(a) No Trust has a Rule 12b-1 Plan and in no event will
a Trust pay, or have any obligation to pay, any compensation directly or
indirectly to you.
(b) Shares of a Trust will not be repurchased by either
the Trust (other than through repurchase offers by the Trust from time to time,
if any) or by us and no secondary market for such shares exists currently, or is
expected to develop. Any representation as to a repurchase or tender offer by a
Trust, other than that set forth in the Trust's then current prospectus,
notification letters, reports or other related material provided by the Trust,
is expressly prohibited.
PAGE
(c) An early withdrawal charge payable by shareholders
of a Trust to us may be imposed on shares accepted for repurchase by the Trust
that have been held for less than a stated period, as set forth in the Trust's
then current Prospectus.
(d) In the event your customer cancels his or her order for
shares of a Trust after confirmation, such shares will not be repurchased,
remarketed or otherwise disposed of by or though us.
14. FUND INFORMATION. No person is authorized to give any
information or make any representations concerning shares of any Fund except
those contained in the Fund's then current prospectus or in materials issued by
us as information supplemental to such prospectus. We will supply reasonable
quantities of prospectuses, supplemental sales literature, sales bulletins, and
additional information as issued by the Fund or us. You agree not to use other
advertising or sales material relating to the Funds except that which (a)
conforms to the requirements of any applicable laws or regulations of any
government or authorized agency in the U.S. or any other country having
jurisdiction over the offering or sale of shares of the Funds, and (b) is
approved in writing by us in advance of such use. Such approval may be withdrawn
by us in whole or in part upon notice to you, and you shall, upon receipt of
such notice, immediately discontinue the use of such sales literature, sales
material and advertising. You are not authorized to modify or translate any such
materials without our prior written consent.
15. INDEMNIFICATION. You agree to indemnify, defend and hold
harmless us, the Funds, and the respective officers, directors and employees of
the Funds and us from any and all losses, claims, liabilities and expenses
arising out of (1) any alleged violation of any statute or regulation (including
without limitation the securities laws and regulations of the U.S. or any state
or foreign country) or any alleged tort or breach of contract, in or related to
the offer or sale by you of shares of the Funds pursuant to this Agreement
(except to the extent that our negligence or failure to follow correct
instructions received from you is the cause of such loss, claim, liability or
expense), (2) any redemption or exchange pursuant to telephone instructions
received from you or your agents or employees, or (3) the breach by you of any
of the terms and conditions of this Agreement. This Section 15 shall survive the
termination of this Agreement.
16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party
to this Agreement may terminate its participation in this Agreement by giving
written notice to the other parties. Such notice shall be deemed to have been
given and to be effective on the date on which it was either delivered
personally to the other parties or any officer or member thereof, or was mailed
postpaid or delivered by electronic transmission to the other parties' chief
legal officers at the addresses shown herein or in the most recent NASD Manual.
This Agreement shall terminate immediately upon the appointment of a Trustee
under the Securities Investor Protection Act or any other act of insolvency by
you. The termination of this Agreement by any of the foregoing means shall have
no effect upon transactions entered into prior to the effective date of
termination. A trade placed by you subsequent to your voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of a dealer, will be effective only upon
written notification by us to you. This Agreement will terminate automatically
in the event of its assignment by us. For purposes of the preceding sentence,
the word "assignment" shall have the meaning given to it in the 1940 Act. This
Agreement may not be assigned by you without our prior written consent. This
Agreement may be amended by us at any time by written notice to you and your
placing of an order or acceptance of payments of any kind after the effective
date and receipt of notice of any such Amendment shall constitute your
acceptance of such Amendment.
17. SETOFF; DISPUTE RESOLUTION. Should any of your concession
accounts with us have a debit balance, we may offset and recover the amount owed
to us or the Funds from any other account you have with us, without notice or
demand to you. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules of the NASD or the American
Arbitration Association. Judgment upon any arbitration award may be entered by
any court having jurisdiction. This Agreement shall be construed in accordance
PAGE
with the laws of the State of California, not including any provision that would
require the general application of the law of another jurisdiction.
18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative
and supersedes any agreement previously in effect. It shall be binding upon the
parties hereto when signed by us and accepted by you. If you have a current
dealer agreement with us, your first trade or acceptance of payments from us
after your receipt of this Agreement, as it may be amended pursuant to Section
16, above, shall constitute your acceptance of its terms. Otherwise, your
signature below shall constitute your acceptance of its terms.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/ GREG JOHNSON
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
415/312-2000
700 Central Avenue
St. Petersburg, Florida 33701-3628
813/823-8712
Dealer: If you have NOT previously signed a Dealer Agreement with us, please
complete and sign this section and return the original to us.
DEALER NAME:
By _________________
(Signature)
Name:
Title:
Address:
Telephone:
NASD CRD #
Franklin Templeton Dealer #
(Internal Use Only)
May 15, 1998
Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16
Dear Securities Dealer:
This letter constitutes notice of amendment of the current Dealer Agreement (the
"Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and
you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as
follows:
1. Defined terms in this amendment have the meanings as stated
in the Agreement unless otherwise indicated.
2. Section 6 is modified to add a subsection 6(c), as follows:
(c) The following limitations apply with respect to
shares of each Trust as described in Section 13 of this Agreement.
(1) Consistent with the NASD Conduct Rules, the total
compensation to be paid to us and selected dealers and their affiliates,
including you and your affiliates, in connection with the distribution of shares
of a Trust will not exceed the underwriting compensation limitation prescribed
by NASD Conduct Rule 2710. The total underwriting compensation to be paid to us
and selected dealers and their affiliates, including you and your affiliates,
may include: (i) at the time of purchase of shares a payment to you or another
securities dealer of 1% of the dollar amount of the purchased shares by the
Distributor; and (ii) a quarterly payment at an annual rate of .50% to you or
another securities dealer based on the value of such remaining shares sold by
you or such securities dealer, if after twelve (12) months from the date of
purchase, the shares sold by you or such securities dealer remain outstanding.
(2) The maximum compensation shall be no more
than as disclosed in the section "Payments to Dealers" of the prospectus of the
applicable Trust.
Pursuant to Section 16 of the Agreement, your placement of an order or
acceptance of payments of any kind after the effective date and receipt of
notice of this amendment shall constitute your acceptance of this amendment.
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By /s/GREG JOHNSON
Greg Johnson, President
777 Mariners Island Blvd.
San Mateo, CA 94404
Attention: Chief Legal Officer (for legal notices only)
650/312-2000
100 Fountain Parkway
St. Petersburg, FL 33716
813/299-8712
AMENDMENT, dated March 2, 1998 to the custody agreements (each an
"Agreement"), between the Templeton funds listed on Schedule A hereto (each a
"Fund"), with each having a place of business at 500 East Broward Blvd., Ft.
Lauderdale, FL 33394 and The Chase Manhattan Bank ("Chase"), having a place of
business at 270 Park Ave., New York, NY 10017-2070.
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement.
Section 2. The Agreement is amended as follows:
Delete all of Section 2 of the Agreement after subsection (B.) thereof, and
insert, in lieu thereof, the following:
(C.) Fund's board of directors (or equivalent body) (hereinafter "Board")
hereby delegates to Chase, and Chase hereby accepts the delegation to it, of the
obligation to perform as Fund's "Foreign Custody Manager" (as that term is
defined in SEC rule 17f-5(a)(2)), both for the purpose of selecting Eligible
Foreign Custodians (as that term is defined herein) to hold Securities and Cash
and of evaluating the contractual arrangements with such Eligible Foreign
Custodians (as set forth in SEC rule 17f-5(c)(2)); provided that, the term
Eligible Foreign Custodian shall not include any "Compulsory Depository." A
Compulsory Depository shall mean a Foreign Securities Depository or clearing
agency the use of which is compulsory because: (1) its use is required by law or
regulation, (2) securities cannot be withdrawn from the depository, or (3)
maintaining securities outside the depository is not consistent with prevailing
custodial practices in the country which the depository serves.
PAGE
Compulsory Depositories used by Chase as of the date hereof are set forth in
Appendix 1-A hereto, and as the same may be amended on notice to Fund from time
to time.
(i) In connection with the foregoing, Chase shall:
(1) provide written reports notifying Fund's Board of the placement of
Securities and Cash with particular Eligible Foreign Custodians and of
any material change in the arrangements with such Eligible Foreign
Custodians, with such reports to be provided to Fund's Board at such
times as the Board deems reasonable and appropriate based on the
circumstances of Fund's foreign custody arrangements;
(2) exercise such reasonable care, prudence and diligence in performing
as Fund's Foreign Custody Manager as a person having responsibility for
the safekeeping of Securities and Cash would exercise;
(3) in selecting an Eligible Foreign Custodian, first have determined
that Securities and Cash placed and maintained in the safekeeping of
such Eligible Foreign Custodian shall be subject to reasonable care,
based on the standards applicable to custodians in the relevant market,
after having considered all factors relevant to the safekeeping of such
Securities and Cash, including, without limitation, those factors set
forth in SEC rule 17f-5(c)(1)(i)-(iv);
(4) determine that the written contract with the Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodian that is a
non-Compulsory Depository or clearing agency, such contract, the rules
or established practices or procedures of the Depository, or any
combination of the foregoing) requires that the Eligible Foreign
Custodian will provide reasonable care for Securities and Cash based on
the standards applicable to custodians in the relevant market; and
2
PAGE
(5) have established a system to monitor the continued appropriateness
of maintaining Securities and Cash with particular Eligible Foreign
Custodians and of the governing contractual arrangements. Chase shall
also monitor Compulsory Depositories and shall advise Fund of any
material negative change in the performance of, or arrangements with,
any Compulsory Depository as the same would adversely affect the
custody of assets.
Subject to (i)(1)-(5) above, Chase is hereby authorized to place and maintain
Securities and Cash on behalf of Fund with Eligible Foreign Custodians pursuant
to a written contract deemed appropriate by Chase.
(ii) Except as expressly provided herein, Fund shall be solely responsible
to assure that the maintenance of Securities and Cash hereunder complies with
the rules, regulations, interpretations and exemptive orders promulgated by or
under the authority of the SEC.
(iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being
placed and maintained in Chase's custody are subject to the Investment Company
Act of 1940, as amended (the "1940 Act"), as the same may be amended from time
to time; (2) its Board has determined that it is reasonable to rely on Chase to
perform as Fund's Foreign Custody Manager; and (3) its Board or its investment
adviser shall have determined that Fund may maintain Securities and Cash in each
country in which Fund's Securities and Cash shall be held hereunder and
determined to accept the risks arising therefrom (including, but not limited to,
a country's financial infrastructure (and including any Compulsory Depository
operating in such country), prevailing custody and settlement practices, laws
applicable to the safekeeping and recovery of Securities and Cash held in
custody, and the likelihood of nationalization, currency controls and the like)
(collectively ("Country Risk")). Nothing contained herein shall require Chase to
make any selection that would entail consideration of Country Risk.
3
PAGE
(iv) Chase shall assist Fund in monitoring Country Risk by furnishing such
information relating to the Country Risk as is specified in Appendix 1-B hereto.
Fund hereby acknowledges that: (1) such information is solely designed to inform
Fund of market conditions and procedures and is not intended as a recommendation
to invest or not invest in particular markets; and (2) Chase has gathered the
information from sources it considers reliable, but that Chase shall have no
responsibility for inaccuracies or incomplete information except to the extent
negligently obtained by Chase.
Section 3. Add the following at the end of Section 3(d):
and which shall be limited to Eligible Foreign Custodians as defined in
(i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained
herein; provided that, for purposes of the sections of this Agreement
addressing Chase liability (including, but not limited to, Sections 7, 10,
14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which
Chase has not acted as Foreign Custody Manager.
Section 4. Add the following at the end of Section 3(e):
and which shall be limited to Eligible Foreign Custodians as
defined in (iii) and (iv)-(v) of the definition of Eligible
Foreign Custodians contained herein; provided that, for
purposes of the sections of this Agreement addressing Chase
liability (including, but not limited to, Sections 7, 10, 14,
and 16-17) the term Foreign Securities Depository shall not
include any Compulsory Depository or any non-compulsory
depository as to which Chase has not acted as Foreign Custody
Manager.
Section 5. Add the following definitions in appropriate alphabetic sequence
to Section 3 of the Agreement:
4
PAGE
(1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7).
(2) an "Eligible Foreign Custodian," shall mean (i) a banking institution
or trust company, incorporated or organized under the laws of a country
other than the United States, that is regulated as such by that country's
government or an agency thereof, (ii) a majority-owned direct or indirect
subsidiary of a U.S. Bank or bank holding company which subsidiary is
incorporated or organized under the laws of a country other than the United
States; (iii) a securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United States, that
acts as a system for the central handling of securities or equivalent
book-entries in that country and that is regulated by a foreign financial
regulatory authority as defined under section 2(a)(50) of the 1940 Act,
(iv) a securities depository or clearing agency organized under the laws of
a country other than the United States when acting as a transnational
system ("Transnational Depository") for the central handling of securities
or equivalent book-entries, and (v) any other entity that shall have been
so qualified by exemptive order, rule or other appropriate action of the
SEC.
Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu
thereof, the following:
At the request of Fund, Chase may, but need not, add an Eligible
Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign
Securities Depository where Chase has not acted as Foreign Custody
Manager with respect to the selection thereof; provided that, any such
entities shall not be included for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event
that it elects to add any such entity.
*********************
5
PAGE
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
TEMPLETON THE CHASE MANHATTAN BANK
By:/s/BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL
----------------------- -------------------------------
Name: Barbara J. Green Name: Lenore Vanden Handel
Title: Secretary Title: Vice President
6
PAGE
Appendix 1-A
LIST OF COMPULSORY DEPOSITORIES APPROVED BY THE BOARD
PAGE
Appendix 1-B
INFORMATION REGARDING COUNTRY RISK
1. To aid Fund's board in its determinations regarding Country Risk,
Chase shall furnish board annually and upon the initial placing of Securities
and Cash into a country the following information (check items applicable):
A Opinions of local counsel concerning:
___ i. Whether applicable foreign law would restrict the access
afforded Fund's independent public accountants to books and
records kept by an eligible foreign custodian located in that
country.
___ ii. Whether applicable foreign law would restrict the Fund's ability
to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.
___ iii. Whether applicable foreign law would restrict the Fund's ability
to recover assets that are lost while under the control of an
Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Fund's assets.
2
PAGE
___ ii. Whether difficulties in converting Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.
C. A market report with respect to the following topics:
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Fund's board in monitoring Country Risk, Chase shall furnish
board the following additional information:
As more fully described in the FCM procedures, market flashes,
including with respect to changes in the information in market reports.
3
PAGE
Schedule A
TEMPLETON U.S. FUNDS
As of February 28, 1998
TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86
TEMPLETON FUNDS, INC. ("TFI") - 2/11/86
Templeton World Fund
Templeton Foreign Fund
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96
TEMPLETON INCOME TRUST ("TIT") - 5/15/96
Templeton Global Bond Fund
TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96
TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91
TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91
TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91
TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96
Templeton Foreign Equity Series
Templeton Growth Series
Templeton Emerging Markets Series
Templeton Emerging Fixed Income Series
TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90
TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95
Templeton Growth and Income Fund
Templeton Global Infrastructure Fund
Templeton Americas Government Securities Fund
Templeton Greater European Fund
Templeton Latin America Fund
TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87
TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88
TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88
TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93
TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93
TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94
TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94
TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94
TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95
TEMPLETONVARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated
2/23/96)
Templeton Money Market Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Developing Markets Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
FRANKLIN/TEMPLETON JAPAN FUND - 6/24/94
TEMPLETON VARIABLE ANNUITY FUND - 1/27/88
4
AMENDMENT No. 2, dated July 23, 1998 to the custody agreements (each an
"Agreement"), between each of the Templeton finds listed on Schedule A hereto
(each a "Fund"), with each having a place of business at 500 East Broward Blvd.,
Ft. Lauderdale, FL 33394, and The Chase Manhattan Bank ("Chase"), having a place
of business at 270 Park Ave., New York, NY 10017-2070.
It is hereby agreed as follows:
Section 1. Except as modified hereby, the Agreement is confirmed in all
respects. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Agreement. This Amendment supersedes in all
respects the Amendment between the parties, dated March 2, 1998, which shall
have no further force or effect as of the date hereof.
Section 2. The Agreement is amended as follows:
Delete all of Section 2 of the Agreement after subsection (B.) thereof, and
insert, in lieu thereof, the following:
(C.) Fund's board of directors (or equivalent body) (hereinafter "Board")
hereby delegates to Chase, and Chase hereby accepts the delegation to it of, the
obligation to perform as Fund's "Foreign Custody Manager" (as that term is
defined in Securities and Exchange Commission ("SEC") rule 17f-5(a)(2)), both
for the purpose of selecting Eligible Foreign Custodians (as that term is
defined herein) to hold Securities and Cash and of evaluating the contractual
arrangements with such Eligible Foreign Custodians (as set forth in SEC rule
17f-5(c)(2)); provided that, the term Eligible Foreign Custodian shall not
include any "Compulsory Depository." A Compulsory Depository shall mean a
Foreign Securities Depository or clearing agency the use of which is compulsory
because: (1) its use is required by law or regulation, (2) securities cannot be
withdrawn from the depository, or (3) maintaining securities outside the
depository is not consistent with prevailing custodial practices in the country
which the depository serves. Compulsory Depositories used by Chase as of the
date hereof are set forth in Appendix 1-A hereto, and as the same may be amended
on notice to Fund from time to time.
(i) In connection with the foregoing, Chase shall:
PAGE
(1) provide written reports notifying Fund's Board of the placement of
Securities and Cash with particular Eligible Foreign Custodians and of any
material change in the arrangements with such Eligible Foreign Custodians,
with such reports to be provided to Fund's Board at such times as the Board
deems reasonable and appropriate based on the circumstances of Fund's
foreign custody arrangements;
(2) exercise such reasonable care, prudence and diligence in performing as
Fund's Foreign Custody Manager as a person having responsibility for the
safekeeping of Securities and Cash would exercise;
(3) in selecting an Eligible Foreign Custodian, first have determined that
Securities and Cash placed and maintained in the safekeeping of such
Eligible Foreign Custodian shall be subject to reasonable care, based on
the standards applicable to custodians in the relevant market, after having
considered all factors relevant to the safekeeping of such Securities and
Cash, including, without limitation, those factors set forth in SEC rule
17f-5(c)(1)(i)-(iv);
(4) determine that the written contract with the Eligible Foreign Custodian
requires that the Eligible Foreign Custodian will provide reasonable care
for Securities and Cash based on the standards applicable to custodians in
the relevant market; provided that, in the case of an Eligible Foreign
Custodian that is a non-Compulsory Depository or clearing agency, such
determination shall only be made to the extent required by SEC rule 17f-5
as in effect from time to time and where so required shall be made based on
such contract, the rules or established practices or procedures of the
Depository, or any combination thereof; and
(5) have established a system to monitor the continued appropriateness of
maintaining Securities and Cash with particular Eligible Foreign Custodians
and of the governing contractual arrangements. Chase shall also monitor
Compulsory Depositories and shall advise Fund of any material negative
change in the performance of, or arrangements with, any Compulsory
Depository as the same would adversely affect the custody of assets. With
respect to monitoring Compulsory Depositories, Chase shall use its
reasonable efforts to obtain the information with respect to the factors
set forth on Schedule 1-C hereto: (i) by November 20, 1998 with respect to
any Compulsory Depository in a country in which Securities are held as of
the date hereof; (ii)
PAGE
to the extent feasible in light of the circumstances then prevailing in a
given country in which Securities are held, no later than 90 days after the
establishment of, or a determination by Chase that a depository has become,
a Compulsory Depository in such country; and (iii) to the extent feasible
in light of the circumstances then prevailing in a given country, no later
than 90 days after the first placement of Securities after the date hereof
with a Subcustodian where such country has a Compulsory Depository. Chase
shall advise Fund when, to Chase's knowledge based on such reasonable
efforts, there is a negative answer with respect to a Compulsory Depository
as to any of such factors. In connection with the foregoing: (i) Fund
acknowledges and agrees that Chase's agreements with Eligible Foreign
Custodians do not, as of the date hereof, comply with factor (i) on
Schedule 1-C and that Chase shall not amend such agreements to so comply
unless Rule 17f-5 is amended or interpreted by the Securities and Exchange
Commission to incorporate such a factor into the Rule with respect to
Compulsory Depositories; and (ii) to the extent that Rule 17f-5 is amended
or interpreted by the Securities and Exchange Commission to incorporate
materially one or more of (i)-(viii), Chase shall be obligated to obtain
the relevant information on such incorporated factors rather than being
limited only to using its reasonable efforts to do so.
In the event that the SEC adopts standards or criteria different from those
set forth in Schedule 1-C, the above provisions and Schedule 1-C shall be
deemed to be amended to conform to the standards or criteria adopted by the
SEC, it being understood that the time within which Chase must furnish the
required information shall be a reasonable time in light of such
differences.
Subject to (i)(1)-(4) and the first sentence of (5) above, Chase is hereby
authorized to place and maintain Securities and Cash on behalf of Fund with
Eligible Foreign Custodians pursuant to a written contract deemed appropriate by
Chase.
(ii) Except as expressly provided herein, Fund shall be responsible to
assure that the maintenance of Securities and Cash hereunder complies with the
rules, regulations, interpretations and exemptive orders promulgated by or under
the authority of the SEC.
(iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being
placed and maintained in Chase's custody are subject to the Investment Company
Act of 1940, as amended (the "1940 Act"), as the same may be amended from time
PAGE
to time; (2) its Board has determined that it is reasonable to rely on Chase to
perform as Fund's Foreign Custody Manager; and (3) its Board or its investment
adviser shall have determined that Fund may maintain Securities and Cash in each
country in which Fund's Securities and Cash shall be held hereunder and
determined to accept the risks arising therefrom (including, but not limited to,
a country's financial infrastructure (and including any Compulsory Depository
operating in such country), prevailing custody and settlement practices, laws
applicable to the safekeeping and recovery of Securities and Cash held in
custody, and the likelihood of nationalization, currency controls and the like)
(collectively ("Country Risk")). Nothing contained herein shall require Chase to
make any selection that would entail consideration of Country Risk.
(iv) Chase shall assist Fund in monitoring Country Risk by furnishing such
information relating to the Country Risk as is specified in Appendix 1-B hereto.
Fund hereby acknowledges that: (1) such information is solely designed to inform
Fund of market conditions and procedures and is not intended as a recommendation
to invest or not invest in particular markets; and (2) Chase has gathered the
information from sources it considers reliable, but that Chase shall have no
responsibility for inaccuracies or incomplete information except to the extent
negligently obtained by Chase.
Section 3. Add the following at the end of Section 3(d):
and which shall be limited to Eligible Foreign Custodians as defined in
(i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained
herein; provided that, for purposes of the sections of this Agreement
addressing Chase liability (including, but not limited to, Sections 7, 10,
14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which
Chase has not acted as Foreign Custody Manager.
Section 4. Add the following at the end of Section 3(e):
and which shall be limited to Eligible Foreign Custodians as defined
in (iii) and (iv)-(v) of the definition of Eligible Foreign Custodians
contained herein; provided that, for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17) the term Foreign Securities Depository
shall not include any Compulsory Depository or any non-compulsory
depository as to which Chase has not acted as Foreign Custody Manager.
PAGE
Section 5. Add the following definitions in appropriate alphabetic sequence
to Section 3 of the Agreement:
(1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule
17f-5(a)(7).
(2) an "Eligible Foreign Custodian," shall mean (i) a banking
institution or trust company, incorporated or organized under the laws
of a country other than the United States, that is regulated as such
by that country's government or an agency thereof, (ii) a
majority-owned direct or indirect subsidiary of a U.S. Bank or bank
holding company which subsidiary is incorporated or organized under
the laws of a country other than the United States; (iii) a securities
depository or clearing agency, incorporated or organized under the
laws of a country other than the United States, that acts as a system
for the central handling of securities or equivalent book-entries in
that country and that is regulated by a foreign financial regulatory
authority as defined under section 2(a)(50) of the 1940 Act, (iv) a
securities depository or clearing agency organized under the laws of a
country other than the United States when acting as a transnational
system ("Transnational Depository") for the central handling of
securities or equivalent book-entries, and (v) any other entity that
shall have been so qualified by exemptive order, rule or other
appropriate action of the SEC.
Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu
thereof, the following:
At the request of Fund, Chase may, but need not, add an Eligible
Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign
Securities Depository where Chase has not acted as Foreign Custody
Manager with respect to the selection thereof; provided that, any such
entities shall not be included for purposes of the sections of this
Agreement addressing Chase liability (including, but not limited to,
Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event
that it elects to add any such entity.
*********************
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
PAGE
TEMPLETON THE CHASE MANHATTAN BANK
(on behalf of each of the Funds
listed on Schedule A hereto)
By:/s/ BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL
-------------------------- -------------------------------
Name: Barbara J. Green Name: Lenore Vanden Handel
Title: Secretary Title: Vice President
PAGE
Schedule A
TEMPLETON U.S. FUNDS
As of June 30, 1998
TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86
TEMPLETON FUNDS, INC. ("TFI") - 2/11/86
Templeton World Fund
Templeton Foreign Fund
TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96
TEMPLETON INCOME TRUST ("TIT") - 5/15/96
Templeton Global Bond Fund
TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96
TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91
TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91
TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91
TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96
Templeton Foreign Equity Series
Templeton Growth Series
Templeton Emerging Markets Series
Templeton Emerging Fixed Income Series
TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90
TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95
Templeton Growth and Income Fund
Templeton Global Infrastructure Fund
Templeton Americas Government Securities Fund
Templeton Greater European Fund
Templeton Latin America Fund
TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87
TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88
TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88
TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93
TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93
TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94
TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94
TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94
TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95
TEMPLETON VARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated
2/23/96)
Templeton Money Market Fund
Templeton Bond Fund
Templeton Stock Fund
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Developing Markets Fund
Mutual Discovery Investments Fund
Mutual Shares Investments Fund
Franklin Growth Investments Fund
Franklin Small Cap Investments Fund
PAGE
Appendix 1-A
LIST OF COMPULSORY DEPOSITORIES APPROVED BY THE BOARD
PAGE
Appendix 1-B
INFORMATION REGARDING COUNTRY RISK
1. To aid Fund's board in its determinations regarding Country Risk,
Chase shall furnish board annually and upon the initial placing of Securities
and Cash into a country the following information (check items applicable):
A Opinions of local counsel concerning:
___ i. Whether applicable foreign law would restrict the access
afforded Fund's independent public accountants to books and
records kept by an eligible foreign custodian located in that
country.
___ ii. Whether applicable foreign law would restrict the Fund's ability
to recover its assets in the event of the bankruptcy of an
Eligible Foreign Custodian located in that country.
___ iii. Whether applicable foreign law would restrict the Fund's ability
to recover assets that are lost while under the control of an
Eligible Foreign Custodian located in the country.
B. Written information concerning:
___ i. The likelihood of expropriation, nationalization, freezes, or
confiscation of Fund's assets.
___ ii. Whether difficulties in converting Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.
C. A market report with respect to the following topics:
PAGE
(i) securities regulatory environment, (ii) foreign ownership
restrictions, (iii) foreign exchange, (iv) securities settlement and
registration, (v) taxation, and (vi) compulsory depositories (including
depository evaluation).
2. To aid Fund in monitoring Country Risk, Chase shall furnish the
following additional information:
As more fully described in the Foreign Custody Manager procedures,
market flashes, including with respect to changes in the information in market
reports.
PAGE
Appendix 1-C
FACTORS REGARDING COMPULSORY DEPOSITORIES
(i) Whether the Eligible Foreign Custodian which is participating in
the Compulsory Depository has undertaken to adhere to the roles,
practices and procedures of such Compulsory Depository;
(ii) Whether no regulatory authority with oversight responsibility for
the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material capital,
solvency, insurance or other similar financial strength requirements
imposed by such authority or, in the case of such notice having been
issued, that such notice has been withdrawn or the remedy of such
noncompliance has been publicly announced by the Compulsory
Depository;
(iii) Whether no regulatory authority with oversight responsibility
over the Compulsory Depository has issued a public notice that the
Compulsory Depository is not in compliance with any material internal
controls requirement imposed by such authority or, in the case of such
notice having been issued, that such notice has been withdrawn or the
remedy of such noncompliance has been publicly announced by the
Compulsory Depository;
(iv) Whether the Compulsory Depository maintains Fund's assets
deposited with the Compulsory Depository by the Eligible Foreign
Custodian participant under no less favorable safekeeping conditions
than those that apply generally to other participants in the
Compulsory Depository;
(v) Whether the Compulsory Depository maintains records that segregate
the Compulsory Depository's own assets from the assets of participants
in the Compulsory Depository;
PAGE
(vi) Whether the Compulsory Depository maintains records that identify
the assets of each of its participants;
(vii) Whether the Compulsory Depository provides periodic reports to
its participants with respect to the safekeeping of assets maintained
by the Compulsory Depository including by way of example, notification
of any transfer to or from participant accounts; and
(viii) Whether the Compulsory Depository is subject to periodic
review, such as audits by independent accountants or inspections by
regulatory authorities.
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
WASHINGTON, D.C. 20006-2401
TELEPHONE: (202) 261-3300
FACSIMILE: (202) 261-3333
October 27, 1998
Templeton Funds, Inc.
500 E. Broward Boulevard
Suite 2100
Ft. Lauderdale, Florida 33394
Dear Sirs:
As counsel for Templeton Funds, Inc. (the "Fund"), a Maryland corporation,
we are familiar with the Fund's registration under the Investment Company Act of
1940 and with the registration statement relating to its Common Shares (the
"Shares") under the Securities Act of 1933 (File No. 2-60067) (the "Registration
Statement"). We also have examined such other corporate records, agreements,
documents and instruments as we deemed appropriate.
Based upon the foregoing, it is our opinion that the Shares registered
pursuant to the Fund's Registration Statement will, when sold at the public
offering price and delivered by the Fund against receipt of the net asset value
of the Shares in accordance with the terms of the Registration Statement, the
Fund's Articles of Incorporation (as amended, restated, or supplemented from
time to time), and the requirements of applicable law, have been duly and
validly authorized, legally and validly issued, and fully paid and
non-assessable.
We consent to the filing of this opinion in connection with Post-Effective
Amendment No. 31 which is filed under the Securities Act of 1933 on behalf of
the Fund with the Securities and Exchange Commission.
Very truly yours,
/s/Dechert Price & Rhoads
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated September 29, 1998, on the
financial statements of Templeton World and Templeton Foreign Fund, a series of
Templeton Funds, Inc., referred to therein, which appears in the 1998 Annual
Reports to Shareholders and which are incorporated herein by reference, in
Post-Effective Amendment No. 31 to the Registration Statement on Form N-1A, File
No. 2-60067, as filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the caption
"Financial Highlights" and in the Statement of Additional Information under the
caption "Auditors."
/s/MCGLADREY & PULLEN, LLP
McGladrey & Pullen, LLP
New York, New York
October 27, 1998
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<NAME> TEMPLETON FUNDS, INC.
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<DISTRIBUTIONS-OF-GAINS> (1180370911)
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<NUMBER-OF-SHARES-SOLD> 120413437
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<GROSS-EXPENSE> (100138396)
<AVERAGE-NET-ASSETS> 9120441465
<PER-SHARE-NAV-BEGIN> 19.66
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> (1.59)
<PER-SHARE-DIVIDEND> (0.44)
<PER-SHARE-DISTRIBUTIONS> (2.60)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.45
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000225930
<NAME> TEMPLETON FUNDS, INC.
<SERIES>
<NUMBER> 002
<NAME> TEMPLETON WORLD FUND - CLASS II
<S> <C>
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<INVESTMENTS-AT-COST> 8122227611
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<SHARES-COMMON-PRIOR> 10710670
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<ACCUMULATED-NET-GAINS> 728584089
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<NET-INVESTMENT-INCOME> 218917865
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<DISTRIBUTIONS-OF-INCOME> (4448539)
<DISTRIBUTIONS-OF-GAINS> (33385853)
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<NUMBER-OF-SHARES-SOLD> 13583157
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<SHARES-REINVESTED> 1794638
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<GROSS-EXPENSE> (100138396)
<AVERAGE-NET-ASSETS> 309458462
<PER-SHARE-NAV-BEGIN> 19.39
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (1.61)
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> (2.60)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.16
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
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</LEGEND>
<CIK> 0000225930
<NAME> TEMPLETON FUNDS, INC.
<SERIES>
<NUMBER> 011
<NAME> TEMPLETON FOREIGN FUND - CLASS I
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<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> (2.11)
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<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Foreign Fund August 31, 1998 annual report and is
qualified in its entirety by reference to such financial staements.
</LEGEND>
<CIK> 0000225930
<NAME> TEMPLETON FUNDS, INC.
<SERIES>
<NUMBER> 012
<NAME> TEMPLETON FOREIGN FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 14814004754
<INVESTMENTS-AT-VALUE> 12057765804
<RECEIVABLES> 153717933
<ASSETS-OTHER> 3270230
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12214753967
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 135988640
<TOTAL-LIABILITIES> 259418019
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13340512184
<SHARES-COMMON-STOCK> 139706569
<SHARES-COMMON-PRIOR> 115856385
<ACCUMULATED-NII-CURRENT> 320363323
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1050699391
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2756238950)
<NET-ASSETS> 11955335948
<DIVIDEND-INCOME> 413030175
<INTEREST-INCOME> 209048038
<OTHER-INCOME> 0
<EXPENSES-NET> (187652680)
<NET-INVESTMENT-INCOME> 434425533
<REALIZED-GAINS-CURRENT> 1318565421
<APPREC-INCREASE-CURRENT> (4427460673)
<NET-CHANGE-FROM-OPS> (2674469719)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (31961548)
<DISTRIBUTIONS-OF-GAINS> (105695936)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 55528728
<NUMBER-OF-SHARES-REDEEMED> (41180696)
<SHARES-REINVESTED> 9502152
<NET-CHANGE-IN-ASSETS> (3855190470)
<ACCUMULATED-NII-PRIOR> 340933341
<ACCUMULATED-GAINS-PRIOR> 951283810
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> (96508519)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (187652680)
<AVERAGE-NET-ASSETS> 1436280270
<PER-SHARE-NAV-BEGIN> 11.25
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> (2.07)
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.30
<EXPENSE-RATIO> 1.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Templeton Foreign Fund August 31, 1998 annual report and is
qualified in its entirety by reference to such financial staements.
</LEGEND>
<CIK> 0000225930
<NAME> TEMPLETON FUNDS, INC.
<SERIES>
<NUMBER> 013
<NAME> TEMPLETON FOREIGN FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 14814004754
<INVESTMENTS-AT-VALUE> 12057765804
<RECEIVABLES> 153717933
<ASSETS-OTHER> 3270230
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12214753967
<PAYABLE-FOR-SECURITIES> 123429379
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 135988640
<TOTAL-LIABILITIES> 259418019
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13340512184
<SHARES-COMMON-STOCK> 5929874
<SHARES-COMMON-PRIOR> 12182692
<ACCUMULATED-NII-CURRENT> 320363323
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1050699391
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2756238950)
<NET-ASSETS> 11955335948
<DIVIDEND-INCOME> 413030175
<INTEREST-INCOME> 209048038
<OTHER-INCOME> 0
<EXPENSES-NET> (187652680)
<NET-INVESTMENT-INCOME> 434425533
<REALIZED-GAINS-CURRENT> 1318565421
<APPREC-INCREASE-CURRENT> (4427460673)
<NET-CHANGE-FROM-OPS> (2674469719)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4907491)
<DISTRIBUTIONS-OF-GAINS> (11895183)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17334441
<NUMBER-OF-SHARES-REDEEMED> (23847551)
<SHARES-REINVESTED> 260292
<NET-CHANGE-IN-ASSETS> (3855190470)
<ACCUMULATED-NII-PRIOR> 340933341
<ACCUMULATED-GAINS-PRIOR> 951283810
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (96508519)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (187652680)
<AVERAGE-NET-ASSETS> 170914242
<PER-SHARE-NAV-BEGIN> 11.42
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (2.12)
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.44
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
