1
TEMPLETON
SMALLER
COMPANIES
GROWTH
FUND
INC.*
Prospectus
January 1, 1996
* From May 15, 1996 Templeton Global Smaller Companies Fund, Inc.
[logo] Templeton
Member US $140 Billion Franklin Templeton Fund
2
Templeton Smaller Companies Growth Fund, Inc.*
700 Central Avenue, St. Petersburg, Florida 33701-3628 USA
Custodian
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081 USA
Transfer Agent
Franklin Templeton Investor Services, Inc.
700 Central Avenue
St. Petersburg, Florida 33701-3628 USA
Paying Agent
Chase Bank AG
Alexanderstrasse 59,
60489 Frankfurt a. M.
Please Pay in DM to the Following Account:
Templeton Smaller Companies Growth Fund, Inc.*
Account No. 623-12-03271
Bank Code Number 501 108 00
Chase Bank AG, Frankfurt a. M.
Representative
Dr. Carl Graf Hardenberg
Attorney at Law
Klein Fontenay 1,
20354 Hamburg
Auditors
McGladrey & Pullen, L.L.P.
1133 Avenue of the Americas
New York, New York 10036 USA
Service Company
Templeton Global Strategic Services (Deutschland) GmbH
Taunusanlage 11, 60329
Frankfurt a.M.
In countries where the offering of the securities described herein is not
permitted this prospectus does not constitute an offer. No investment brokers,
dealers or other persons are entitled to give information or commitments not
contained in this prospectus.
* From May 15, 1996 Templeton Global Smaller Companies Fund, Inc.
3
TABLE OF CONTENTS
PAGE NUMBER
Participation in the Fund
Important notice
Participation in the fund
Publications
Expense table
Financial highlights
Investment objective and policies
Investment techniques
Debt securities
Investment restrictions
Risks
How to buy shares of the fund
Paying agents
Account maintenance
Determination of net asset value Suspensions in determining the net asset value
Offering price Sales charge Cumulative quantity discount Letter of intent Group
purchases Net asset value purchases Savings plan Institutional accounts Account
statements Exchange privilege How to sell shares of the fund Reinstatement
privilege Deferred sales charge Systematic withdrawal plan Management of the
fund Investment manager
Investment management agreement
Management fees
Business manager
Transfer agent
Custodian
Independent accountants
Representative
Statements and reports
Distribution service plan
General information
Description of shares/share certificates
Meetings of shareholders
Dividends and distributions
Tax status
Taxes in the USA
Taxes in the Federal Republic of Germany
Inquiries
4
Performance information
Jurisdiction
Right of revocation
Contractual conditions
Application form, management report and, if applicable, a semi-annual report are
attached.
5
IMPORTANT NOTICE
This prospectus contains information on Templeton Smaller Companies Growth Fund,
Inc. (the "Fund" or the "Investment Company") which future Shareholders should
be aware of before they invest. It is recommended that investors carefully read
this prospectus and keep it with the other documents given to them.
Templeton Smaller Companies Growth Fund, Inc. was incorporated under the laws of
Maryland on February 4, 1981 with an unlimited duration. The Fund is registered
under the Investment Company Act of 1940, as amended (the "1940 Act") as an
open-end, diversified investment company. On January 1, 1991, in accordance with
the decision of the Shareholders of the Fund in their annual meeting of November
29, 1990, the name of the Fund was changed from "Templeton Global Funds, Inc."
to "Templeton Smaller Companies Growth Fund, Inc."
The German version of the prospectus and all of the other published documents of
the Fund govern your legal relationship with the Fund. The text of the
contractual conditions is included in this prospectus starting on page 28. A
complete transcript of the charter/bylaws of the Fund and of the additional
information will be supplied to you upon request from the German service company
Templeton Global Strategic Services (Deutschland) GmbH.
The prospectus is to be accompanied by an annual report with a closing date not
longer than 16 months past, and when the closing date is more than 9 months past
a semi-annual report is also to be included.
The investment shares have been neither approved nor disapproved by the
Securities and Exchange Commission or state regulatory agencies in the United
States, and nor has the Securities and Exchange Commission or the state
regulatory agencies given an opinion on the accuracy or adequacy of this
prospectus. Representations to the contrary constitute a criminal offense.
The investment company is under the supervision of neither the Federal
Regulatory Office for the Credit System nor any other governmental supervision
by a German authority, though the intention to distribute the Shares of the
investment company in the Federal Republic of Germany has been reported to the
Federal Regulatory Office for the Credit System since January 3, 1990 in
accordance with Section 7 of the Foreign Investment Law.
Investment Shares are not deposits or obligations of, or guaranteed or endorsed
by, a bank. Furthermore, investment Shares in the United States are not insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency. Investment Shares involve economic risks including the possible
loss of capital.
6
Deposits of the investment Shares with the custodian are not covered by deposit
insurance mechanisms.
PARTICIPATION IN THE FUND
The investment Shares of Templeton Growth Fund, Inc. have been offered since May
1, 1995 in Germany and Austria under the category of Class I Shares with no
change in the rights pertaining to them. The new category was needed because a
new class of Shares in the Fund assets is being offered in the United States
(Class II Shares) which involves a different expense structure.
In Germany and Austria only the Class I Shares are available. If you desire to
acquire these Shares, please fill out the Shareholder Application and sent it to
the address provided. If you need assistance in filling it out, please consult
your investment broker or the German service company. The Class I Shares can be
acquired at the Offering Price, which is calculated on the basis of the net
asset value per Share in addition to sales charges of a maximum of 5.75% of the
Offering Price (6.10% of the net asset value). The initial investment must
amount to at least DM 5,000. Subsequent payments must be at least DM 1,000 (see
the section "How to Buy Shares of the Fund").
PUBLICATIONS
Daily the Fund publishes the Offering Price and Liquidation Price, among other
things, in the following newspapers:
"Borsen-Zeitung" (interim gains and certain other proceeds are also
here)
"Die Welt"
"Frankfurter Allgemeine Zeitung"
"Handelsblatt"
"Hannoversche Allgemeine Zeitung"
"Stuttgarter Zeitung"
"Suddeutsche Zeitung"
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the direct
and indirect costs in connection with an investment in the Fund. The figures are
estimates for the Fund's current fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
Offering Price 5.75%
7
Deferred Sales Charge None*
ANNUAL FUND OPERATING EXPENSES (As a percentage of average net assets)
Management Fees 0.75% 12b-1 Costs 0.25%** Other Expenses (audit, legal, business
management, transfer agent and custodian) 0.36% Total Fund Operating Expenses
1.36%
* Investments of $1 million or more are not subject to a front-end sales charge;
however, a deferred sales charge of 1% is imposed on certain redemptions within
12 months of the month of such investments. See the sections "How to Sell Shares
of the Fund" and "Deferred Sales Charge".
** These expenses may not exceed 0.25% of the Fund's average net assets (see the
section "Distribution Service Plan"). With a longer period of time it is
possible that the combination of front-end sales charges and these costs could
result in an amount which is higher than the maximum sales charge as the Fund
may calculate when they are calculated at the full level as sales charges.
The above table contains figures based on the estimated operating expenses of
the Fund as of the end of the last fiscal year and which were adjusted with
reference to current costs. The table should help investors and interested
parties understand the various costs and expenses directly or indirectly borne
by the investors in the Fund. The information in this table does not reflect the
charge of up to $15 per transaction if a Shareholder requests that redemption
proceeds be sent by express mail or wired to a commercial bank account.
In a $1,000 investment in the Fund you would pay the following expenses,
assuming (1) a 5% annual rate of return and (2) redemption at the end of each
time period:
ONE YEAR THREE YEAR FIVE YEARS TEN YEARS
US $71 US $98 US $128 US $212
In this example it is assumed that no deferred sales charges are due on
redemption.
The annual return of 5% and the annual expenses are not to be interpreted as
commitments as to actual or expect performance or the actual or expected
expenses of the Fund.
Deviations may arise in both cases.
8
For your better understanding, note that you will only be directly charged the
sales charges while the annual operating expenses of the Fund are paid from its
assets and are already taken into account in the determination of the net asset
value.
9
FINANCIAL HIGHLIGHTS
(per Share issued during the period of time indicated)
The following tables of selected financial information have been audited by
McGladrey & Pullen, LLP, independent certified public accountants, for the
periods indicated in the 1995 Annual Report. This report is attached to the
prospectus. The data per share and on the outstanding Shares were adjusted to
take account of the share split of 5-2-1 on December 7, 1988. The financial data
should be read in conjunction with the other financial statements and notes
thereto included in the 1994 Annual Report. Further data on the performance of
the fund is set forth there.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31 Pro Forma*
-------------------------------------------------------------------------
Earnings per share
(for a Share outstanding
throughout the period)
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Net asset value,
beginning of
period $ 8.24 $ 7.44 $ 7.70 $ 8.10 $ 7.21 $ 8.94 $ 8.04 $ 10.06 $ 8.68 $ 7.48
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment
income .11 0.09 0.10 0.15 0.17 0.17 0.17 0.18 0.20 0.23
Net realized
and unrealized
gain (loss) 0.62 0.81 1.23 0.25 1.47 (1.31) 1.85 (1.52) 1.84 1.70
Total from
investment
operations 0.73 0.90 1.33 0.40 1.64 (1.14) 2.02 1.34 2.04 1.93
Less distributions:
Dividends from
net investment
income (0.11) (0.07) (0.15) (0.15) (0.17) (0.21) (0.22) (0.23) (0.22) (0.17)
Distributions
from net
realized
gains (0.09) (0.03) (1.41) (0.65) (0.58) (0.38) (0.90) (0.45) (0.44) (0.56)
Distributions in
excess of net capital
gain realized - - (0.03) - - - - - - -
Total
distributions (0.20) (0.10) (1.59) (0.80) (0.75) (0.59) (1.12) (0.68) (0.66) (0.73)
Change in
net asset
value for
the year .53 0.80 (0.26) (0.40) 0.89 (1.73) 0.90 (2.02) 1.38 1.20
10
Net asset
value, end
of year $8.77 $8.24 $ 7.44 $ 7.70 $ 8.10 $ 7.21 $ 8.94 $ 8.04 $ 10.06 $ 8.68
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*** 9.20% 12.22% 22.71% 5.64% 26.69% (13.50)% 28.44% (11.80)% 25.55% 28.80%
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of year
(000) $1,447,155 $1,409,494 $1,129,848 $950,409 $898,364 $756,478 $946,288 $268,885 $348,135 $308,367
Ratio to
average
net assets
of:
Expenses 1.36% 1.36% 1.29% 1.33% 0.97% 0.96% 0.95% 0.52% 0.47%** 0.51%
Net
investment
income 1.32% 1.17% 1.70% 1.96% 2.33% 2.13% 2.25% 2.07% 2.13% 2.76%
Portfolio
turnover
rate 18.79% 28.06% 28.73% 48.97% 34.01% 26.90% 23.79% 12.73% 4.32%
</TABLE>
* Not reflected in the sales charges.
11
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital growth, primarily
through investment in common stocks and all types of common stock equivalents,
including rights, warrants and preferred stock, of companies of various nations
throughout the world. The Fund seeks to achieve its objective by investing
primarily in securities of smaller companies globally. There can be no assurance
that the Fund's investment objective will be achieved.
The Fund's investment policy is based on the belief that in today's world,
investment opportunities change rapidly, not only from company to company and
from industry to industry, but also from one national economy to another.
Accordingly, the Fund seeks investment opportunities in all types of securities
issued by companies or governments of any nation, both developed and
underdeveloped. Under normal circumstances, the Fund will invest at least 65% of
its total assets in issuers domiciled in at least three different nations (one
of which may be the United States).
Consistent with its investment objective, the Fund expects to invest 75% of its
portfolio in issuers whose individual market capitalizations would place them
(at the time of purchase) in the same size range as companies in approximately
the lowest 20% by total market capitalization of companies that have equity
securities listed on a U.S. national securities exchange or traded in the NASDAQ
system. Based on recent U.S. share prices, these companies typically have
individual market capitalizations of between approximately US $50 million and US
$1 billion. Because the Fund is permitted to apply the U.S. size standard on a
global basis, it may invest in issuers that might rank above the lowest 20% by
total market capitalization in local markets and, in fact, might in some
countries rank among the largest companies in terms of capitalization. The Board
of Directors has adopted an operating policy under which the Fund will not
purchase securities of companies with individual market capitalizations of
greater than US $1 billion.
Whenever, in the judgment of the Investment Manager, market or economic
conditions warrant, the Fund may, for temporary defensive purposes, (1) invest
in bonds and other debt obligations of companies of various nations throughout
the world, and (2) invest in debt obligations of the United States Government or
its political subdivisions or (3) debt obligations of other governments, (4)
short-term time deposits with banks (maturities of 60 days or less), (5) certain
repurchase agreements (United States Government obligations with a simultaneous
agreement with the seller to repurchase them within no more than seven days at
the original purchase price plus accrued interest) and (6) commercial paper.
Certain of these debt obligations may consist of high-risk, lower quality debt
securities.
12
The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts").The Fund may invest no more than
5% of its total assets in securities issued by any one company or government,
exclusive of U.S. Government securities. Although the Fund may invest up to 25%
of its assets in a single industry, there is no present intention of doing so.
The Fund may borrow money as a temporary measure up to an amount not exceeding
5% of the value of its total assets, invest up to 5% of its total assets in
warrants and invest up to 10% of its total assets in restricted securities,
securities with a limited trading market and securities which are not otherwise
readily marketable.
The Fund invests for long-term growth of capital and does not emphasize
short-term trading profits. Accordingly, the Fund expects to have a portfolio
turnover rate of less than 50%.
The Fund is not limited to investing in marketable securities and may also
acquire securities whose disposition may be restricted in any manner by virtue
of contractual engagements. The Fund may hold all of its assets in deposits,
which, however, on the basis of its investment objective, it will not do.
INVESTMENT TECHNIQUES
DEBT SECURITIES. The Fund may invest in medium quality or high risk, lower
quality debt securities. As an operating policy, the Fund will invest no more
than 5% of its assets in debt securities rated lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation
("S&P"). The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the Fund's net asset value.
Although they may offer higher yields than do higher rated securities, low rated
and unrated debt securities generally involve greater volatility of price and
risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish 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
13
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
objective may, to the extent of investment in low rated debt securities, be more
dependent upon such credit-worthiness 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 market for low grade bonds is relatively young and many of the low
rated bonds presently on the market have not weathered a major recession.
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 (see "Tax Status").
Thus, the Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash in order to satisfy the
distribution requirement.
Recent legislation, which requires federally insured savings and loan
associations to divest their investments in low rated debt securities, may have
a material adverse effect on the Fund's net asset value and investment
practices.
STRUCTURED INVESTMENTS. Included among the issuers of debt
securities in which the Funds may invest are entities organized and
operated solely for the purpose of restructuring the investment
characteristics of various securities. These entities are typically
14
organized by investment banking firms which receive fees in connection with
establishing each entity and arranging for the placement of its securities.
This type of restructuring involves the deposit with or purchases by an entity,
such as a corporation or trust, of specified instruments and the issuance by
that entity of one or more classes of securities ("Structured Investments")
backed by, or representing interests in, the underlying instruments.
The cash flow on the underlying instruments may be apportioned among the newly
issued Structured Investments to create securities with different investment
characteristics such as varying maturities, payment priorities or interest rate
provisions; the extent of the payments made with respect to Structured
Investments is dependent on the extent of the cash flow on the underlying
instruments. Because Structured Investments of the type in which the Funds
anticipate investing typically involve no credit enhancement, their credit risk
will generally be equivalent to that of the underlying instruments.
The Fund is permitted to invest in a class of Structured Investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments.
Although the Fund's purchase of subordinated Structured Investments would have a
similar economic effect to that of borrowing against the underlying securities,
the purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing
activities.
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a 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.
INVESTMENT RESTRICTIONS
The Fund has imposed upon itself certain Investment Restrictions, which together
with the Investment Objective and Policies are fundamental policies except as
otherwise indicated. No changes in the Fund's Investment Objective and Policies
or Investment Restrictions (except those which are not fundamental policies) can
be made without approval of the Shareholders. For this purpose, the provisions
of the 1940 Act require the affirmative vote of the lesser of either (A) 67% or
more of the Shares present at a
15
Shareholders' meeting at which more than 50% of the outstanding Shares are
present or represented by proxy or (B) more than 50% of the outstanding Shares
of the Fund.
In accordance with these Restrictions, the Fund will not:
1. Invest more than 5% of the value of the Fund's total assets in securities of
a single Issuer (this does not apply to U.S.
Government securities).
2. 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 interests (other than debentures or equity stock
interests) in oil, gas or other mineral exploration or development programs;
purchase or sell commodity contracts except stock index futures contracts;
invest in other open-end investment companies or, as an operating policy
approved by the Board of Directors, invest in closed-end investment companies.
3. Purchase or retain securities of any company in which Directors or Officers
of the Fund or of its Investment Manager individually own more than 0.5% of the
securities of such company or in the aggregate own more than 5% of the
securities of such company.
4. 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.
5. Act as an underwriter; issue senior securities; purchase on margin or sell
short; write, buy or sell puts, calls, straddles or spreads.
6. 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 Canadian and United States 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.
7. Borrow money for any purpose other than redeeming its Shares or purchasing
its Shares for cancellation, and then only as a temporary measure to an amount
not exceeding 5% of the value of its total assets, or pledge, mortgage, or
hypothecate its assets other than to secure such temporary borrowings, and then
only to such extent not exceeding 10% of the value of its total assets as the
Board of Directors may by resolution approve. 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 its Shares.
16
8. 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.
9. Invest more than 5% of the Fund's total assets in warrants, whether or not
listed on one of the two New York exchanges (NYSE and AMEX), including no more
than 2% of its total assets which may be invested in warrants that are not
listed on those exchanges. Warrants acquired by the Fund in "Units" or attached
to securities are not included in this Restriction.
10. Invest more than 10% of its total assets in restricted securities (stock not
registered with the SEC and not admitted to the official market), securities
with a limited trading market (which the Fund may not be able to dispose of at
the current market price, etc.) or those which are not otherwise readily
marketable with readily available current market quotations.
11. Invest more than 25% of the Fund's total assets in a single
industry.
12. Invest in "letter stocks" (shares which can only be issued on the basis of a
"Special Letter" from the Securities and Exchange Commission (SEC) or securities
on which there are sales restrictions under a purchase agreement.
13. Participate on a joint or a joint and several basis in any trading account
in securities. (See "Investment Objective and Policies" as to transactions in
the same securities for the Fund and other Templeton Funds.)
The Fund has undertaken with a state securities commission that it will limit
investments in illiquid securities to no more than 5% of its total assets.
Whenever any investment policy or investment restriction states a maximum
percentage of the Fund's assets which may be invested in any security or other
property, it is intended that such maximum percentage limitation be determined
immediately after and as a result of the Fund's acquisition of such security or
property. With the exception of Investment Restrictions Numbers 10 and 11,
above, nothing herein shall be deemed to prohibit the Fund from purchasing the
securities of any issuer pursuant to the exercise of subscription rights
distributed to the Fund by the issuer, except that no such purchase may be made
if, as a result, the Fund would no longer be a diversified investment company as
defined in the 1940 Act. Foreign corporations frequently issue additional
capital stock by means of subscription rights offerings to existing shareholders
at a price below the market price of the shares. The failure to exercise such
rights would result in dilution of the Fund's interest in the issuing company.
Therefore, the exception
17
applies in cases where the limits set forth in any investment policy or
restriction would otherwise be exceeded by exercising rights, or have already
been exceeded as a result of fluctuations in the market value of the Fund's
portfolio securities.
RISKS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained. As
with any investment in securities, the value of, and income from, an investment
in the Fund can decrease as well as increase, depending on a variety of factors
which may affect the values and income generated by the Fund's portfolio
securities, including general economic conditions, market factors and currency
valuations.
In addition to the factors which affect the value of individual securities, a
Shareholder may anticipate that the value of the Shares of the Fund will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which the Fund is invested may also be
reflected in declines in the price of Shares of the Fund. Changes in currency
valuations will also affect the price of Shares of the Fund. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future.
The value of debt securities held by the Fund generally will vary inversely with
changes in prevailing interest rates. Additionally, investment decisions made by
the Investment Manager will not always be profitable or prove to have been
correct.
Finally, the exchange rate between the dollar and the DM has undergone major
oscillations in the past and thus can significantly influence the investment
returns. The Fund is not intended as a complete investment program.
The Fund expects to invest 75% of its assets in issuers whose individual market
capitalizations would place them (at the time of purchase) in the same size
range as companies in approximately the lowest 20% by total market
capitalization of companies that have equity securities listed on a U.S.
national securities exchange or traded in the NASDAQ system. While the companies
in which the Fund primarily invests may offer greater opportunities for capital
appreciation than larger, more established companies, investments in smaller,
emerging growth companies may involve greater risks and thus may be considered
speculative. For example, small companies may have limited product lines,
markets or financial and management resources. In addition, many small emerging
growth company stocks trade less frequently and in smaller volume, and may be
subject to more abrupt or erratic price movements, than stocks of large
18
companies. The securities of small emerging growth companies may also be more
sensitive to market changes than the securities of large companies.
The Fund has the right to purchase securities in any foreign country, developed
or developing. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. Some countries may withhold portions of interest and
dividends at the source. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. The Fund may encounter difficulties or be unable to vote proxies,
exercise shareholder rights, pursue legal remedies, and obtain judgments in
foreign courts. Brokerage commissions, custodial services, and other costs
relating to investment outside of the United States are generally more expensive
than in the United States. Foreign securities markets also have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. In many countries, there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers and listed companies than in the United States. There is an increased
risk, therefore, of uninsured loss due to lost, stolen, or counterfeit stock
certificates. In addition, the securities markets of many of the countries in
which the Fund may invest may also be smaller, less liquid, and subject to
greater price volatility than those in the United States.
19
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. In addition, the
issuers of the securities underlying unsponsored Depositary Receipts are not
obligated to disclose material information in the United States and, therefore,
there may be less information available regarding such issuers and there may not
be a correlation between such information and the market value of the Depositary
Receipts. Depositary Receipts also involve the risks of other investments in
foreign securities, as discussed above.
The Fund is authorized to invest in medium quality or high risk, lower quality
debt securities. As an operating policy, which may be changed by the Board of
Directors without Shareholder approval, the Fund will not invest more than 5% of
its total assets in debt securities rated lower than BBB by S&P or Baa by
Moody's or, if unrated, are of equivalent investment quality as determined by
the Investment Manager. The Board may consider a change in this operating policy
if, in its judgment, economic conditions change such that a higher level of
investment in high-risk, lower quality debt securities would be consistent with
the interests of the Fund and its Shareholders. High- risk, lower quality debt
securities, commonly referred to as "junk bonds," 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 obligation and may be in
default. Unrated debt securities are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) will be carefully analyzed by the Investment Manager to insure, to the
extent possible, that the planned investment is sound. The Fund may, from time
to time, purchase defaulted debt securities if, in the opinion of the Investment
Manager, the issuer may resume interest payments in the near future. The Fund
will not invest more than 10% of its total assets in defaulted debt securities,
which may be illiquid.
The Fund usually effects currency exchange transactions on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign exchange market. However, some
price spread on currency exchange (to cover service charges) will be incurred
when the Fund converts assets from one currency to another. There are further
risk considerations, including possible losses through the holding of securities
in domestic and foreign custodian banks and depositories, as described in the
text of the additional information.
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
20
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
Eastern European countries. Finally, even though certain Eastern European
currencies may be convertible into United States dollars, the conversion rates
may be artificial to the actual market values and may be adverse to Fund
Shareholders.
HOW TO BUY SHARES OF THE FUND
Class I Shares of the Fund may be purchased at the Offering Price through:
Templeton Global Strategic Services (Deutschland) GmbH
Taunusanlage 11, 60329 Frankfurt a.M.,
Telephone (0 69) 2 72 23-2 72
Fax (0 69) 2 72 23-1 20
or through investment brokers and banks which, on the basis of a distribution
agreement with Templeton Global Strategic Services (Deutschland) GmbH, are able
to independently deal in Shares of the
Fund.
The broker is neither a servant of the Fund nor of the general distribution
company, and nor does the broker represent them in any other manner.
The general distribution company in Europe is Templeton Global Strategic
Services S.A., Centre Neuberg, 30 Grand-Rue, L-2011 Luxembourg, which had
shareholders' equity of 159,803,000 Luxembourg francs as of 9/30/95.
Any signature may be rejected by the general distribution company or by the
Fund.
The Shareholder Application should be sent to Templeton Global Strategic
Services (Deutschland) GmbH.
The amount of the investment should be paid in DM at Chase Bank AG, with the
annotation "Templeton Smaller Companies Growth Fund, Inc." If a nonnegotiable
check in DM is issued it should be made out to the Templeton Smaller Companies
Growth Fund, Inc. and the
application should be attached to it.
Applications can also be sent to Templeton Global Strategic
Services (Deutschland) GmbH with a check in U.S. dollars drawn on
a U.S. bank and made out to the Transfer Agent of the Fund,
Franklin Templeton Investor Services, Inc. On behalf of and at the
risk of the investor, Templeton Global Strategic Services
(Deutschland) GmbH forwards these documents to the Transfer Agent.
If a check in U.S. dollars is drawn on a non U.S. bank, Franklin
21
Templeton Investor Services, Inc. requires this amount first. Only
after receipt of the money by Franklin Templeton Investor Services,
Inc. can the application be activated.
Templeton Global Strategic Services (Deutschland) GmbH next reviews the
application for sufficiency and then forwards it with the check to Franklin
Templeton Investor Services, Inc.
After receipt of the application and payment at the business office of the
Transfer Agent it calculates the number of whole and fractional Shares of the
Fund acquired on the basis of the Offering Price, determined first after receipt
of the application and payment by Franklin Templeton Investor Services, Inc.
The Shareholders are then immediately mailed a written statement from Templeton
Global Strategic Services S.A. as to the Class I Shares of the Fund they have
acquired. On written request Franklin Templeton Investor Services, Inc. will
issue a certificate for all of the whole Shares of a shareholder account see the
section "General Information - Description of the Investment Shares").
Investors should immediately check the statements which are mailed to them after
each purchase (or each redemption) to verify that the proper entry has been made
of the purchase (or redemption) in the respective investor account.
PAYING AGENTS
Chase Bank AG
Alexanderstrasse 59, 60489 Frankfurt a. M.
Account No. 623 12 03271, Bank Code No. 501 108 00,
The use of a Paying Agent in the Federal Republic of Germany facilitates the
movement of payments between the domestic investor and the Transfer Agents (
Franklin Templeton Investor Services, Inc.) Transfers, checks or cash payments
for the acquisition of investment Shares can be made at the Paying Agent. These
payments should be made in DM. The Paying Agent converts the amounts received
into U.S. dollars. As of February 1, 1996 the Paying Agent will not longer
charge a processing fee to the investor for this service. It then immediately
forwards these amounts to the Transfer Agents to the investor's account.
Investors can also pay by check in U.S. dollars made out to
Franklin Templeton Investor Services, Inc. Such checks must be
drawn on U.S. banks.
The Transfer Agent has the duty of establishing a shareholder account for the
investor. All amounts received for investment in the Fund directly by the
Transfer Agent or through the Paying Agent will be applied, after deduction of
the sales charges, to the acquisition of Class I Shares of the Fund at the net
asset value
22
calculated at the close of the trading day of the New York Stock Exchange
following receipt of the money by the Transfer Agent. Only then does the
investor become a Shareholder of the Fund. Prior to that time no rights or
engagements exist between the Fund and the investor.
For redemption proceeds, distributions and other payments by the Fund, the
Shareholders may obtain payment in German marks through the Paying Agent.
ACCOUNT MAINTENANCE
Accounts can be opened either for a single investor or for two joint investors
(joint account). Dispositions of joint accounts can only be effected with the
signatures of both holders of the account. By opening a joint account the
account holders authorize the Fund or the Transfer Agent to transfer their share
to the surviving account holder in the event of their death. If, however, the
heir of the deceased account holder revokes the transfer order before the Fund
or the Transfer Agent can effect it, the surviving account holder will not be
able to demand transfer of the share, if he would receive it from the deceased
by way of gift.
In the event of death the Fund may demand the submittal of letters of
administration, letters testamentary or other documents needed for verification
of entitlement to availment. The Fund may waive the submittal of letters of
administration or letters testamentary when it has an original copy or a
certified copy of the testamentary disposition (will or inheritance agreement)
along with the pertinent probate record. The Fund may consider those indicated
therein as heirs or testamentary executors to be those entitled, may allow them
to effect dispositions and, in particular, freely render service to them.
This does not apply when the Fund knows that the person indicated therein is not
entitled to disposition or when the Fund is not informed as to this as the
result of any negligence.
DETERMINATION OF NET ASSET VALUE
The net asset value per Share of each class of the Fund is determined as of the
scheduled closing time of the NYSE (generally 4:00 p.m., New York time) each day
that the NYSE is open for trading, by dividing the value of the Fund's
securities plus any cash and other assets (including accrued interest and
dividends receivable) less all liabilities (including accrued expenses) by the
number of Shares outstanding, adjusted to the nearest whole cent. A security
listed or traded on a recognized stock exchange or NASDAQ is valued at its last
sale price on the principal exchange on which the security is traded. The value
of a non U.S. security is determined in its national currency as of the close of
trading on the non U.S. exchange on which it is traded, or as of the
23
scheduled closing time of the NYSE, if that is earlier, and that value is then
converted into its U.S. dollar equivalent at the foreign exchange rate in effect
at noon, New York time, on the day the value of the non U.S. security is
determined. If no sale is reported at that time, the mean between the current
bid and asked price is used. Occasionally, events which affect the values of
such securities and such exchange rates may occur between the times at which
they are determined and the close of the NYSE, and will therefore not be
reflected in the computation of the Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Directors. All other securities for which
over-the-counter market quotations are readily available are valued at the mean
between the current bid and asked price. Securities for which market quotations
are not readily available and other assets are valued at fair value as
determined by the management and approved in good faith by the Board of
Directors.
The expenses of the Fund will be borne by both of the Fund's classes in
proportion to the respective outstanding number of shares of each class, so that
each class will only bear the costs of the distribution service plan applicable
to it. The allocation of the net assets is also determined in proportion to the
outstanding shares.
SUSPENSIONS IN DETERMINING THE NET ASSET VALUE
The Board of Directors may establish procedures under which the Fund may suspend
the determination of net asset value for the whole or any part of any period
during which (1) the NYSE is closed other than for customary weekend and holiday
closings, (2) trading on the NYSE is restricted, (3) an emergency exists as a
result of which disposal of securities owned by the Fund is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) for such other period as the SEC may by
order permit for the protection of the holders of the Fund's Shares.
OFFERING PRICE
The price to the public on purchases of Class I Shares made by a single
purchaser, by an individual together with his or her spouse and their children
under age 21 and their grandchildren under age 21, or by a single trust or
fiduciary account other than a (U.S.) employee benefit plan, is the net asset
value per Share plus a sales charge not exceeding 5.75% of the Offering Price
(equivalent to 6.10% of the net asset value), which is reduced on larger sales
as shown below:
SALES CHARGE
24
<TABLE>
<CAPTION>
Amount of As a Percentage As a Percentage
Investment of the Gross of the Net
at Offering Investment Investment
Price (Offering Price) (Offering Price
less Sales
Charges)
<S> <C> <C>
Less than $50,000 5.75% 6.10%
$50,000 but less than
$100,000 4.50% 4.71%
$100,000 but less than
$250,000 3.50% 3.63%
$250,000 but less than
$500,000 2.50% 2.56%
$500,000 but less than
$1,000,000 2.00% 2.04%
$1,000,000 or more none none
</TABLE>
No front-end sales charge applies to investments of US $1 million or more, but a
deferred sales charge of 1% is imposed on certain redemptions of all or a
portion of investments of US $1 million or more within 12 months of the calendar
month of such investments.
A portion or all of the sales charge is paid by Templeton Global Strategic
Services (Deutschland) GmbH to persons, banks and other entities who have
brokered the acquisition of the Shares of the Fund.
In the following an example is given of the offering price as of August 31,
1995.
The assets of the Fund in the amount of US $1,461,366,288, less liabilities of
US $11,642,515, leaves net assets of the Fund at US $1,449,723,773, of which a
share of US $1,447,154,636 pertains to Class I. These net assets, divided by the
number of outstanding Class I shares (165,040,865) as of 8/31/95, result in a
net asset value per Class I share of US $8.77, which corresponds to the
redemption value on that date. The net asset value per Class I share in addition
to the sales charge of 6.10% (US $0.54) results in an offering price per Class I
share of US $9.31.
Upon determination of the pertinent sales charges the present
25
investment amount and the net asset value applicable at present or upon purchase
(whichever is higher) of the Class I shares already held by the investor in
given U.S. Funds of the Franklin Group of Funds and the Templeton Family of
Funds (also "Franklin Templeton Funds") are added in favor of the investor. In
order to make use of the reduced sales charge the investor must inform the
distribution company of his existing shareholder account.
As only some of the U.S. Franklin Templeton Funds are registered for public
distribution in Germany, if in doubt the investor should contact Templeton
Global Strategic Services (Deutschland) GmbH.
CUMULATIVE QUANTITY DISCOUNT
The schedule of reduced sales charges per the sale charge table also may be
applied to qualifying sales of Class I Shares on a cumulative basis. For this
purpose, the dollar amount of the sale is added to the higher of the value
(calculated at the applicable Offering Price) or the purchase price of the
shares owned by the purchaser, his or her spouse, their children under age 21,
and their grandchildren under age 21 in a Franklin Templeton Fund.
For example, if the investor held Class I Shares valued at US $40,000 (or, if
valued at less than US $40,000, had been purchased for US $40,000) and purchased
an additional US $20,000 of the Fund's Class I Shares, the sales charge for the
US $20,000 purchase would be at the rate of 4.50%. It is the policy of the
general distribution company to give investors the best sales charge rate
possible; however, there can be no assurance that an investor will receive the
appropriate discount unless, at the time of placing the purchase order, the
investor or the dealer makes a request for the discount and gives the general
distribution company sufficient information to determine whether the purchase
will qualify for the discount. The cumulative quantity discount may be amended
or terminated at any time.
LETTER OF INTENT
An Investor also may be eligible for reduced sales charges on investments in
Class I Shares by means of a Letter of Intent ("LOI") which expresses the
investor's intention to invest a certain amount within a 13-month period in
Class I Shares of the Fund or the Templeton Smaller Companies Growth Fund, Inc.
The appropriate forms can be obtained from Templeton Global Strategic Services
(Deutschland) GmbH. The initial investment must be at least DM 5,000, or amount
to 5% of the target sum for which the letter of intent was given.
Shares purchased with the first 5% of this amount will be held in escrow to
secure payment of the higher sales charge if the full amount indicated is not
purchased, and such escrowed Shares will be involuntarily redeemed to pay the
additional sales charge, if
26
necessary.
Purchases not originally made pursuant to an LOI may be included under a
subsequent LOI executed within 90 days of the respective purchase.
Redemptions made by Shareholders during the 13-month period will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the LOI have been completed.
GROUP PURCHASES
An individual who is a member or client of certain qualified groups who, for
example, also has life insurance connected with the fund, may also purchase
Class I Shares of the Fund at the sales charge applicable. Further information
can be obtained from Templeton Global Strategic Services (Deutschland) GmbH.
NET ASSET VALUE PURCHASES
Class I Shares may be purchased without the imposition of a sales charge ("net
asset value") by (i) officers, trustees, directors, and full-time employees of
the Fund, any of the Franklin Templeton Funds, or the Franklin Templeton Group,
and their spouses and family members, including any subsequent payments made by
such parties after cessation of employment; (ii) companies exchanging Shares
with or selling assets pursuant to a merger, acquisition or exchange offer with
the Fund; (iii) insurance company separate accounts for pension plan contracts;
(iv) accounts managed by the Franklin Templeton Group; (v) shareholders of the
unavailable (in Germany and Austria) Templeton Institutional Funds, Inc.
reinvesting redemption proceeds from that fund under an employee benefit plan
qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code"), in Shares of the Fund; (vi) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (vii) registered securities dealers or brokers for their investment
account only; and (viii) registered personnel and employees of securities
dealers and their family members, in accordance with the internal policies and
procedures of the employing securities dealer.
In the context of investments for various pension plans for U.S. employees, in
which German Shareholders cannot participate under all rules, sales charges are
also not applied.
Finally, investment Shares may be acquired at the net asset value by banks and
securities servicing firms with moneys over which they have free and exclusive
investment power and which they hold as trustees, agents, advisors, custodians
or in similar capacities. Minimum requirements apply to such acquisitions which
can be
27
requested from Templeton Global Strategic Services (Deutschland) GmbH.
Shares of the Fund may also be purchased at net asset value by any state, county
or city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). Such
investors should consult their own legal departments to determine whether and to
what extent the shares of the fund constitute legal investments for them.
Investment Shares can also be acquired by investors at the net asset value who,
in the last 60 days, have had shares in a fund with similar investment
objectives and had to pay (deferred) sales charges for them.
SAVINGS PLAN
In Germany investors can open a savings plan in which they can may payment to
purchase Class I Shares in monthly or quarterly amounts.
The minimum amount for a savings installment is DM 300 (monthly or quarterly)
and no initial payment is required to initiate the savings plan.
In order to eliminate fees for the investor and the Fund, from April 1, 1996 the
savings plan will be operated by direct deposit.
Participants in the savings program are thus requested to provide a collection
authorization, revocable at all times, to Templeton Global Strategic Services
(Deutschland) GmbH in the application form so that it can debit their bank
account either on the first day of each month or of the first month of each
calendar quarter for the savings amount agreed to, and to credit the Paying
Agent's account for the Fund.
Participants in the savings program engage to have sufficient funds in their
bank account on the date of the debit entry and only to challenge the debits
entered when the content of the debit is not covered by the collection
authorization.
The sales changes will only apply on savings amounts actually paid in; no prior
charge will apply.
Investors should realize that the Shares of the Fund acquired in the context of
a savings plan may undergo oscillations in value and, under certain
circumstances, a constant increase in the asset value will not be achieved and,
under unfavorable circumstances, a loss may even be sustained in the savings
amount.
INSTITUTIONAL ACCOUNTS
There are additional methods of purchasing, redeeming or exchanging
Shares of the Fund available for institutional accounts. Additional
28
information can be btained from Templeton Global trategic Services(Deutschland)
GmbH.
ACCOUNT STATEMENTS
Shareholder accounts are opened in accordance with the Shareholder's
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from Franklin Templeton Investor Services, Inc. (the
"Transfer Agent").
EXCHANGE PRIVILEGE
Class I Shares of the Templeton Smaller Companies Growth Fund, Inc. can be
exchanged free of charge for Class I Shares of other U.S. Franklin Templeton
Funds which are eligible for sale in the Shareholder's state of residence, doing
so on the basis of the respective net asset value per Share at the time of the
exchange.
If the exchanged Shares were subject to a deferred sales charge in the original
fund purchased, and Shares are subsequently redeemed within 12 months of the
calendar month of the original purchase date, a deferred sales charge will be
imposed.
The application can be made by letter, without the use of a form, in the German
language, to Templeton Global Strategic Services (Deutschland) GmbH.
Exchange purchases are subject to the minimum investment requirements of the
fund purchased and no sales charge generally applies when it had already been
charged on the original investment and no higher sales charge applies to the new
fund. Such exchanges are permitted only after at least 15 days have elapsed from
the date of the prior exchange or of the purchase of the Shares to be exchanged.
(Shares held in reserve under a letter of intent do not qualify for the exchange
privilege.)
This exchange privilege may be modified, limited or terminated at any time by
the Fund upon 60 days' written notice. A Shareholder who wishes to make an
exchange should first obtain and review a current prospectus of the fund into
which he or she wishes to exchange.
HOW TO SELL SHARES OF THE FUND
Shares will be redeemed, without charge, on request of the Shareholder in
"Proper Order" to the Transfer Agent. "Proper order" means that the request to
redeem must meet all the following requirements:
1. The application is to be sent in writing through:
29
Templeton Global Strategic Services (Deutschland) GmbH Taunusanlage 11, 60329
Frankfurt a.M.
to
Franklin Templeton Investor Services, Inc.
P.O. Box 33030
St. Petersburg, Florida 33733-8030
1. [sic] It must be signed by the Shareholder(s) exactly in the
manner as the Shares are registered, and must specify either the
number of Shares, or the dollar amount of Shares, to be redeemed.
2. The signature(s) of the redeeming Shareholder(s) must be
guaranteed.
Such signature guaranty must be performed in the manner employed for signature
guaranties by the subsidiaries of U.S. financial institutions and member firms
of the U.S. NASD or the British IMRO, or a similar independent administrative
agency, or that employed by a German bank licensed under Section 32 of the
"KWG", or else the signature(s) must be certified by a German notary.
A signature guarantee is not required for redemptions of US $50,000 or less,
requested by a registered Shareholder. However, the Fund reserves the right to
require signature guarantees on all redemptions. A signature guarantee is
required in connection with any request for a transfer of Shares or when
payments at to be made to addresses other than the address registered with the
Transfer Agent. A signature guaranty is also required in connection with a
redemption of shares if the Transfer Agent has received instructions to change
the address within 30 days prior to receiving the redemption request.
Also, a signature guarantee is required if the Fund or the Transfer Agent
believes that a signature guarantee would protect the Fund against potential
claims based on the transfer instructions, including, for example, when (a) the
current address of one or more joint owners of an account cannot be confirmed;
(b) multiple owners have a dispute or give inconsistent instructions to the
Fund; (c) the Fund has been notified of an adverse claim; (d) the instructions
received by the Fund are given by an agent, not the owner; (e) the Fund
determines that joint owners who are married to each other are separated; or (f)
the authority of a representative of a company or other entity has not been
established to the satisfaction of the Fund;
3. Any outstanding certificates must accompany the request together
with a stock power signed by the Shareholder(s), with signature(s)
guaranteed as described in Item 2 above;
4. In the case where the shares intended for redemption involve an
30
estate, bank, foundation, trust, custodian, corporation or partnership,
documents must be attached which, in the opinion of the Transfer Agent,
substantiate the authority of the signatory or signatories, or which satisfy all
applicable legal requirements. Further information can be obtained from
Templeton Global Strategic Services (Deutschland) GmbH.
The redemption application can also be made in accordance with the requirements
set forth above directly to Franklin Templeton Investor Services, Inc. In such
case, however, it must be made in the English language.
The redemption price will be the net asset value of the Shares next computed
after the redemption request in Proper Order is received by the Transfer Agent.
Payment of the redemption price ordinarily will be made by check in U.S. dollars
within seven days after receipt of the redemption request in Proper Order.
However, if Shares have been purchased by check, the Fund will make redemption
proceeds available when a Shareholder's check received for the Shares purchased
has been cleared for payment by the Shareholder's bank, which, depending upon
the location of the Shareholder's bank, could take up to 15 days or more. The
check will be mailed by air mail to the Shareholder's registered address (or as
otherwise directed). Remittance by wire to an account in the same name(s) as the
Shares are registered subject to a handling charge of up to US $15 which will be
deducted from the redemption proceeds.
The investor may also demand payment through the Paying Agent.
The Fund may involuntarily redeem an investor's Shares if the net asset value of
such Shares is less than US $100, except that involuntary redemptions will not
result from fluctuations in the value of an investor's Shares. In addition, the
Fund may involuntarily redeem the Shares of any investor who has failed to
provide the Fund with a certified taxpayer identification number or such other
tax-related certifications as the Fund may require. A notice of redemption sent
by air mail to the investor's address of record will fix a date not less than 30
days after the mailing date, and Shares will be redeemed at net asset value at
the close of business on that date, unless sufficient additional Shares are
purchased to bring the aggregate account value up to US $100 or more, or unless
a certified taxpayer identification number (or such other information as the
Fund has requested) has been provided, as the case may be. A check for the
redemption proceeds will be mailed to the investor at the address of record.
REINSTATEMENT PRIVILEGE
Former Shareholders can reinvest the proceeds of redemptions of
Shares and dividends or capital gain distributions free of sales
charges in the Templeton Smaller Companies Growth Fund, Inc. and/or
the Templeton Smaller Companies Growth Fund, Inc. if, within 365
31
days after the date of the redemption or dividend or distribution, they send a
written application and a check to the Transfer Agent.
The reinstatement will then be effected at the net asset value, calculated
right after receipt. Credit will be given for any deferred sales charge paid on
the Shares redeemed. The amount of gain or loss resulting from a redemption may
be affected by exercise of the reinstatement privilege if the Shares redeemed
were held for 90 days or less, or if a Shareholder reinvests in the same fund
within 30 days.
A Shareholder can only make use of the reinstatement privilege once.
DEFERRED SALES CHARGE
In order to recover commissions paid to investment brokers for investments of US
$1 million or more, the pertinent Class I Shares redeemed within the period of
12 months of the calendar month of their purchase will be assessed a deferred
sales charge. The deferred charge is 1% of the lesser of the value of the Shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the net asset value at the time of purchase of such Shares, and is retained by
the general distribution company. In determining if a deferred sales charge
applies, and at what amount, Shares not subject to a deferred sales charge are
deemed to be redeemed first, including those held longer. In a Share exchange
(excluding Shares acquired by exchange which are redeemed within 12 months after
the initial acquisition) and in distributions to the Shareholders of certain
U.S. pension plans, sales charges due subsequently are waived.
SYSTEMATIC WITHDRAWAL PLAN
A Shareholder may establish a Systematic Withdrawal Plan ("Plan") and receive
periodic monthly, quarterly, semiannual or annual payments from the account from
his account of US $100 dollars or more. The equivalent value of the Shares held
by the Shareholder must be at least US $25,000. There are no service charges for
establishing or maintaining a Plan. Capital gain distributions and income
dividends paid to the Shareholder's account must be reinvested for the
Shareholder's account in additional Shares at net asset value.
Payments are then made from the liquidation of the Class I Shares at net asset
value on the day of the liquidation (which is generally on or about the 25th of
the month) to meet the specified withdrawals. The payment of the liquidation
price is effected by check in U.S. dollars within seven days after the date of
liquidation in good order.
Liquidation of Class I Shares may reduce or possibly exhaust the Shares in the
Shareholder's account, to the extent withdrawals
32
exceed Shares earned through dividends and distributions, particularly in the
event of a market decline. If sufficient Shares are not posted on the date of
the agreed distribution no payment under the plan will be made and, rather, the
account will be closed and the remaining balance will be sent to the
Shareholder. The payments under the withdrawal plan cannot be considered pure
profit or income because part of the payment may be in the nature of a return of
the invested capital.
Maintaining a Plan concurrently with purchases of additional Shares of the Fund
would be disadvantageous because of the sales charge on the additional
purchases. The Shareholder should ordinarily not make additional investments of
less than US $5,000 or three times the annual withdrawals.
A Plan may be terminated on written notice by the Shareholder or the Fund, and
it will terminate automatically if all Shares are liquidated or withdrawn from
the account, or upon the Fund's receipt of notification of the death or
incapacity of the Shareholder. Share certificates may not be issued while a Plan
is in effect.
MANAGEMENT OF THE FUND
The Fund is managed by its Board of Directors and all powers are exercised by or
under authority of the Board.
The name, address, principal occupation during the past five years and other
information with respect to each of the Directors and Principal Executive
Officers of the Fund are as follows:
HARRIS J. ASHTON
Metro Center 1 Station Place Stamford, Connecticut Director Chairman of the
Board, president and chief executive officer of General Host Corporation
(nursery and craft centers); and a
director of RBC Holdings (U.S.A.)Inc. (a bank holding company) and
Bar-S Foods.
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street Easton, Maryland
Director
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of
Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
33
HARMON E. BURNS
777 Mariners Island Blvd.
San Mateo, California
Director
Executive vice president, secretary and director of Franklin Resources, Inc.;
executive vice president and director, Franklin Templeton Distributors, Inc.;
executive vice president of Franklin Advisers, Inc.; officer and/or director, as
the case may be, of other subsidiaries of Franklin Resources, Inc., and officer
and/or director, trustee or general partner, as the case may be, for 41 of the
investment companies in the Franklin Templeton Group.Age 50.
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Director
Retired; formerly, credit adviser, National Bank of Canada,
Toronto.Age 85.
HASSO-G VON DIERGARDT
R.R. 3
Stouffville, Ontario
Director
Farmer; and president of Clairhaven Investments, Ltd. and other
private investment companies.Age 79.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a director of
General Host Corporation.Age 63.
JOHN Wm. GALBRAITH
360 Central Avenue Suite 1300
St. Petersburg, Florida
Director
President of Galbraith Properties, Inc. (personal investment
company); director of Gulfwest Banks, Inc. (bank holding company)
(1995- present) and Mercantile Bank (1991-present); vice chairman
of Templeton, Galbraith & Hansberger Ltd. (1986-1992); and chairman
of Templeton Funds Management, Inc. (1974- 1991). Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director Consultant for the Triangle Consulting Group; chairman of
34
the board and chief executive officer of Florida Progress Corporation
(1982-February 1990) and director of various of its subsidiaries; chairman and
director of Precise Power Corporation; executive-in-residence of Eckerd College
(1991-present); and a director of Checkers Drive-In Restaurants, Inc. Age 72.
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board and
Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of Franklin Administrative Services,
Inc., General Host Corporation, and Templeton Global Investors, Inc.; and
officer and director, trustee or managing general partner, as the case may be,
of most other subsidiaries of Franklin and of 55 of the investment companies in
the Franklin Templeton Group. Age 62.
BETTY P. KRAHMER
2201 Kentmere Parkway
Wilmington, Delaware
Director
Director or trustee of various civic associations; formerly,
economic analyst, U.S. Government. Age 66.
GORDON S. MACKLIN
8212 Burning Tree Road
Bethesda, Maryland
Director Chairman of White River Corporation (information services); director of
Fund America Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, Fusion Systems Corporation, Infovest Corporation,
and Medimmune, Inc.; formerly, chairman of Hambrecht and Quist Group; director
of H&Q Healthcare Investors; and president of the National Association of
Securities Dealers, Inc. Age 67.
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978-present); chairman and chief executive
officer of Landmark Banking Corporation (1969-1978); financial vice president of
Florida Power and Light (1965- 1969); vice president of The Federal Reserve Bank
of Atlanta (1958-1965); and director of various other business and nonprofit
organizations. Age 66.
35
MARC S. JOSEPH, J.D.
500 East Broward Blvd.
Fort Lauderdale, Florida
President
Vice president of Templeton Investment Counsel Inc.; management consultant with
McKinsey & Company (1987-1990); vice president of Pacific Financial Research
(1990-1993) Age 35.
MARTIN L. FLANAGAN
777 Mariners Island Blvd.
San Mateo, California
Vice President
Senior vice president, treasurer and chief financial officer of Franklin
Resources, Inc., director and executive vice president of Templeton Investment
Counsel, Inc.; director, president and chief executive officer of Templeton
Global Investors, Inc.; director or trustee and president or vice president of
various Templeton Funds; accountant, Arthur Andersen & Company (1982-1983); and
a member of the International Society of Financial Analysts and the American
Institute of Certified Public Accountants. Age 35.
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
President
President and director of Templeton Global Advisors Limited; director of global
equity research for Templeton Worldwide, Inc.; president or vice president of
the Templeton Funds; formerly, investment administrator with Roy West Trust
Corporation (Bahamas) Limited (1984-1985). Age 35.
JOHN R. KAY
500 East Broward Blvd.
Fort Lauderdale, Florida
Vice President
Vice president of the Templeton Funds; vice president and treasurer of Templeton
Global Investors, Inc. and Templeton Worldwide, Inc.; assistant vice president
of Franklin Templeton Distributors, Inc.; formerly, vice president and
controller, the Keystone Group, Inc. Age 55.
THOMAS M. MISTELE
700 Central Avenue
St. Petersburg, Florida
Secretary
Senior vice president of Templeton Global Investors, Inc.; vice
president of Franklin Templeton Distributors, Inc.; secretary of
the Templeton Funds; formerly, attorney, Dechert Price & Rhoads
36
(1985-1988) and Freehill, Hollingdale & Page (1988); and judicial
clerk, U.S. District Court (Eastern District of Virginia) (1984-1985). Age 42.
JAMES R. BAIO
500 East Broward Blvd.
Fort Lauderdale, Florida
Treasurer
Certified public accountant; treasurer of the Templeton Funds; senior vice
president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and
Templeton Funds Trust Company; formerly, senior tax manager, Ernst & Young
(certified public accountants) (1977-1989). Age 42.
JEFFREY L. STEELE
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
Partner, Dechert Price & Rhoads. Age 50.
* These are Directors who are "interested persons" of the Fund as
that term is defined in the 1940 Act. Mr. Brady and Franklin
Resources, Inc. are limited partners of Darby Overseas Partners,
L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in
February, 1994, and is Chairman and a shareholder of the corporate
general partner of Darby Overseas. In addition, Darby Overseas and
Templeton Global Advisor Limited are limited partners of Darby
Emerging Markets Fund, L.P.
There are no family relationships between any of the Directors.
INVESTMENT MANAGER
The Investment Manager of the Fund is:
Templeton Investment Counsel, Inc.
Broward Financial Centre
Fort Lauderdale, Florida 33394-3091
The Investment Manager manages the investment and reinvestment of the Fund's
assets. The Investment Manager is an indirect wholly owned subsidiary of
Franklin Resources, Inc. ("Franklin") and as of 9/30/95 it had shareholders'
equity of US $690,415.
Through its subsidiaries, Franklin is engaged in various aspects of the
financial services industry.
The Investment Manager and its affiliates serve as advisers for a wide variety
of public investment mutual funds and private clients
37
in many nations. The Templeton organization has been investing globally over the
past 52 years and, with its affiliates, provides investment management and
advisory services to a worldwide client base, including over 4.3 million mutual
fund shareholders, foundations, endowments, employee benefit plans and
individuals. The Investment Manager and its affiliates have approximately 4,100
employees in the United States, Australia, Scotland, Germany, Hong Kong,
Luxembourg, Bahamas, Singapore, Canada and Russia.
The Investment Manager uses a disciplined, long-term approach to value-oriented
global and international investing. Securities are selected for the Fund's
portfolio from a list of securities entering consideration, and they are studied
by Templeton's analysts on the basis of fundamental company-by-company analysis
constantly updated by a global company data bank. The Investment Manager
performs similar services for other funds and accounts and there may be times
when the actions taken with respect to the Fund's portfolio will differ from
those taken by the Investment Manager on behalf of other funds and accounts.
Neither the Investment Manager and its affiliates, its officers, directors or
employees, nor the officers and Directors of the Fund are prohibited from
investing in securities held by the Fund or other funds and accounts which are
managed or administered by the Investment Manager to the extent such
transactions comply with the Fund's Code of Ethics.
The lead portfolio manager for the Fund is Marc S. Joseph. Mr.
Joseph joined the Investment Manager in 1993 as a Vice President.
Prior to joining the Templeton organization, he served as vice
president of Pacific Financial Research and a management consultant
for McKinsey & Co. He holds a B.S. in Computer Science from the
College of William & Mary and an M.B.A. from Harvard Business
School, where he graduated as a Baker Scholar. Mr. Joseph is also
a magna cum laude graduate of the Harvard Law School, where he was
an editor of the Harvard Law Review. Mark R. Beveridge, Vice
President of the Investment Manager, and Gary Clemons, Vice
President of the Investment Manager, exercise secondary portfolio
management responsibilities with respect to the Fund. Mr. Beveridge
has a B.A. in Business Administration with emphasis in Finance from
the University of Miami. Prior to joining the Templeton
organization, Mr. Beveridge was a principal with a financial
accounting software firm based in Miami, Florida. Mr. Clemons was
a research analyst for Templeton Quantitative Advisors, Inc. in New
York. Mr. Clemons holds an M.B.A. with an emphasis in
Finance/Investment Banking from the University of Wisconsin and a
B.S. from the University of Nevada-Reno.
INVESTMENT MANAGEMENT AGREEMENT. The Investment Management Agreement requires
the Investment Manager to manage the investment and reinvestment of the Fund's
assets. The Investment Manager is not required to furnish any personnel,
overhead items or facilities for the Fund, including daily pricing or trading
desk facilities,
38
although such expenses are paid by investment advisers of some other investment
companies.
These expenses have been and may continue to be borne by the Fund.
The Investment Management Agreement provides that the Investment Manager will
select brokers and dealers for execution of the Fund's portfolio transactions
consistent with the Fund's brokerage policies. Although the services provided by
broker-dealers in accordance with the brokerage policies incidentally may help
reduce the expenses of or otherwise benefit the Investment Manager and other
investment advisory clients of the Investment Manager and of its affiliates, as
well as the Fund, the value of such services is indeterminable and the
Investment Manager's fee is not reduced by any offset arrangement by reason
thereof.
When the Investment Manager determines to buy or sell the same security for the
Fund that the Investment Manager or certain of its affiliates have selected for
one or more of the Investment Manager's other clients or for clients of its
affiliates, the orders for all such securities trades may be placed for
execution by methods determined by the Investment Manager, with approval by the
Board of Directors, to be impartial and fair, in order to seek good results for
all parties. Records of securities transactions of persons who know when orders
are placed by the Fund are available for inspection at least four times annually
by the compliance officer of the Fund so that the non-interested Directors (as
defined in the 1940 Act) can be satisfied that the procedures are generally fair
and equitable for all parties.
The Investment Management Agreement provides that the Investment Manager shall
have no liability to the Fund or any Shareholder of the Fund for any error of
judgment, mistake of law, or any loss arising out of any investment or other act
or omission in the performance by the Investment Manager of its duties under the
Investment Management Agreement, or for any loss or damage resulting from the
imposition by any government of exchange control restrictions which might affect
the liquidity of the Fund's assets, or from acts or omissions of custodians or
security depositories, or from any wars or political acts of any foreign
governments to which such assets might be exposed, except for any liability,
loss or damage resulting from willful misfeasance, bad faith or gross negligence
on the Investment Manager's part or reckless disregard of its duties under the
Investment Management Agreement. The Investment Management Agreement will
terminate automatically in the event of its assignment, and may be terminated by
the Fund at any time without payment of any penalty on 60 days' written notice,
with the approval of a majority of the Directors of the Fund in office at the
time or by vote of a majority of the outstanding Shares of the Fund (as defined
in the 1940 Act).
39
MANAGEMENT FEES. For its services, the Fund pays the Investment Manager a fee,
calculated and paid monthly, equal on an annual basis to 0.75% of the Fund's
average daily net assets, payable in U.S. dollars at the end of each calendar
month. Each class of Shares pays a portion of the fee, determined by the
proportion of the Fund that it represents. The Investment Manager will comply
with any applicable state regulations which may require the Investment Manager
to make reimbursements to the Fund in the event that the Fund's aggregate
operating expenses, including the management fee but generally excluding
interest, taxes, brokerage fees and commissions and extraordinary expenses, such
as litigation, are in excess of specific applicable limitations. The strictest
rule applicable to the Fund is 2.5% of the first US $30,000,000 of net assets,
2% of the next US $70,000,000 of net assets and 1.5% of the remainder.
The investment manager performs investment analysis, consulting and monitoring
for the Fund. The investment manager represents no overhead or equipment expense
for the Fund, though such expenses are assumed by some investment advisers of
other investment firms. In remuneration for its service the Fund pays the
investment manager a monthly fee of 0.75% of its daily average net asset amount
during the year.
BUSINESS MANAGER
Templeton Global Investors, Inc.
700 Central Avenue, St. Petersburg,
Florida 33701-3628 USA
Templeton Global Investors, Inc. performs certain administrative
functions as Business Manager for the Fund including:
. providing office space, telephone, office equipment and
supplies for the Fund;
. paying all compensation of the Fund's officers for
services rendered as such;
. authorizing expenditures and approving bills for
payment on behalf of the Fund;
. supervising preparation of annual and semiannual
reports to Shareholders, notices of dividends, capital
gain distributions and tax credits, and attending to
correspondence and other communications with individual
Shareholders;
. daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily quotations of the
bid and asked prices of the Fund's Shares, earnings reports and
other financial data;
. monitoring relationships with organizations serving the
Fund, including the Custodian and printers;
. providing trading desk facilities for the Fund;
. supervising compliance by the Fund with recordkeeping
40
requirements under the 1940 Act and regulations thereunder, and with state
regulatory requirements; maintaining books and records for the Fund (other than
those maintained by the Custodian and Transfer Agent); and preparing and filing
tax reports other than the Fund's income tax returns; . monitoring the
qualifications of the tax-deferred retirement plans offered by the Fund; and .
providing the personnel needed to carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal on an annual
basis to 0.15% of the first US $200,000,000 of the Fund's average daily net
assets, reduced to 0.135% annually of such assets in excess of US $200,000,000,
further reduced to 0.1% annually of such net assets in excess of US
$700,000,000, and further reduced to 0.075% annually of such net assets in
excess of US $1,200,000,000. Each class of Shares pays a portion of the fee,
determined by the proportion of the Fund that it represents. Since the Business
Manager's fee covers services often provided by investment advisers to other
funds, the Fund's combined expenses for advisory and administrative services may
be higher than those of other investment companies.
The Business Manager is relieved of liability to the Fund for any act or
omission in the course of its performance under the Business Management
Agreement, in the absence of willful misfeasance, bad faith or gross negligence.
The Business Management Agreement may be terminated by the Fund at any time on
60 days' written notice without payment of penalty, provided that such
termination by the Fund shall be directed or approved by vote of a majority of
the Directors of the Fund in office at the time or by vote of a majority of the
outstanding voting securities of the Fund and shall terminate automatically and
immediately in the event of its assignment.
Templeton Global Investors, Inc. is an indirect wholly owned
subsidiary of Franklin.
The shareholders' equity of Templeton Global Investors, Inc.
amounted to US $708,265,555 as of 9/30/95.
TRANSFER AGENT
Franklin Templeton Investor Services, Inc.
700 Central Avenue, St. Petersburg,
Florida 33701-3628 USA
serves as transfer agent and dividend disbursing agent for the
Fund. Services performed by the Transfer Agent include processing
purchase, transfer and redemption orders; making dividend payments,
capital gain distributions and reinvestments; and handling routine
communications with Shareholders. The Transfer Agent receives from
41
the Fund an annual fee of US $13.74 per Shareholder account plus out-of-pocket
expenses, such fee to be adjusted each year to reflect changes in the Department
of Labor Consumer Price Index.
The shareholders' equity of Franklin Templeton Investor Services,
Inc. as of 9/13/95 was about US $82,975,473.
CUSTODIAN
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081 USA
serves as custodian of the Fund's assets, which are maintained at the
Custodian's principal office and at the offices of its branches and agencies
throughout the world. The Custodian has entered into agreements with non U.S.
sub-custodians approved by the Directors pursuant to Rule 17f-5 under the 1940
Act. The Custodian, its branches and sub-custodians, in the United States and
frequently outside of the United States, generally do not actually hold
certificates for the securities in their custody, but instead have book records
with U.S. and non U.S. securities depositories, which in turn have book records
with the transfer agents of the issuers of the securities. Compensation for the
services of the Custodian is based on a schedule of charges agreed on from time
to time.
The shareholders' equity of the custodian as of 12/31/94 amounted to about US
$5.57 billion.
The custodian receives the following annual depository fees for its service:
Canadian and U.S. Securities:
0.02% calculated on the value up to US $1 billion
0.0175% on the value from US $1 billion to US $2 billion
0.015% on the value from US $2 billion to US $5 billion
0.0125% on the value in excess of that set forth above
Foreign Securities (non U.S.)
0.08% on the value up to US $1 billion
0.07% on the value in excess of US $1 billion
Securities of Developing Markets:
0.03% (Mexico) - 0.05% (other countries)
Cash management fee: US $10,000
The Custodian also receives reimbursement for its expenses.
These fees are periodically reviewed by the contractual parties.
42
INDEPENDENT ACCOUNTANTS
The accounting firm of
McGladrey & Pullen, L.L.P.
1133 Avenue of the Americas
New York, New York 10036
serves as independent accountants for the Fund. Its audit services comprise
examination of the Fund's financial statements and review of the Fund's filings
with the Securities and Exchange Commission ("SEC") and the Internal Revenue
Service ("IRS").
REPRESENTATIVE
Dr. Carl Graf Hardenberg
Attorney at Law
Klein Fontenay 1
20354 Hamburg
acts as representative for the Fund in the Federal Republic of Germany in
accordance with Section 6 of the Foreign Investment Law.
He represents the Fund before the courts and otherwise. He serves as authorized
recipient for certain documents for the management company and the general
distribution company.
For claims against the Fund, the management company or the general distribution
company which relate to the distribution of the Shares in the Federal Republic
of Germany the courts of Hamburg have jurisdiction.
STATEMENTS AND REPORTS
The Fund's fiscal year ends on August 31. Semiannual reports, at least, are sent
to Shareholders each year containing the securities position of the fund and
other information, including the annual reports with financial statements
audited by independent auditors.
DISTRIBUTION SERVICE PLAN
A distribution service plan has been approved for Class I Shares pursuant to
Rule 12b-1 under the 1940 Act, within the framework of which the general
distribution company can reimburse expenses for the financing of any activity
primarily intended to result in the sale of Shares issued by the Fund. The
maximum amount which the Fund may pay under the Plan for such distribution
expenses is 0.25% per annum of Class I's average daily net assets. The general
distribution company may repay part of these fees to investment brokers who
provide an active service to the Shareholders mediated thereby. The Plan
provides that costs and expenses not compensated
43
in a given month (including costs and expenses not compensated because they
exceed the annual limit of 0.25% of the average daily net assets of the Fund),
in accordance with the provisions of law, may be reimbursed in subsequent months
or years.
GENERAL INFORMATION
DESCRIPTION OF SHARES/SHARE CERTIFICATES. The Fund's authorized capital consists
of 1,500,000,000 Common Shares, par value US $0.01 per Share, of which
750,000,000 shares are classified as Class I Shares. The board of directors may
apportion and divide unissued Shares of the Fund into categories. Each Class I
Share entitles the holder to one vote on electing directors and all other
matters and a similarly calculated amount of dividends as well as capital and
net asset distributions in the event of the liquidation of the Fund. Fractional
Shares confer the same partial rights to the holder as whole Shares.
The Fund usually does not issue any certificate for Shares acquired.
Certificates representing whole Shares (but not Fractional Shares) are only
issued at the express, written request of a Shareholder made to the Transfer
Agent. No charge is made for the issuance of one certificate for all or some of
the Shares purchased in a single order.
MEETINGS OF SHAREHOLDERS. The Fund is not required to hold annual meetings of
Shareholders and may elect not to do so. The Fund will call a special meeting of
Shareholders when requested to do so by Shareholders holding at least 10% of the
Fund's outstanding Shares. In addition, the Fund is required to assist
Shareholder communications in connection with the calling of Shareholder
meetings to consider removal of a Director or Directors.
DIVIDENDS AND DISTRIBUTIONS. Dividends and (any) distributions realizing capital
gains are paid normally in October and (if necessary) in December and represent
all or substantially all of the net income of the Fund from financial
investments and the net capital gain realized. Income dividends and capital gain
distributions paid by the Fund, other than on those Shares whose owners keep
them registered in the name of a broker-dealer, are automatically reinvested on
the payment date in whole or fractional Shares at net asset value as of the
ex-dividend date, unless a Shareholder makes a written request for payments in
cash.
Prior to purchasing Shares of the Fund, the impact of dividends or capital gain
distributions which have been declared but not yet paid should be carefully
considered. Any dividend or capital gain distribution paid shortly after a
purchase by a Shareholder prior to the record date will have the effect of
reducing the per Share net asset value of the Shares by the amount of the
dividend or distribution. All or a portion of such dividend or distribution,
although in effect a return of capital, generally will be subject
44
to tax.
Checks in U.S. dollars are forwarded by air mail to the address of record. The
proceeds of any such checks which are not accepted by the addressee and returned
to the Fund will be reinvested in the Shareholder's account in whole or
fractional Shares at net asset value next computed after the check has been
received by the Transfer Agent. Subsequent distributions will be reinvested
automatically at net asset value as of the ex-dividend date in additional whole
or fractional Shares.
TAX STATUS
TAXES IN THE USA. U.S. income tax: The Fund intends normally to pay a dividend
at least once annually representing substantially all of its net investment
income. This includes, among other items, dividends, interest, and net
short-term capital gains to the extent that they exceed net long-term capita
losses. It also intends to distribute at least annually any realized capital
gains. By so doing and meeting certain diversification of assets and other
requirements of the Internal Revenue Service Code of 1986, the Fund intends to
qualify annually as a regulated investment company under the Code. The status of
the Fund as a regulated investment company does not involve government
supervision of management or of its investment practices or policies. As a
regulated investment company, the Fund generally will be relieved of liability
for United States Federal income tax on that portion of its net investment
income and net realized capital gains which it distributes to its Shareholders.
Distributions are subject to U.S. federal income tax to the extent that they
flow to American taxpayers.
U.S. source taxes: In accordance with Article X of the treaty between the
Federal Republic of Germany and the United States of America on avoiding double
taxation in the area of income taxes, in the 8/21/91 version, the American
government assesses a source tax in the amount of 15% on the distribution of
dividends, interest and short-term gains from the Fund on persons residing in
the Federal Republic of Germany. Distributions of long-term realized capital
gains are not subject to source taxation.
U.S. estate taxes: In accordance with Article 9 of the treaty of 12/3/90 between
the Federal Republic of Germany and the United States of America on avoiding
double taxation in the area of estates and gifts taxation, the Shares of the
Fund are not subject to American taxation to the extent that they are part of an
estate or a gift of a person residing in the Federal Republic of Germany. The
entitlement to dispose of an individual account passes the heirs upon the death
of the holder, after submitting certain documents (forms may be obtained through
the general distribution company).
45
In addition, the Fund may have to require from the heirs transfer forms issued
by the U.S. Internal Revenue Service or similar documents releasing the Fund
from liability for estate taxes arising in certain circumstances. A transfer
form for the Internal Revenue Service (Form 5173) will be required in any event
when the gross assets located in the United States of America by a deceased
Shareholder are more than or equal to US $60,000.00. In the case of gross assets
located in the United States of America which have a lower value, the Fund may
require the appropriate affidavit. Further particulars on this can be obtained
from the German service company Templeton Global Strategic Services
(Deutschland) GmbH.
TAXATION IN THE FEDERAL REPUBLIC OF GERMANY: With each distribution and proceeds
equivalent to distribution, at latest 3 months after the close of the fiscal
year of the Fund it gives the tax information required in Section 17, Paragraph
3, Number 2 of the Foreign Investment Law and informs the tax authorities. Every
exchange day, in accordance with Section 17, Paragraph 3, Number 3 of the
Foreign Investment Law, the Fund also publishes its interim gain and the
proceeds equivalent to distribution.
Shareholders in Germany, in accordance with Section 17 of the Foreign Investment
Law, are only liable for income tax on the distributed and retained interest and
dividend income of the Fund, so it is unimportant whether the proceeds
distributed are paid out or automatically reinvested into new Shares of the
Fund.
The distributed or retained capital gains achieved by the Fund from the disposal
of securities and warrants for shares of corporations are always tax-free,
unless the capital gain applies as operating income of the taxpayer.
The application of the part of the 15% U.S. source tax withheld on interest and
dividends to the German income tax to be paid is effected in accordance with
Section 19 of the Foreign Investment Law and the rule of the Income Tax Law.
When Shareholders have their Shares of the Fund placed in the custody of or
managed by domestic credit institutions, such institutions are required to
withhold interest instalment tax at the level of 32.25% (or 37.625% in counter
trade), even when the distribution is automatically reinvested in new Shares of
the Fund. If at a given time only a portion of the interest and dividend
proceeds achieved up to that point are distributed, a domestic credit
institution must compute and discharge the interest instalment tax on the total
income of the Fund.
The interest instalment tax does not apply, however, when the Shareholder
himself manages his Shares of the Fund and receives the distributions directly
from the Fund or through a German Paying Agent.
46
In the event of a redemption, exchange or other transfer of rights to the Shares
of the Fund (transfer transactions) private Shareholders are only taxed on the
interim gain achieved. The interim gain is defined in Section 17, Paragraph 2 a)
of the Foreign Investment Law, with reference to Section 20, Paragraph 1, No. 7,
and Paragraph 2 of the Income Tax Law, and can be simply described as that part
of the net asset value of a Share of the Fund resulting from interest and
equally treated income realized from the Fund as well as accumulated claims to
such income where dividend income is not paid into the interim gain.
If a redemption of Shares of the Fund is effected through a domestic credit
institution then it is subject to the withholding of the interest instalment tax
on the interim gain.
Otherwise, for private Shareholders the gains made in transfer transactions are
tax-free, to the extent that the Shares of the Fund are held beyond the
speculation period of six months.
Shareholders are reminded that the description of taxation in this section
relies on knowledge up to January 1, 1996. Given the changes taking place in the
tax in ever more frequent intervals and the unforeseeable nature of differing
interpretations by the financial authorities, it is recommended to the
Shareholders that they contact their tax advisors as to their personal tax
situations.
INQUIRIES
Shareholders' inquiries will be answered promptly. They should be addressed to:
Templeton Global Strategic Services (Deutschland) GmbH
Taunusanlage 11,
60329 Frankfurt am Main
Copies of account statements less than three years old are provided on request
without charge; requests for copies going back more than three years from the
date the request is received by the Transfer Agent are subject to a fee of up to
US $15 per account.
PERFORMANCE INFORMATION
The Fund may include its total return in advertisements or reports to
Shareholders or prospective investors. Quotations of average annual total return
will be expressed in terms of the average annual compounded rate of return on a
hypothetical investment in the Fund over a period of 1, 5 and 10 years (or up to
the life of the Fund), will reflect the deduction of the maximum initial sales
charge and deduction of a proportional share of Fund expenses (on an annual
basis), and will assume that all dividends and distributions are reinvested when
paid. Total return may be
47
expressed in terms of the cumulative value of an investment in the
Fund at the end of a defined period of time.
JURISDICTION
The Federal Republic of Germany:
The jurisdiction for claims against the Fund, the management company or the
general distribution company relating to the distribution of the Shares of the
Fund in the Federal Republic of Germany is Hamburg. The claim and all other
documents may be delivered to the representative.
RIGHT OF REVOCATION
The Federal Republic of Germany:
When a purchase of Shares of the Fund takes place on the basis of verbal
negotiations outside of the scope of the ongoing of business of the seller of
the Shares or of such person as has intermediated in the sale of the Shares, and
such seller or intermediator has not been asked to the negotiations by the
buyer, in accordance with Section 11 of the Foreign Investment Law the buyer is
entitled to revoke his declaration of purchase (right of revocation).
The revocation must be effected within a period of two weeks in writing to the
Fund or to its representative. This period commences with the making of the
declaration of purchase and, at earliest, upon delivery of the sales prospectus.
Timely sending of the revocation shall be sufficient for compliance with the
period.
The right of revocation shall not apply when a trader acquires the Shares for
his operating assets.
If the buyer has already made payment prior to the revocation, he is to be
reimbursed by the investment company, against return of the Shares acquired, the
value of the Shares paid for (Section 21, Paragraph 2-4 of the "KAAG") on the
day subsequent to the receipt of the declaration of revocation, as well as the
expenses paid.
CONTRACTUAL CONDITIONS
1. General
1.1 The legal relationship between the investor and the Fund is subject to
United States law and shall be governed by the following contractual conditions
deriving from U.S. laws, the charter/bylaws and additional information. The
complete text of the contractual documents mentioned above in the German
language may be obtained from the German representative.
1.2 The purchase contract takes effect as soon as the Shareholder
48
Application and the Purchase Price are received in good order in the currency of
the United States of America by the Transfer Agent and provided that the
Shareholder Application is not rejected.
Upon the entry into force of the contract, the buyer acquires Class I Shares of
the Fund, the number of which is determined according to the net asset value of
the Class I Shares of the Fund on the day subsequent to the effectiveness of the
contract and according to the investment amount thereof.
An initial acquisition must be for at least DM 5,000.
1.3 Immediately subsequent to the effectiveness of the purchase contract the
Transfer Agent shall avail the buyer of a shareholder account in which, among
other things, the number of Shares acquired thereby are to be held. The buyer
will be sent a pertinent statement and, upon request, a certificate.
2. Offering Price
2.1 The purchase price for a Class I Share is to be determined from the net
asset value of the Fund attributed to this Class of Shares divided by the number
of outstanding Class I Shares plus the sale charge scaled according the size of
the investment.
2.2 Buyers who acquire Shares in the amount of least US $50,000 within 13 months
and, for at least one day during this time, hold it, and make the respective
letter of intent, shall be entitled to benefit from a quantity discount on the
total investment. Redemptions effected by the Shareholder during this period of
13 months shall be deducted from the sum of the purchases whether or not the
provisions of the letter of intent are complied with or not.
2.3 The reduced sales charges shall also apply to further purchases of Class I
Shares when all Class I Shares belonging to a single buyer in addition to the
newly subscribed Shares reach the amount of US $50,000 or more.
3. Liquidation and Redemption of Shares
Class I shares may be redeemed free of charge when the Shareholder has made an
application to the Transfer Agent in good order through Templeton Global
Strategic Services (Deutschland) GmbH.
The liquidation price shall be the net asset value of the Class I Shares
calculated immediately subsequent to the receipt of the redemption application
in good order by the Transfer Agent. The payment of the liquidation price is
normally effected by check in U.S. dollars.
4. Investment Restrictions
49
4.1 For the protection of the investors the Fund is subject to extensive
investment restrictions which cannot be changed without the consent of the
Shareholders. They are set forth in detail in the prospectus.
4.2 Essentially, the Fund cannot acquire:
a) Shares in other funds
b) Real estate or mortgages
c) Commodities or currency futures contracts
d) Securities of any company in which Directors or Officers of
individually own more than 0.5% of the securities of such
company or in the aggregate own more than 5% of the securities
of such company
e) Shares in mineral exploration programs
4.3 The Fund is also not authorized to:
a) Borrow money for any purpose other than redeeming Shares, and
then only as a temporary measure to an amount not exceeding 5%
of the value of its total assets
b) Encumber the total assets, or pledge or mortgage them other
than to secure borrowings in accordance with a), and then only
to such extent not exceeding 10% of the value of its net
assets
c) Invest more than 25% of the Fund's total assets in a single
industry
d) Invest in "letter stocks"
e) Participate on a joint or a joint and several basis in any
trading account in securities
f) Sell short, or buy or sell puts, calls, straddles or spreads
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Templeton Smaller Companies Growth Fund, Inc.
Service Company:
Templeton Global Strategic Services (Deutschland) GmbH
Taunusanlage 11
60329 Frankfurt
Telephone (0 69) 2 72 23-2 72
Fax (0 69) 2 72 23-1 20
