TEMPLETON SMALLER COMPANIES GROWTH FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1996,
IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH
THE PROSPECTUS OF TEMPLETON SMALLER COMPANIES GROWTH FUND, INC. DATED
JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME,
WHICH CAN BE OBTAINED WITHOUT CHARGE
UPON REQUEST TO THE PRINCIPAL UNDERWRITER,
FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: 800/DIAL BEN
TABLE OF CONTENTS
General Information and History................. 1
Investment Objective and Policies............... 1
- -Investment Policies............................ 1
- -Debt Securities................................ 2
- -Structured Investments......................... 3
- -Investment Restrictions........................ 3
- -Risk Factors................................... 5
- -Trading Policies............................... 10
- -Personal Securities Transactions............... 10
Management of the Fund.......................... 11
Director Compensation........................... 17
Principal Shareholders.......................... 18
Investment Management and Other
Services...................................... 18
- -Investment Management Agreement................ 18
- -Management Fees................................ 20
- -The Investment Manager......................... 20
- -Business Manager............................... 21
- -Custodian and Transfer Agent................... 22
- -Legal Counsel.................................. 23
- -Independent Accountants........................ 23
- -Reports to Shareholders........................ 23
Brokerage Allocation............................ 23
Purchase, Redemption and
Pricing of Shares............................. 26
- -Ownership and Authority Disputes............... 27
- -Tax-Deferred Retirement Plans.................. 27
- -Letter of Intent............................... 28
- -Special Net Asset Value Purchases.............. 30
- -Redemptions in Kind. . . . . . . .............. 31
Tax Status...................................... 31
Principal Underwriter........................... 36
Description of Shares........................... 38
Performance Information......................... 38
Financial Statements............................ 42
GENERAL INFORMATION AND HISTORY
Templeton Smaller Companies Growth Fund, Inc. (the "Fund") was
incorporated under the laws of Maryland on February 4, 1981, and is registered
under the Investment Company Act of 1940 (the "1940 Act") as an open-end
diversified investment company.
The Fund's investment objective 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 objectives by investing
primarily in securities of smaller companies generally. For defensive purposes,
the Fund also may invest in bonds and other debt obligations of such issuers and
fixed-income obligations of various governments.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT POLICIES. The investment objective and policies
of the Fund are described in the Prospectus under the heading
"General Description--Investment Objective and Policies."
DEBT SECURITIES. The Fund may invest in medium quality or
high risk, lower quality debt securities. As an operating
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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 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 creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could
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lessen the ability of a highly leveraged company to make principal and interest
payments on its debt securities. If the issuer of low rated debt securities
defaults, the Fund may incur additional expenses to seek recovery.
The Fund may accrue and report interest on high yield bonds structured
as zero coupon bonds or pay-in-kind securities as income even though it receives
no cash interest until the security's maturity or payment date. In order to
qualify for beneficial tax treatment afforded regulated investment companies,
the Fund must distribute substantially all of its net 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 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
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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 its investment objective and
policies, are fundamental policies except as otherwise indicated. No changes in
the Fund's investment objective, policies or investment restrictions (except
those which are not fundamental policies) can be made without the 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 Fund's Shares
present at a 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 does not:
1. Invest more than 5% of its total assets in the
securities of any one issuer (exclusive of 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); invest in
other open-end investment companies (except in
connection with a merger, consolidation, acquisition or
reorganization); invest in interests (other than
publicly issued debentures or equity stock interests)
in oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts, 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 Templeton
Investment Counsel, Inc. (the "Investment Manager"),
individually owning more than 1/2 of 1% of the
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securities of such company, 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 U.S.
Government obligations with a simultaneous agreement with the
seller to repurchase them within no more than seven days at
the original repurchase price plus accrued interest.
7. Borrow money for any purpose other than redeeming its
Shares for cancellation, and then only as a temporary
measure up to an amount not exceeding 5% of the value
of its total assets; or pledge, mortgage, or
hypothecate its assets for any purpose other than to
secure such borrowings, and then only 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.
8. Invest more than 5% of the value of its total assets in
securities of issuers which have been in continuous operation
less than three years.
9. Invest more than 5% of its total assets in warrants whether or
not listed on the New York or American Stock Exchange, and
more than 2% of its total assets 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, securities with a limited trading market (which
the Fund may not be able to dispose of at the current market
price) or those which are not otherwise readily marketable
with readily available current market quotations.
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11. Invest more than 25% of its total assets in a single
industry.
12. Invest in "letter stocks" or securities on which there
are any 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--Trading 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 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.
RISK FACTORS. The Fund has an unlimited right to purchase securities in
any foreign country, developed or developing, if they are listed on a stock
exchange, as well as a limited right to purchase such securities if they are
unlisted. Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in the
United States. Foreign companies are not
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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, therefore, may encounter
difficulty in obtaining market quotations for purposes of valuing its portfolio
and calculating its net asset value. Foreign markets have substantially less
volume than the New York Stock Exchange ("NYSE") and securities of some foreign
companies are less liquid and more volatile than securities of comparable United
States companies. Although the Fund may not invest more than 10% of its total
assets in securities with a limited trading market, in the opinion of management
such securities with a limited trading market do not present a significant
liquidity problem. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the United States, are likely to
be higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers and listed companies than in the United
States.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii) the
small current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
In addition, many countries in which the Fund may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position.
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Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in 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.
Investing in Russian companies involves a high degree of risk and
special considerations not typically associated with investing in the United
States securities markets, and should be considered highly speculative. Such
risks include: (a) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (b) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (c) pervasiveness of corruption and crime in the
Russian economic system; (d) currency exchange rate volatility and the lack of
available currency hedging instruments; (e) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation); (f)
controls on foreign investment and local practices disfavoring foreign investors
and limitations on repatriation of invested capital, profits and dividends, and
on the Fund's ability to exchange local currencies for U.S. dollars; (g) the
risk that the government of Russia or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the dissolution of the Soviet Union and could follow radically different
political and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, or a return to the centrally planned
economy that existed prior to the dissolution of the Soviet Union; (h) the
financial condition of Russian companies, including large amounts of
inter-company debt which may create a payments crisis on a national scale; (i)
dependency on exports and the corresponding importance of international trade;
(j) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation; and (k) possible
difficulty in identifying a purchaser of securities held by the Fund due to the
underdeveloped nature of the securities markets.
There is little historical data on Russian securities
markets because they are relatively new and a substantial
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proportion of securities transactions in Russia are privately negotiated outside
of stock exchanges. Because of the recent formation of the securities markets as
well as the underdeveloped state of the banking and telecommunications systems,
settlement, clearing and registration of securities transactions are subject to
significant risks. Ownership of shares (except where shares are held through
depositories that meet the requirements of the 1940 Act) is defined according to
entries in the company's share register and normally evidenced by extracts from
the register or by formal share certificates. However, there is no central
registration system for shareholders and these services are carried out by the
companies themselves or by registrars located throughout Russia. These
registrars are not necessarily subject to effective state supervision and it is
possible for the Fund to lose its registration through fraud, negligence or even
mere oversight. While the Fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian or
other agent inspecting the share register and by obtaining extracts of share
registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the Fund of its ownership rights or improperly dilute
its interests. In addition, while applicable Russian regulations impose
liability on registrars for losses resulting from their errors, it may be
difficult for the Fund to enforce any rights it may have against the registrar
or issuer of the securities in the event of loss of share registration.
Furthermore, although a Russian public enterprise with more than 1,000
shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. This practice may prevent the Fund from investing in the securities of
certain Russian companies deemed suitable by the Investment Manager. Further,
this also could cause a delay in the sale of Russian company securities by the
Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to
potential loss on the investment.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) will be incurred, particularly when the Fund changes investments from
one country to another or when proceeds of the sale of Shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the
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Fund from transferring cash out of the country or withhold portions of interest
and dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments which could affect investments in
securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations, and by indigenous economic
and political developments. Some countries in which the Fund may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies have experienced a steady devaluation
relative to the U.S. dollar. Any devaluations in the currencies in which a
Fund's portfolio securities are denominated may have a detrimental impact on the
Fund. Through the Fund's flexible policy, the Investment Manager endeavors to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time it places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
The Directors consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Directors also consider the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories (see "Investment Management and Other
Services--Custodian and Transfer Agent"). However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Investment
Manager, any losses resulting from the holding of the Fund's portfolio
securities in foreign countries and/or with securities depositories will be at
the risk of the Shareholders. No assurance can be given that the Directors'
appraisal of the risks
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will always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
TRADING POLICIES. The Investment Manager and its affiliated companies
serve as investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of certain of these funds and clients may
contain many or some of the same securities. When certain funds or clients are
engaged simultaneously in the purchase or sale of the same security, the trades
may be aggregated for execution and then allocated in a manner designed to be
equitable to each party. The larger size of the transaction may affect the price
of the security and/or the quantity which may be bought or sold for each party.
If the transaction is large enough, brokerage commissions in certain countries
may be negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7 under
the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from a
Compliance Officer and must be completed within 24 hours after this clearance;
(2) Copies of all brokerage confirmations must be sent to the Compliance Officer
and within 10 days after the end of each calendar quarter, a report of all
securities transactions must be provided to the Compliance Officer; (3) In
addition to items (1) and (2), access persons involved in preparing and making
investment decisions must file annual reports of their securities holdings each
January and also inform the Compliance Officer (or other designated personnel)
if they own a security that is being considered for a fund or other client
transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
MANAGEMENT OF THE FUND
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:
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
HARRIS J. ASHTON
Metro Center, 1 Station Place
Stamford, Connecticut
Director
Chairman of the Board,
president and chief executive
officer of General Host
Corporation (nursery and craft
centers); and a director of RBC
Holdings (U.S.A.) Inc. (a bank
holding company) and Bar-S
Foods. Age 63.
NICHOLAS F. BRADY*
The Bullitt House
102 East Dover Street
Easton, Maryland
Director
Chairman of Templeton Emerging Markets Investment Trust PLC; chairman
of Templeton Latin America Investment Trust PLC; chairman of Darby Overseas
Investments, Ltd. (an investment firm) (1994- present); director of the Amerada
Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J.
Heinz Company; Secretary of the United States Department of the Treasury
(1988-January 1993); and chairman of the board of Dillion, Read & Co. Inc.
(investment banking) prior thereto. Age 65.
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.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
F. BRUCE CLARKE
19 Vista View Blvd.
Thornhill, Ontario
Director
Retired; formerly, credit
adviser for National Bank of
Canada, Toronto. Age 85.
HASSO-G VON DIERGARDT-NAGLO
R.R. 3
Stouffville, Ontario
Director
Farmer; and president of
Clairhaven Investments, Ltd.
and other private investment
companies. Age 79.
S. JOSEPH FORTUNATO
200 Campus Drive
Florham Park, New Jersey
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a
director of General Host Corporation. Age 63.
JOHN Wm. GALBRAITH
360 Central Avenue
Suite 1300
St. Petersburg, Florida
Director
President of Galbraith
Properties, Inc. (personal
investment company); director
of Gulfwest Banks, Inc. (bank
holding company) (1995-present)
and Mercantile Bank (1991-
present); vice chairman of
Templeton, Galbraith &
Hansberger Ltd. (1986-1992);
and chairman of Templeton Funds
Management, Inc. (1974-1991).
Age 74.
ANDREW H. HINES, JR.
150 2nd Avenue N.
St. Petersburg, Florida
Director
Consultant for the Triangle Consulting Group; chairman of the board
and chief executive officer of Florida Progress Corporation (1982-February 1990)
and director of various of its subsidiaries; chairman and director of Precise
Power Corporation; executive-in-residence of Eckerd College (1991-present); and
a director of Checkers Drive-In Restaurants, Inc. Age 72.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEARS
CHARLES B. JOHNSON*
777 Mariners Island Blvd.
San Mateo, California
Chairman of the Board
and Vice President
President, chief executive officer, and director of Franklin Resources, Inc.;
chairman of the board and director of Franklin Advisers, Inc. and Franklin
Templeton Distributors, Inc.; director of General Host Corporation, and
Templeton Global Investors, Inc.; and officer and director, trustee or managing
general partner, as the case may be, of most other subsidiaries of Franklin and
of 55 of the investment companies in the Franklin Templeton Group. Age 62.
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.
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH FUND DURING PAST FIVE YEAR
FRED R. MILLSAPS
2665 NE 37th Drive
Fort Lauderdale, Florida
Director
Manager of personal investments (1978-present); chairman and chief executive
officer of Landmark Banking Corporation (1969-1978); financial vice president of
Florida Power and Light (1965-1969); vice president of The Federal Reserve Bank
of Atlanta (1958- 1965); and a director of various business and nonprofit
organizations. Age 66.
MARC S. JOSEPH, J.D.
500 East Broward Blvd.
Fort Lauderdale, Florida
President
Vice president of Templeton
Investment Counsel, Inc.;
management consultant, McKinsey
& Company (1987 - 1990); vice
president, 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 with 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.
- 15 -
<PAGE>
MARK G. HOLOWESKO
Lyford Cay
Nassau, Bahamas
Vice President
President and director of Templeton Global Advisors Limited;
chief investment officer of global equity research for Templeton Worldwide,
Inc.; president or vice president of the Templeton Funds; formerly, investment
administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985). Age
35.
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 (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 with Ernst
& Young (certified public accountants) (1977-1989). Age 41.
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 Advisors Limited are limited partners of
Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Directors.
DIRECTOR COMPENSATION
All of the Fund's Officers and Directors also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid by
the Fund to any officer or Director who is an officer, trustee or employee of
the Investment Manager or its affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or fees
for attendance at Board and Committee meetings, the amount of which is based on
the level of assets in each fund. Accordingly, the Fund currently pays the
independent Directors
and Mr. Brady an annual retainer of $6,000 and a fee of $500 per meeting
attended of the Board and its Committees. The independent Directors and Mr.
Brady are reimbursed for any expenses incurred in attending meetings, paid pro
rata by each Franklin Templeton Fund in which they serve. No pension or
retirement benefits are accrued as part of Fund expenses.
The following table shows the total compensation paid to the Directors
by the Fund and by all investment companies in the Franklin Templeton Group:
- 16 -
<PAGE>
<TABLE>
<CAPTION>
Number of Total Compensation
Aggregate Franklin Templeton from all Funds in
Compensation from Fund Boards on which Franklin Templeton
Name of Director THE FUND* DIRECTOR SERVES GROUP**
<S> <C> <C> <C>
Harris J. Ashton $7,000 56 $327,925
Nicholas F. Brady 7,000 24 98,225
F. Bruce Clarke 8,000 20 83,350
Hasso-G von Diergardt-Naglo 7,000 20 77,350
S. Joseph Fortunato 7,000 58 344,745
John Wm. Galbraith 2,000 23 70,100
Andrew H. Hines, Jr. 8,000 24 106,325
Betty P. Krahmer 7,000 24 93,475
Gordon S. Macklin 7,000 53 321,525
Fred R. Millsaps 8,000 24 104,325
</TABLE>
- ---------------
* For the fiscal year ended August 31, 1995.
** For the calendar year ended December 31, 1995.
PRINCIPAL SHAREHOLDERS
As of December 1, 1995, there were 176,646,946 Shares of the Fund
outstanding, of which 940,980 Shares (0.533%) were owned beneficially, directly
or indirectly, by all the Directors and Officers of the Fund as a group. As of
December 1, 1995, to the knowledge of management, no person owned beneficially
or of record 5% or more of the outstanding Shares of Class I, except Merrill
Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 45286, Jacksonville, Florida
32232-5286 owned of record 9,026,926 Shares (5% of the outstanding Shares) and
no person owned beneficially or of record 5% or more of the outstanding Shares
of Class II, except Merrill Lynch, Pierce, Fenner & Smith, Inc., 4800 Deer Lake
Dr. E., 3rd Floor, Jacksonville, Florida 32246-6484 owned 29,501 shares (5% of
the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of
the Fund is Templeton Investment Counsel, Inc., a Florida
corporation with offices in Ft. Lauderdale, Florida. On
October 30, 1992, the Investment Manager assumed the investment
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<PAGE>
management duties of Templeton, Galbraith & Hansberger, Ltd. ("TGH"), a Cayman
Islands corporation, with respect to the Fund in connection with the merger of
the business of TGH with that of Franklin Resources, Inc. ("Franklin"). The
Investment Management Agreement, dated November 1, 1993, and amended and
restated December 6, 1994, was approved by the Shareholders of the Fund on
October 13, 1993, was last approved by the Board of Directors, including
approval by a majority of the Directors who were not parties to the Agreement or
interested persons of any such party, at a meeting on December 5, 1995, and
continues from year to year, subject to approval annually by the Board of
Directors of the Fund or by vote of a majority of the outstanding Shares of the
Fund (as defined in the 1940 Act) and also, in either event, with the approval
of a majority of those Directors who are not parties to the Investment
Management Agreement or interested persons of any such party in person at a
meeting called for the purpose of voting on such approval.
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, 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 (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policies incidentally may help reduce the expenses of or
otherwise benefit the Investment Manager and other investment advisory clients
of the Investment Manager and of its affiliates, as well as the 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. See "Investment Objective and Policies-Trading
Policies." 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
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<PAGE>
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 Manager also provides management services to numerous
other investment companies or funds and accounts pursuant to management
agreements with each fund or account. The Investment Manager may give advice and
take action with respect to any of the other funds and accounts it manages, or
for its own account, which may differ from action taken by the Manager on behalf
of a Fund. Similarly, with respect to a Fund, the Investment Manager is not
obligated to recommend, purchase or sell, or to refrain from recommending,
purchasing or selling any security that the Investment Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund or account. Furthermore, the
Investment Manager is not obligated to refrain from investing in securities held
by a Fund or other funds or accounts which it manages or administers. Any
transactions for the accounts of the Investment Manager and other access persons
will be made in compliance with the Fund's Code of Ethics as described in the
section "Investment Objectives and Policies --Personal Securities Transactions."
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 securities depositories, or from any wars or political acts of
any foreign governments to which such assets might be exposed, except for any
liability, loss or damage resulting from willful misfeasance, bad faith or gross
negligence on the Investment Manager's part or reckless disregard of its duties
under the Investment Management Agreement. 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 in office at the
time or by vote of a majority of the outstanding voting securities of the Fund
(as defined by the 1940 Act).
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
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<PAGE>
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 $30,000,000 of net assets, 2% of the next
$70,000,000 of net assets and 1.5% of the remainder.
During the fiscal years ended August 31, 1995, 1994, and 1993, the
Investment Manager (and, prior to October 30, 1992, TGH, the Fund's previous
investment manager) received fees from the Fund of $10,004,316, $10,050,360, and
$7,657,346, respectively, pursuant to the Investment Management Agreement and
Agreements in effect prior to October 30, 1992.
THE INVESTMENT MANAGER. The Investment Manager is an
indirect wholly owned subsidiary of Franklin, a publicly traded
company whose shares are listed on the NYSE. Charles B. Johnson
(a Director and Officer of the Fund) and Rupert H. Johnson, Jr.
are principal shareholders of Franklin and own, respectively,
approximately 20% and 16% of its outstanding shares. Messrs.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Global Investors, Inc. performs
certain administrative functions 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;
- 20 -
<PAGE>
. 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
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 executive, clerical and secretarial help
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 $200,000,000 of the Fund's average daily
net assets, reduced to 0.135% annually of such assets in excess of $200,000,000,
further reduced to 0.1% annually of such net assets in excess of $700,000,000,
and further reduced to 0.075% annually of such net assets in excess of
$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. During the fiscal years ended August 31,
1995, 1994, and 1993, the Business Manager (and, prior to April 1, 1993,
Templeton Funds Management, Inc., the previous business manager) received
business management fees of 1,575,214, $1,567,336, and $1,270,208, respectively.
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.
- 21 -
<PAGE>
CUSTODIAN AND TRANSFER AGENT. The Chase Manhattan Bank, N.A., serves as
Custodian of the Fund's assets, which are maintained at the Custodian's
principal office, MetroTech Center, Brooklyn, New York 11245, and at the offices
of its branches and agencies throughout the world. The Custodian has entered
into agreements with foreign sub-custodians approved by the Directors pursuant
to Rule 17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians
generally do not hold certificates for the securities in their custody, but
instead have book records with domestic and foreign securities depositories,
which in turn have book records with 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.
Franklin Templeton Investor Services, Inc. serves as the Fund's
Transfer Agent. Services performed by the Transfer Agent include processing
purchase, transfer and redemption orders; making dividend payments, capital gain
distributions and reinvestments; and handling routine communications with
Shareholders. The Transfer Agent receives from the Fund an annual fee of $13.74
per Shareholder account plus out-of-pocket expenses, such fee to be adjusted
each year to reflect changes in the Department of Labor Consumer Price Index.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, D.C. 20005, is legal counsel for the Fund.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, New York 10017, 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").
REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on August 31.
Shareholders will be provided at least semiannually with reports showing the
Fund's portfolio and other information, including an annual report with
financial statements audited by independent accountants. Shareholders who would
like to receive an interim quarterly report may phone the Fund Information
Department at 1-800/DIAL BEN.
BROKERAGE ALLOCATION
The Investment Management Agreement provides that the Investment
Manager is responsible for selecting members of securities exchanges, brokers
and dealers (such members, brokers and dealers being hereinafter referred to as
"brokers") for the execution of the Fund's portfolio transactions consistent
with the Fund's brokerage policy and, when applicable, the negotiation
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<PAGE>
of commissions in connection therewith. All decisions and
placements are made in accordance with the following principles:
1. Purchase and sale orders are usually placed with
brokers who are selected by the Investment Manager as
able to achieve "best execution" of such orders. "Best
execution" shall mean prompt and reliable execution at
the most favorable securities price, taking into
account the other provisions hereinafter set forth.
The determination of what may constitute best execution
and price in the execution of a securities transaction
by a broker involves a number of considerations,
including, without limitation, the overall direct net
economic result to the Fund (involving both price paid
or received and any commissions and other costs paid),
the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a
large block is involved, availability of the broker to
stand ready to execute possibly difficult transactions
in the future, and the financial strength and stability
of the broker. Such considerations are judgmental and
are weighed by the Investment Manager in determining
the overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the
Investment Manager shall take into account its past experience
as to brokers qualified to achieve "best execution," including
brokers who specialize in any foreign securities held by the
Fund.
3. The Investment Manager is authorized to allocate
brokerage business to brokers who have provided
brokerage and research services, as such services are
defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for the Fund and/or other
accounts, if any, for which the Investment Manager
exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act), and, as to transactions as
to which fixed minimum commission rates are not
applicable, to cause the Fund to pay a commission for
effecting a securities transaction in excess of the
amount another broker would have charged for effecting
that transaction, if the Investment Manager determines
in good faith that such amount of commission is
reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed
in terms of either that particular transaction or the
Investment Manager's overall responsibilities with
respect to the Fund and the other accounts, if any, as
to which it exercises investment discretion. In
- 23 -
<PAGE>
reaching such determination, the Investment Manager is not
required to place or attempt to place a specific dollar value
on the research or execution services of a broker or on the
portion of any commission reflecting either of said services.
In demonstrating that such determinations were made in good
faith, the Investment Manager shall be prepared to show that
all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that research
services provide lawful and appropriate assistance to the
Investment Manager in the performance of its investment
decision-making responsibilities, and that the commissions
paid were within a reasonable range. The determination that
commissions were within a reasonable range shall be based on
any available information as to the level of commissions known
to be charged by other brokers on comparable transactions, but
there shall be taken into account the Fund's policies that (i)
obtaining a low commission is deemed secondary to obtaining a
favorable securities price, since it is recognized that
usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii)
the quality, comprehensiveness and frequency of research
studies which are provided for the Fund and the Investment
Manager are useful to the Investment Manager in performing its
advisory services under its Investment Management Agreement
with the Fund. Research services provided by brokers are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Manager under its
Investment Management Agreement. Research furnished by brokers
through whom the Fund effects securities transactions may be
used by the Investment Manager for any of its accounts, and
not all such research may be used by the Investment Manager
for the Fund. When execution of portfolio transactions is
allocated to brokers trading on exchanges with fixed brokerage
commission rates, account may be taken of various services
provided by the broker.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange are executed with
primary market makers acting as principal, except where, in
the judgment of the Investment Manager, better prices and
execution may be obtained on a commission basis or from other
sources.
5. Sales of the Fund's Shares (which shall be deemed to
also include shares of other companies registered under
the 1940 Act which have either the same investment
- 24 -
<PAGE>
adviser or an investment adviser affiliated with the
Investment Manager) made by a broker are one factor among
others to be taken into account in recommending and in
deciding to allocate portfolio transactions (including agency
transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker
shall furnish "best execution," as defined in paragraph 1
above, and that such allocation shall be within the scope of
the Fund's other policies as stated above; and provided
further, that in every allocation made to a broker in which
the sale of Shares is taken into account there shall be no
increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set forth in
paragraph 3 above, on the basis of best execution alone or
best execution plus research services, without taking account
of or placing any value upon such sale of Shares.
Insofar as known to management, no Director or Officer of the Fund, nor
the Investment Manager or Principal Underwriter or any person affiliated with
any of them, has any material direct or indirect interest in any broker which
may be employed by or on behalf of the Fund. Franklin Templeton Distributors,
Inc., the Fund's Principal Underwriter, is a registered broker-dealer, but it
has never executed any purchase or sale transactions for the Fund or
participated in any commissions on any such transactions, and has no intention
of doing so in the future. The total brokerage commissions on the Fund's
portfolio transactions during the fiscal years ended August 31, 1995, 1994, and
1993 (not including any spreads or concessions on principal transactions) were
$1,298,000, $3,802,000, and $2,064,000, respectively. All portfolio transactions
are allocated to broker-dealers only when their prices and execution, in the
judgment of the Investment Manager, are equal to the best available within the
scope of the Fund's policies. There is no fixed method used in determining which
broker-dealers receive which order or how many orders.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The Prospectus describes the manner in which the Fund's
Shares may be purchased and redeemed. See "How to Buy Shares of
the Fund" and "How to Sell Shares of the Fund."
closing of the NYSE (generally 4:00 p.m., New York time), every Monday through
Friday (exclusive of national business holidays). The Fund's offices will be
closed, and net asset value will not be calculated, on those days on which the
NYSE is closed, which
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<PAGE>
currently are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business in New York on each day on which the NYSE is open. Trading of European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every New York business day. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and on which the Fund's net asset value is not calculated. The Fund calculates
net asset value per Share, and therefore effects sales, redemptions and
repurchases of its Shares, as of the close of the NYSE once on each day on which
that Exchange is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio securities used in
such calculation and if events occur which materially affect the value of those
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Board of Directors.
The Board of Directors may establish procedures under which 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 Shares.
OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving
multiple claims of ownership or authority to control a Shareholder's account,
the Fund has the right (but has no obligation) to: (1) freeze the account and
require the written agreement of all persons deemed by the Fund to have a
potential property interest in the account, prior to executing instructions
regarding the account; or (2) interplead disputed funds or accounts with a court
of competent jurisdiction. Moreover, the Fund may surrender ownership of all or
a portion of an account to the IRS in response to a Notice of Levy.
In addition to the special purchase plans described in the Prospectus,
other special purchase plans also are available:
- 26 -
<PAGE>
TAX-DEFERRED RETIREMENT PLANS. The Fund offers its
Shareholders the opportunity to participate in the following
types of retirement plans:
. For individuals whether or not covered by other
qualified plans;
. For simplified employee pensions;
. For employees of tax-exempt organizations; and
. For corporations, self-employed individuals and
partnerships.
Capital gains and income received by the foregoing plans generally are
exempt from taxation until distribution from the plans. Investors considering
participation in any such plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan. Additional information,
including the fees and charges with respect to all of these plans, is available
upon request to the Principal Underwriter. No distribution under a retirement
plan will be made until Franklin Templeton Trust Company ("FTTC") receives the
participant's election on IRS Form W-4P (available on request from FTTC) and
such other documentation as it deems necessary, as to whether or not U.S. income
tax is to be withheld from such distribution.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals (whether or not
covered by qualified private or governmental retirement plans) may purchase
Shares of the Fund pursuant to an IRA. However, contributions to an IRA by an
individual who is covered by a qualified private or governmental plan may not be
tax-deductible depending on the individual's income. Custodial services for IRAs
are available through FTTC. Disclosure statements summarizing certain aspects of
IRAs are furnished to all persons investing in such accounts, in accordance with
IRS regulations.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to
establish a simplified form of employee retirement program investing in Shares
of the Fund, there are available Simplified Employee Pensions invested in IRA
Plans. Details and materials relating to these Plans will be furnished upon
request to the Principal Underwriter.
RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS
(403(B)). Employees of public school systems and certain types
of charitable organizations may enter into a deferred
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<PAGE>
compensation arrangement for the purchase of Shares of the Fund without being
taxed currently on the investment. Contributions which are made by the employer
through salary reduction are excludable from the gross income of the employee.
Such deferred compensation plans, which are intended to qualify under Section
403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), are
available through the Principal Underwriter.
Custodial services are provided by FTTC.
QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND
PARTNERSHIPS. For employers who wish to purchase Shares of the Fund in
conjunction with employee retirement plans, there is a prototype master plan
which has been approved by the IRS. A "Section 401(k) plan" is also available.
FTTC furnishes custodial services for these plans. For further details,
including custodian fees and plan administration services, see the master plan
and related material which is available from the Principal Underwriter.
LETTER OF INTENT. Purchasers who intend to invest $50,000 or more in
Class I Shares of the Fund or any other fund in the Franklin Group of Funds and
the Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, Templeton Variable Products Series Fund,
Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin
Templeton Funds"), within 13 months (whether in one lump sum or in installments,
the first of which may not be less than 5% of the total intended amount and each
subsequent installment not less than $25 unless the investor is a qualifying
employee benefit plan (the "Benefit Plan"), including automatic investment and
payroll deduction plans), and to beneficially hold the total amount of such
Class I Shares fully paid for and outstanding simultaneously for at least one
full business day before the expiration of that period, should execute a Letter
of Intent ("LOI") on the form provided in the Shareholder Application in the
Prospectus. Payment for not less than 5% of the total intended amount must
accompany the executed LOI unless the investor is a Benefit Plan. Except for
purchases of Shares by a Benefit Plan, those Class I Shares purchased with the
first 5% of the intended amount stated in the LOI will be held as "Escrowed
Shares" for as long as the LOI remains unfulfilled. Although the Escrowed Shares
are registered in the investor's name, his full ownership of them is conditional
upon fulfillment of the LOI. No Escrowed Shares can be redeemed by the investor
for any purpose until the LOI is fulfilled or terminated. If the LOI is
terminated for any reason other than fulfillment, the Transfer Agent will redeem
that portion of the Escrowed Shares required and apply the proceeds to pay any
adjustment that may be appropriate to the sales commission on all Class I Shares
(including the Escrowed Shares) already purchased under the LOI
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<PAGE>
and apply any unused balance to the investor's account. The LOI is not a binding
obligation to purchase any amount of Shares, but its execution will result in
the purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to an LOI may be included under a
subsequent LOI executed within 90 days of such purchase. In this case, an
adjustment will be made at the end of 13 months from the effective date of the
LOI at the net asset value per Share then in effect, unless the investor makes
an earlier written request to the Principal Underwriter upon fulfilling the
purchase of Shares under the LOI. In addition, the aggregate value of any
Shares, including Class II Shares, purchased prior to the 90-day period referred
to above may be applied to purchases under a current LOI in fulfilling the total
intended purchases under the LOI. However, no adjustment of sales charges
previously paid on purchases prior to the 90-day period will be made.
If an LOI is executed on behalf of a benefit plan (such plans are
described under "How to Buy Shares of the Fund -- Net Asset Value Purchases
(Both Classes)" in the Prospectus), the level and any reduction in sales charge
for these employee benefit plans will be based on actual plan participation and
the projected investments in the Franklin Templeton Funds under the LOI. Benefit
Plans are not subject to the requirement to reserve 5% of the total intended
purchase, or to any penalty as a result of the early termination of a plan, nor
are Benefit Plans entitled to receive retroactive adjustments in price for
investments made before executing LOIs.
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under
"How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase Class I Shares of the
Fund at net asset value (without a front-end or contingent deferred sales
charge). Franklin Templeton Distributors, Inc. ("FTD") or one of its affiliates
may make payments, out of its own resources, to securities dealers who initiate
and are responsible for such purchases, as indicated below. FTD may make these
payments in the form of contingent advance payments, which may require
reimbursement from the securities dealers with respect to certain redemptions
made within 12 months of the calendar month following purchase, as well as other
conditions, all of which may be imposed by an agreement between FTD, or its
affiliates, and the securities dealer.
The following amounts will be paid by FTD or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and fixed-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
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rollovers): 1.00% on sales of $1 million but less than $2 millon, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
fixed-income Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases. With
respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, FTD, or one of its
affiliates, out of its own resources, may pay up to 1% of the amount invested.
Under agreements with certain banks in Taiwan, Republic of China, the
Fund's Shares are available to such banks' discretionary trust funds at net
asset value. The banks may charge service fees to their customers who
participate in the discretionary trusts. Pursuant to agreements, a portion of
such service fees may be paid to FTD, or an affiliate of FTD to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash;
however, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash, in conformity with applicable rules of the SEC. In such circumstances, the
securities distributed would be valued at the price used to compute the Fund's
net assets value. If Shares are redeemed in kind, the redeeming Shareholder
might incur brokerage costs in converting the assets into cash. A Fund is
obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1% of
its net assets during any 90-day period for any one Shareholder.
TAX STATUS
The Fund intends normally to pay a dividend at least once annually
representing substantially all of its net investment income (which includes,
among other items, dividends and interest) and to distribute at least annually
any realized capital gains. By so doing and meeting certain diversification of
assets and other requirements of the Code, the Fund intends to qualify annually
as a regulated investment company under the
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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. Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement also are subject to a nondeductible 4%
excise tax. To prevent application of the excise tax, the Fund intends to make
distributions in accordance with the calendar year distribution requirement.
Dividends of net investment income and net short-term capital gains are
taxable to Shareholders as ordinary income. Distributions of net investment
income may be eligible for the corporate dividends-received deduction to the
extent attributable to the Fund's qualifying dividend income. However, the
alternative minimum tax applicable to corporations may reduce the benefit of the
dividends-received deduction. Distributions of net capital gains (the excess of
net long-term capital gains over net short-term capital losses) designated by
the Fund as capital gain dividends are taxable to Shareholders as long-term
capital gains, regardless of the length of time the Fund's Shares have been held
by a Shareholder, and are not eligible for the dividends-received deduction.
Generally, dividends and distributions are taxable to Shareholders, whether
received in cash or reinvested in Shares of the Fund. Any distributions that are
not from the Fund's investment company taxable income or net capital gain may be
characterized as a return of capital to Shareholders or, in some cases, as
capital gain. Shareholders will be notified annually as to the Federal tax
status of dividends and distributions they receive and any tax withheld thereon.
Distributions by the Fund reduce the net asset value of the Fund
Shares. Should a distribution reduce the net asset value below a Shareholder's
cost basis, the distribution nevertheless would be taxable to the Shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implication of
buying Shares just prior to a distribution by the Fund. The price of Shares
purchased at that time includes the amount of the forthcoming distribution, but
the distribution will generally be taxable to them.
The Fund may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC
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if at least one-half of its assets constitute investment-type assets or 75% or
more of its gross income is investment-type income. Under the PFIC rules, an
"excess distribution" received with respect to PFIC stock is treated as having
been realized ratably over the period during which the Fund held the PFIC stock.
The Fund itself will be subject to tax on the portion, if any, of the excess
distribution that is allocated to the Fund's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though the Fund
distributes the corresponding income to Shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
The Fund may be able to elect alternative tax treatment with respect to
PFIC stock. Under an election that currently may be available, the Fund
generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election may be available that would involve marking
to market the Fund's PFIC shares at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains are
treated as though they were realized. If this election were made, tax at the
fund level under the PFIC rules would generally be eliminated, but the Fund
could, in limited circumstances, incur nondeductible interest charges. The
Fund's intention to qualify annually as a regulated investment company may limit
its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject the Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to Shareholders, and which will be taxed to Shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
Income received by the Fund from sources within foreign countries may
be subject to withholding and other income or similar taxes imposed by such
countries. If more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible and intends to elect to "pass through" to the Fund's
Shareholders the amount of foreign taxes paid by the Fund.
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<PAGE>
Pursuant to this election, a Shareholder will be required to include in gross
income (in addition to taxable dividends actually received) his pro rata share
of the foreign taxes paid by the Fund, and will be entitled either to deduct (as
an itemized deduction) his pro rata share of foreign income and similar taxes in
computing his taxable income or to use it as a foreign tax credit against his
U.S. Federal income tax liability, subject to limitations. No deduction for
foreign taxes may be claimed by a Shareholder who does not itemize deductions,
but such a Shareholder may be eligible to claim the foreign tax credit (see
below). Each Shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund will "pass
through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that
it may not exceed the Shareholder's U.S. tax attributable to his foreign source
taxable income. For this purpose, if the pass-through election is made, the
source of the Fund's income flows through to its Shareholders. With respect to
the Fund, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency-denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by the Fund. Shareholders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by the Fund. Foreign taxes may not be deducted in computing alternative
minimum taxable income and the foreign tax credit can be used to offset only 90%
of the alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals. If the Fund is not eligible
to make the election to "pass through" to its Shareholders its foreign taxes,
the foreign income taxes it pays generally will reduce investment company
taxable income and the distributions by the Fund will be treated as United
States source income.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates, which occur between the time the Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities, generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security and the date of
disposition also are
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<PAGE>
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of
the Fund's net investment income to be distributed to its Shareholders as
ordinary income. For example, fluctuations in exchange rates may increase the
amount of income that the Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other net investment income during a taxable year, the Fund would not be able to
make ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as a return of capital to Shareholders
for Federal income tax purposes, rather than as an ordinary dividend, reducing
each Shareholder's basis in his Fund Shares, or as a capital gain.
Upon the sale or exchange of his Shares, a Shareholder will realize a
taxable gain or loss depending upon his basis in the Shares. Such gain or loss
will be treated as capital gain or loss if the Shares are capital assets in the
Shareholder's hands, and generally will be long-term if the Shareholder's
holding period for the Shares is more than one year and generally otherwise will
be short-term. Any loss realized on a sale or exchange will be disallowed to the
extent that the Shares disposed of are replaced (including replacement through
the reinvesting of dividends and capital gain distributions in the Fund) within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the Shares. In such a case, the basis of the Shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a Shareholder
on the sale of Fund Shares held by the Shareholder for six months or less will
be treated for Federal income tax purposes as a long-term capital loss to the
extent of any distributions of long-term capital gains received by the
Shareholder with respect to such Shares.
In some cases, Shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Shares. This prohibition generally applies where (1)
the Shareholder incurs a sales charge in acquiring the stock of a regulated
investment company, (2) the stock is disposed of before the 91st day after the
date on which it was acquired, and (3) the Shareholder subsequently acquires
Shares of the same or another regulated investment company and the otherwise
applicable sales charge is reduced or eliminated under a "reinvestment right"
received upon the initial purchase of shares of stock. In that case, the gain or
loss recognized will be determined by excluding
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<PAGE>
from the tax basis of the Shares exchanged all or a portion of the sales charge
incurred in acquiring those Shares. This exclusion applies to the extent that
the otherwise applicable sales charge with respect to the newly acquired Shares
is reduced as a result of having incurred a sales charge initially. Sales
charges affected by this rule are treated as if they were incurred with respect
to the stock acquired under the reinvestment right. This provision may be
applied to successive acquisitions of shares of stock.
The Fund generally will be required to withhold Federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to Shareholders if (1) the Shareholder
fails to furnish the Fund with the Shareholder's correct taxpayer identification
number or social security number and to make such certifications as the Fund may
require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect, or (3) when required to do so, the
Shareholder fails to certify that he is not subject to backup withholding. Any
amounts withheld may be credited against the Shareholder's Federal income tax
liability.
Ordinary dividends and taxable capital gain distributions declared in
October, November, or December with a record date in such a month and paid
during the following January will be treated as having been paid by the Fund and
received by Shareholders on December 31 of the calendar year in which declared,
rather than the calendar year in which the dividends are actually received.
Distributions also may be subject to state, local and
foreign taxes. U.S. tax rules applicable to foreign investors
may differ significantly from those outlined above. Shareholders
are advised to consult their own tax advisers for details with
respect to the particular tax consequences to them of an
investment in the Fund.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc. ("FTD" or the
"Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida
33733-8030, toll free telephone (800) 237-0738, is the Principal
Underwriter of the Fund's Shares. FTD is a wholly owned
subsidiary of Franklin.
The Fund, pursuant to Rule 12b-1 under the 1940 Act, has adopted a
Distribution Plan with respect to each class of Shares (the "Plans"). Under the
Plan adopted with respect to Class I
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Shares, the Fund may reimburse the Principal Underwriter or others quarterly
(subject to a limit of 0.25% per annum of the Fund's average daily net assets)
for costs and expenses incurred by FTD or others in connection with any activity
which is primarily intended to result in the sale of Fund Shares. Under the Plan
adopted with respect to Class II Shares, the Fund will pay FTD or others
quarterly (subject to a limit of 1.00% per annum of the Fund's average daily
assets attributable to Class II Shares of which up to 0.25% of such net assets
may be paid to dealers for personal service and/or maintenance of Shareholder
accounts) for costs and expenses incurred by FTD or others in connection with
any activity which is primarily intended to result in the sale of the Fund's
Shares. Payments to FTD or others could be for various types of activities,
including (1) payments to broker-dealers who provide certain services of value
to the Fund's Shareholders (sometimes referred to as a "trail fee"); (2)
reimbursement of expenses relating to selling and servicing efforts or of
organizing and conducting sales seminars; (3) payments to employees or agents of
the Principal Underwriter who engage in or support distribution of Shares; (4)
payment of the costs of preparing, printing and distributing Prospectuses and
reports to prospective investors and of printing and advertising expenses; (5)
payment of dealer commissions and wholesaler compensation in connection with
sales of Fund Shares and interest or carrying charges in connection therewith;
and (6) such other similar services as the Fund's Board of Directors determines
to be reasonably calculated to result in the sale of Shares. Under the Plan
adopted with respect to Class I Shares, the costs and expenses not reimbursed in
any one given quarter (including costs and expenses not reimbursed because they
exceed 0.25% of the Fund's average daily net assets attributable to Class I
Shares) may be reimbursed in subsequent quarters or years.
During the fiscal year ended August 31, 1995, FTD incurred in
connection with the distribution of Shares costs and expenses of $3,293,741 for
Class I Shares of the Fund, $3,952 for Class II Shares of the Fund. During the
same period, the Fund made reimbursements pursuant to the Plan in the amount of
$3,315,877. FTD has informed the Fund that it had no unreimbursed expenses for
Class I Shares of the Fund under the Class I Plan as of August 31, 1995. In the
event that the Plan is terminated, the Fund will not be liable to FTD for any
unreimbursed expenses that had been carried forward from previous months or
years. During the fiscal year ended August 31, 1995, FTD spent, pursuant to the
Plan, with respect to Class I Shares of the Fund, the following amounts on:
compensation to dealers, $2,410,107; sales promotion, $210,416; printing,
$187,733; advertising, $455,801; and wholesale costs and expenses, $29,684; with
respect to Class II Shares of the Fund, the following amounts on: compensation
to
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dealers, $339; sales promotion, $9; printing, $8; advertising, $20; and
wholesale costs and expenses, $3,577.
The Distribution Agreement provides that the Principal Underwriter will
use its best efforts to maintain a broad and continuous distribution of the
Fund's Shares among bona fide investors and may sign selling agreements with
responsible dealers, as well as sell to individual investors. The Shares are
sold only at the Offering Price in effect at the time of sale, and the Fund
receives not less than the full net asset value of the Shares sold. The discount
between the Offering Price and the net asset value may be retained by the
Principal Underwriter or it may reallow all or any part of such discount to
dealers. In the fiscal years ended August 31, 1995, 1994, and 1993, FTD (and,
prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such
discount $241,160, $752,231, and $625,039, or approximately 10.00%, 16.88%, and
20.10%, of the gross sales commissions for those years, respectively.
The Distribution Agreement provides that the Fund shall pay the costs
and expenses incident to registering and qualifying its Shares for sale under
the Securities Act of 1933 and under the applicable Blue Sky laws of the
jurisdictions in which the Principal Underwriter desires to distribute such
Shares, and for preparing, printing and distributing prospectuses and reports to
Shareholders. The Principal Underwriter pays for the cost of printing additional
copies of prospectuses and reports to Shareholders used for selling purposes.
(The Fund pays costs of preparation, set-up and initial supply of the Fund's
prospectus for existing Shareholders.)
The Distribution Agreement is subject to renewal from year to year in
accordance with the provisions of the 1940 Act and terminates automatically in
the event of its assignment. The Distribution Agreement may be terminated
without penalty by either party on 60 days' written notice to the other,
provided termination by the Fund shall be approved by the Board of Directors or
a majority (as defined in the 1940 Act) of the Shareholders. The Principal
Underwriter is relieved of liability for any act or omission in the course of
its performance of the Distribution Agreement, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations.
FTD is the Principal Underwriter of the Shares of the Fund throughout
the world, except for Europe and such other countries or territories as it might
hereafter relinquish to another principal underwriter. The Fund has entered into
a non-exclusive underwriting agreement with Templeton Global Strategic Services
(Deutschland) GmbH ("Templeton Strategic Services"), whose office
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address is Taunusanlage 11, 60329 Frankfurt am Main, Germany, as principal
underwriter for sale of the Shares in all countries in Europe. The terms of the
underwriting agreements with Templeton Strategic Services are substantially
similar to those of the Distribution Agreement with FTD. Templeton Strategic
Services is an indirect wholly owned subsidiary of Franklin.
FTD is the principal underwriter for the other Templeton Funds.
DESCRIPTION OF SHARES
The Shares have non-cumulative voting rights so that the holders of a
plurality of the Shares voting for the election of Directors at a meeting at
which 50% of the outstanding Shares are present can elect all the Directors and,
in such event, the holders of the remaining Shares voting for the election of
Directors will not be able to elect any person or persons to the Board of
Directors.
PERFORMANCE INFORMATION
The Fund may, from time to time, include its total return in
advertisements or reports to Shareholders or prospective investors. Quotations
of average annual total return for the Fund will be expressed in terms of the
average annual compounded rate of return for periods in excess of one year or
the total return for periods less than one year of a hypothetical investment in
the Fund over periods of one, five and ten years (up to the life of the Fund)
calculated pursuant to the following formula: P(1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the average annual total return for
periods of one year or more or the total return for periods of less than one
year, n = the number of years, and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of the maximum initial sales charge and
deduction of a proportional share of Fund expenses on an annual basis, and
assume that all dividends and distributions are reinvested when paid. The Fund's
average annual total return for the one-, five-and ten-year periods ended August
31, 1995 was 2.92%, 13.66%, and 11.63%, respectively.
Performance information for the Fund may be compared, in reports and
promotional literature, to: (i) the S&P's 500 Stock Index, Dow Jones Industrial
Average, or other unmanaged indices so that investors may compare the Fund's
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities market in general; (ii) other
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groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Fund. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for the Fund reflects only the performance of a
hypothetical investment in the Fund during the particular time period on which
the calculations are based. Performance information should be considered in
light of the Fund's investment objective and policies, characteristics and
quality of the portfolio and the market conditions during the given time period,
and should not be considered as a representation of what may be achieved in the
future.
From time to time, the Fund and the Investment Manager may also refer
to the following information:
(1) The Investment Manager's and its affiliates' market share of
international equities managed in mutual funds prepared or published by
Strategic Insight or a similar statistical organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley
Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance
Corporation, Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic and industry distribution of the Fund's
portfolio and the Fund's top ten holdings.
(5) The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due to
a liberalization of securities laws and a reduction of foreign exchange
controls, and improving communication technology, of various countries
as published by various statistical organizations.
(6) To assist investors in understanding the different returns and risk
characteristics of various investments, the Fund may show historical
returns of various investments and
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<PAGE>
published indices (E.G., Ibbotson Associates, Inc. Charts
and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
(9) Allegorical stories illustrating the importance of
persistent long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued
or "bargain" securities and its diversification by industry, nation and
type of stocks or other securities.
(12) Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing, including the following:
o "Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
- --------
* Sir John Templeton sold the Templeton organization to
Franklin Resources, Inc. in October, 1992 and resigned from
the Fund's Board on April 16, 1995. He is no longer
involved with the investment management process.
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<PAGE>
o "When buying stocks, search for bargains among quality
stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
In addition, the Fund and the Investment Manager may also refer to the
number of Shareholders in the Fund or the aggregate number of shareholders of
the Franklin Templeton Funds or the dollar amount of fund and private account
assets under management in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Fund's Annual Report to
Shareholders dated August 31, 1995 are incorporated herein by reference.
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