TEMPLETON GROWTH FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1995
IS NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS OF
TEMPLETON GROWTH FUND, INC. DATED
MAY 1, 1995, 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) 237-0738
TABLE OF CONTENTS
General Information and History
Investment Objective and Policies
-Investment Policies
-Repurchase Agreements
-Loans of Portfolio Securities
-Debt Securities
-Stock Index Futures Contracts
-Stock Index Options
-Investment Restrictions
-Risk Factors
-Trading Policies
-Personal Securities Transactions
Management of the Fund
Director Compensation
Principal Shareholders
Investment Management and Other
Services
-Investment Management Agreement
-Management Fees
-Templeton, Galbraith & Hansberger Ltd.
-Business Manager
-Custodian and Transfer Agent
-Legal Counsel
-Independent Accountants
-Reports to Shareholders
Brokerage Allocation
Purchase, Redemption and Pricing
of Shares
-Ownership and Authority
Disputes
-Tax-Deferred Retirement Plans
-Letter of Intent
-Special Net Asset Value Purchases
Tax Status
Principal Underwriter
Description of Shares
Performance Information
Financial Statements
GENERAL INFORMATION AND HISTORY
Templeton Growth Fund, Inc. (the "Fund") was incorporated in
Maryland on November 10, 1986 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end
diversified management investment company. The Fund is the
successor in interest to approximately 58% of Templeton Growth
Fund, Ltd., a Canadian corporation organized on September 1, 1954
(the "Canadian Fund"), which was reorganized on December 31, 1986
into two mutual funds. Under the reorganization, the Canadian
Shareholders of the Canadian Fund, representing 42% of the Shares
outstanding, remained Shareholders of the Canadian Fund and the
non-Canadian Shareholders, representing 58% of the Shares
outstanding, became Shareholders of the Fund. Accordingly, 58% of
the portfolio and other assets of the Canadian Fund were
transferred to the Fund for Shares of the Fund, which were
immediately transferred, on a Share for Share basis, to the
non-Canadian Shareholders in redemption of their holdings in the
Canadian Fund.
INVESTMENT OBJECTIVE AND POLICIES
Investment Policies. The Fund's investment objective and
policies are described in the Prospectus under the heading
"General Description--Investment Objective and Policies." The
Fund may invest for defensive purposes in commercial paper which,
at the date of investment, must be rated A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc.
("Moody's") or, if not rated, issued by a company which, at the
date of investment, has an outstanding debt issue rated AAA or AA
by S&P or Aaa or Aa by Moody's.
Repurchase Agreements. Repurchase agreements are contracts
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed upon price and
date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Templeton,
Galbraith & Hansberger Ltd. (the "Investment Manager") will
monitor the value of such securities daily to determine that the
value equals or exceeds the repurchase price. Repurchase
agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying
securities. The Fund will enter into repurchase agreements only
with parties who meet creditworthiness standards approved by the
Fund's Board of Directors, i.e., banks or broker-dealers which
have been determined by the Investment Manager to present no
serious risk of becoming involved in bankruptcy proceedings
within the time frame contemplated by the repurchase transaction.
Loans of Portfolio Securities. The Fund may lend to banks
and broker-dealers portfolio securities with an aggregate market
value of up to one-third of its total assets. Such loans must be
secured by collateral (consisting of any combination of cash,
U.S. Government securities or irrevocable letters of credit) in
an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The Fund
retains all or a portion of the interest received on investment
of the cash collateral or receives a fee from the borrower. The
Fund may terminate the loans at any time and obtain the return of
the securities loaned within five business days. The Fund will
continue to receive any interest or dividends paid on the loaned
securities and will continue to have voting rights with respect
to the securities. However, as with other extensions of credit,
there are risks of delay in recovery or even loss of rights in
collateral should the borrower fail.
Debt Securities. The Fund may invest in debt securities
which are rated at least Caa by Moody's or CCC by S&P or deemed
to be of comparable quality by the Investment Manager. As an
operating policy, the Fund will not invest more than 5% of its
assets in debt securities rated lower than Baa by Moody's or BBB
by S&P. The market value of debt securities generally varies in
response to changes in interest rates and the financial condition
of each issuer. During periods of declining interest rates, the
value of debt securities generally increases. Conversely, during
periods of rising interest rates, the value of such securities
generally declines. These changes in market value will be
reflected in the Fund's net asset value.
Bonds rated Caa by Moody's are of poor standing. Such
securities may be in default or there may be present elements of
danger with respect to principal or interest. Bonds rated CCC by
S&P are regarded, on balance, as speculative. Such securities
will have some quality and protective characteristics, but these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.
Although they may offer higher yields than do higher rated
securities, low rated and unrated debt securities generally
involve greater volatility of price and risk 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 credit-
worthiness analysis than would be the case if the Fund were
investing in higher rated securities.
Low rated debt securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate
changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments.
A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated
debt securities prices because the advent of a recession could
lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the
issuer of low rated debt securities defaults, the Fund may incur
additional expenses to seek recovery.
The Fund may accrue and report interest on high yield bonds
structured as zero coupon bonds or pay-in-kind securities as
income even though it receives no cash interest until the
security's maturity or payment date. In order to qualify for
beneficial tax treatment afforded regulated investment companies,
the Fund must distribute substantially all of its income to
Shareholders (see "Tax Status"). Thus, the Fund may have to
dispose of its portfolio securities under disadvantageous
circumstances to generate cash in order to satisfy the
distribution requirement.
Recent legislation, which requires federally insured savings
and loan associations to divest their investments in low rated
debt securities, may have a material adverse effect on the Fund's
net asset value and investment practices.
Stock Index Futures Contracts. The Fund's investment
policies also permit it to buy and sell stock index futures
contracts with respect to any stock index traded on a recognized
stock exchange or board of trade, to an aggregate amount not
exceeding 20% of the Fund's total assets at the time when such
contracts are entered into. Successful use of stock index
futures is subject to the Investment Manager's ability to predict
correctly movements in the direction of the stock markets. No
assurance can be given that the Investment Manager's judgment in
this respect will be correct.
A stock index futures contract is a contract to buy or sell
units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is
the current value of the stock index. For example, the Standard
& Poor's 500 Stock Index (the "S&P 500 Index") is composed of 500
selected common stocks, most of which are listed on the New York
Stock Exchange. The S&P 500 Index assigns relative weightings to
the value of one share of each of these 500 common stocks
included in the Index, and the Index fluctuates with changes in
the market values of the shares of those common stocks. In the
case of the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock
index futures contract specifies that no delivery of the actual
stocks making up the index will take place. Instead, settlement
in cash must occur upon the termination of the contract, with the
settlement being the difference between the contract price and
the actual level of the stock index at the expiration of the
contract. For example, if the Fund enters into a futures
contract to buy 500 units of the S&P 500 Index at a specified
future date at a contract price of $150 and the S&P 500 Index is
at $154 on that future date, the Fund will gain $2,000 (500 units
x gain of $4). If the Fund enters into a futures contract to
sell 500 units of the stock index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on that
future date, the Fund will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market
appreciation, the Fund may enter into a "long hedge" of common
stock which it proposes to add to its portfolio by purchasing
stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the
securities which the Fund proposes to purchase change in value in
correlation with the stock index contracted for, the purchase of
futures contracts on that index would result in gains to the Fund
which could be offset against rising prices of such common stock.
During or in anticipation of a period of market decline, the
Fund may "hedge" common stock in its portfolio by selling stock
index futures for the purpose of limiting the exposure of its
portfolio to such decline. To the extent that the Fund's
portfolio of securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index
could substantially reduce the risk to the portfolio of a market
decline and, by so doing, provide an alternative to the
liquidation of securities positions in the portfolio with
resultant transaction costs.
Parties to an index futures contract must make initial
margin deposits to secure performance of the contract, which
currently range from 1-1/2% to 5% of the contract amount.
Initial margin requirements are determined by the respective
exchanges on which the futures contracts are traded. There also
are requirements to make variation margin deposits as the value
of the futures contract fluctuates.
At the time the Fund purchases a stock index futures
contract, an amount of cash, U.S. Government securities, or other
highly liquid debt securities equal to the market value of the
contract will be deposited in a segregated account with the
Fund's custodian. When selling a stock index futures contract,
the Fund will maintain with its custodian liquid assets that,
when added to the amounts deposited with a futures commission
merchant or broker as margin, are equal to the market value of
the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning a portfolio with a volatility
substantially similar to that of the index on which the futures
contract is based, or holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than
the price of the contract written by the Fund (or at a higher
price if the difference is maintained in liquid assets with the
Fund's custodian).
Stock Index Options. The Fund may purchase and sell put and
call options on securities indices in standardized contracts
traded on national securities exchanges, boards of trade, or
similar entities, or quoted on NASDAQ. An option on a securities
index is a contract that gives the purchaser of the option, in
return for the premium paid, the right to receive from the writer
of the option, cash equal to the difference between the closing
price of the index and the exercise price of the option,
expressed in dollars, times a specified multiplier for the index
option. An index is designed to reflect specified facets of a
particular financial or securities market, a specific group of
financial instruments or securities, or certain indicators.
The Fund may write call options and put options only if they
are "covered." A call option on an index is covered if the Fund
maintains with its custodian cash or cash equivalents equal to
the contract value. A call option is also covered if the Fund
holds a call on the same index as the call written where the
exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the
exercise price of the call written, provided the difference is
maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian. A put option on an index
is covered if the Fund maintains cash or cash equivalents equal
to the exercise price in a segregated account with its custodian.
A put option is also covered if the Fund holds a put on the same
index as the put written where the exercise price of the put held
is (i) equal to or greater than the exercise price of the put
written, or (ii) less than the exercise price of the put written,
provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.
If an option written by the Fund expires, the Fund will
realize a capital gain equal to the premium received at the time
the option was written. If an option purchased by the Fund
expires unexercised, the Fund will realize a capital loss equal
to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, index, exercise price, and
expiration). There can be no assurance, however, that a closing
purchase or sale transaction can be effected when the Fund
desires.
Investment Restrictions. The Fund has imposed upon itself
certain Investment Restrictions, which together with the
Investment Objective and Policies are fundamental policies except
as otherwise indicated. No changes in the Fund's Investment
Objective and Policies or Investment Restrictions (except those
which are not fundamental policies) can be made without approval
of the Shareholders. For this purpose, the provisions of the
1940 Act require the affirmative vote of the lesser of either (A)
67% or more of the Shares present at a Shareholders' meeting at
which more than 50% of the outstanding Shares are present or
represented by proxy or (B) more than 50% of the outstanding
Shares of the Fund.
In accordance with these Restrictions, the Fund will not:
1. Invest in real estate or mortgages on real estate
(although the Fund may invest in marketable securities
secured by real estate or interests therein or issued
by companies or investment trusts which invest in real
estate or interests therein); invest in interests
(other than debentures or equity stock interests) in
oil, gas or other mineral exploration or development
programs; purchase or sell commodity contracts except
stock index futures contracts; invest in other open-end
investment companies or, as an operating policy
approved by the Board of Directors, invest in
closed-end investment companies.
2. Purchase or retain securities of any company in which
Directors or Officers of the Fund or of its Investment
Manager, individually owning more than 1/2 of 1% of the
securities of such company, in the aggregate own more
than 5% of the securities of such company.
3. Purchase more than 10% of any class of securities of
any one company, including more than 10% of its
outstanding voting securities, or invest in any company
for the purpose of exercising control or management.
4. Act as an underwriter; issue senior securities;
purchase on margin or sell short; write, buy or sell
puts, calls, straddles or spreads (but the Fund may
make margin payments in connection with, and purchase
and sell, stock index futures contracts and options on
securities indices).
5. Loan money, apart from the purchase of a portion of an
issue of publicly distributed bonds, debentures, notes
and other evidences of indebtedness, although the Fund
may buy Canadian and United States Government
obligations with a simultaneous agreement by the seller
to repurchase them within no more than seven days at
the original purchase price plus accrued interest.
6. Borrow money for any purpose other than redeeming its
Shares or purchasing its Shares for cancellation, and
then only as a temporary measure to an amount not
exceeding 5% of the value of its total assets, or
pledge, mortgage, or hypothecate its assets other than
to secure such temporary borrowings, and then only to
such extent not exceeding 10% of the value of its total
assets as the Board of Directors may by resolution
approve. (For the purposes of this Restriction,
collateral arrangements with respect to margin for a
stock index futures contract are not deemed to be a
pledge of assets.)
7. Invest more than 5% of the value of the Fund's total
assets in securities of issuers which have been in
continuous operation less than three years.
8. Invest more than 5% of the Fund's total assets in
warrants, whether or not listed on the New York or
American Stock Exchange, including no more than 2% of
its total assets which may be invested in warrants that
are not listed on those exchanges. Warrants acquired
by the Fund in units or attached to securities are not
included in this Restriction. This Restriction does
not apply to options on securities indices.
9. Invest more than 15% of the Fund's total assets in
securities of foreign issuers that are not listed on a
recognized United States or foreign securities
exchange, including no more than 10% of its total
assets (including warrants) which may be invested in
securities with a limited trading market. The Fund's
position in the latter type of securities may be of
such size as to affect adversely their liquidity and
marketability and the Fund may not be able to dispose
of its holdings in these securities at the current
market price.
10. Invest more than 25% of the Fund's total assets in a
single industry.
11. Invest in "letter stocks" or securities on which there
are sales restrictions under a purchase agreement.
12. Participate on a joint or a joint and several basis in
any trading account in securities.
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. The value of the Fund's assets is calculated as
described in the Prospectus under the heading "How to Buy Shares
of the Fund." Nothing in the Investment Policies or Investment
Restrictions (except Restrictions 9 and 10) shall be deemed to
prohibit the Fund from purchasing securities pursuant to
subscription rights distributed to the Fund by any issuer of
securities held at the time in its portfolio (as long as such
purchase is not contrary to the Fund's status as a diversified
investment company under the 1940 Act).
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
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 and securities of some
foreign companies are less liquid and more volatile than
securities of comparable United States companies. Although the
Fund may invest up to 15% of its total assets in unlisted foreign
securities, including not more than 10% of its total assets in
securities with a limited trading market, in the opinion of
management such securities with a limited trading market do not
present a significant liquidity problem. Commission rates in
foreign countries, which are generally fixed rather than subject
to negotiation as in the 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 liqui-
dity 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.
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
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's management endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price
spread on currency exchange (to cover service charges) may be
incurred, particularly when the Fund changes investments from one
country to another or when proceeds of the sale of Shares in U.S.
dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would
prevent the Fund from transferring cash out of the country or
withhold portions of interest and dividends at the source. There
is the possibility of cessation of trading on national exchanges,
expropriation, nationalization or confiscatory taxation,
withholding and other foreign taxes on income or other amounts,
foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in
foreign government securities, political or social instability,
or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations
and by indigenous economic and political developments. Some
countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally
traded. Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable
developments in particular nations where, from time to time, it
places the 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
will always be correct or that such exchange control restrictions
or political acts of foreign governments might not occur.
There are additional risks involved in stock index futures
transactions. These risks relate to the Fund's ability to reduce
or eliminate its futures positions, which will depend upon the
liquidity of the secondary markets for such futures. The Fund
intends to purchase or sell futures only on exchanges or boards
of trade where there appears to be an active secondary market,
but there is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. Use
of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the
stock index futures on the one hand and movements in the prices
of the securities being hedged or of the underlying stock index
on the other. Successful use of stock index futures by the Fund
for hedging purposes also depends upon the Investment Manager's
ability to predict correctly movements in the direction of the
market, as to which no assurance can be given.
There are several risks associated with transactions in
options on securities indices. For example, there are
significant differences between the securities and options
markets that could result in an imperfect correlation between
these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use
options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected events. There can be no
assurance that a liquid market will exist when the Fund seeks to
close out an option position. If the Fund were unable to close
out an option that it had purchased on a securities index, it
would have to exercise the option in order to realize any profit
or the option may expire worthless. If trading were suspended in
an option purchased by the Fund, it would not be able to close
out the option. If restrictions on exercise were imposed, the
Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by
the Fund is covered by an option on the same index purchased by
the Fund, movements in the index may result in a loss to the
Fund; however, such losses may be mitigated by changes in the
value of the Fund's securities during the period the option was
outstanding.
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 these funds and clients may contain many or some of
the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the
same security, the transactions will be placed for execution 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 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:
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
CHARLES B. JOHNSON* President, chief executive
777 Mariners Island officer, and director of
Boulevard Franklin Resources, Inc.;
San Mateo, California chairman of the board and
Director and Vice director of Franklin Advisers,
President Inc. and Franklin Templeton
Distributors, Inc.; director
of Franklin Administrative
Services, Inc., General Host
Corporation, and Templeton
Global Investors, Inc.; and
officer and director, trustee
or managing general partner,
as the case may be, of most
other subsidiaries of Franklin
and of 55 of the investment
companies in the Franklin
Templeton Group.
HARRIS J. ASHTON Chairman of the Board,
Metro Center, 1 Station president and chief executive
Place officer of General Host
Stamford, Connecticut Corporation (nursery and craft
Director centers); director of RBC
Holdings Inc. (a bank holding
company) and Bar-S Foods; and
director, trustee or managing
general partner, as the case
may be, for most of the
investment companies in the
Franklin Templeton Group.
S. JOSEPH FORTUNATO Member of the law firm of
200 Campus Drive Pitney, Hardin, Kipp & Szuch;
Florham Park, New Jersey director of General Host
Director Corporation; and director,
trustee or managing general
partner, as the case may be,
for most of the investment
companies in the Franklin
Templeton Group.
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
F. BRUCE CLARKE Retired; former credit
19 Vista View Blvd. advisor, National Bank of
Thornhill, Ontario Canada, Toronto; and a
Director director or trustee of other
Templeton Funds.
HASSO-G VON DIERGARDT-NAGLO Farmer; president of
R.R. 3 Clairhaven Investments, Ltd.
Stouffville, Ontario and other private investment
Director companies; and a director or
trustee of other Templeton
Funds.
JOHN G. BENNETT, JR. Founder, chairman of the
3 Radnor Corporate board, and president of the
Center, Suite 150 Foundation for New Era
100 Matsonford Road Philanthropy; president and
Radnor, Pennsylvania chairman of the boards of the
Director Evelyn M. Bennett Memorial
Foundation and NEP
International Trust; chairman
of the board and chief
executive officer of The
Bennett Group International,
LTD; chairman of the boards of
Human Service Systems, Inc.
and Multi-Media
Communications, Inc.; director
or trustee of many national
and international
organizations, universities,
and grantmaking foundations
serving in various executive
board capacities; and member
of the Public Policy Committee
of the Advertising Council.
FRED R. MILLSAPS Manager of personal
2665 NE 37th Drive investments (1978-present);
Fort Lauderdale, Florida chairman and chief executive
Director officer of Landmark Banking
Corporation (1969-1978);
financial vice president of
Florida Power and Light (1965-
1969); vice president of
Federal Reserve Bank of
Atlanta (1958-1965); director
of various other business and
nonprofit organizations.
Name, Address and Principal Occupation
Office with Fund During Past Five Years
BETTY P. KRAHMER Director or trustee of various
2201 Kentmere Parkway civic associations; and former
Wilmington, Delaware economic analyst, U.S.
Director Government.
ANDREW H. HINES, JR. Consultant, Triangle
150 2nd Avenue N. Consulting Group; chairman of
St. Petersburg, Florida the board and chief executive
Director 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); director of
Checkers Drive-In Restaurants,
Inc.; and a director or
trustee of other Templeton
Funds.
GORDON S. MACKLIN Chairman of White River
8212 Burning Tree Road Corporation (information
Bethesda, Maryland services); director of Fund
Director 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;
president of the National
Association of Securities
Dealers, Inc.; and director,
trustee, or managing general
partner, as the case may be,
of most of the investment
companies in the Franklin
Templeton Group.
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
NICHOLAS F. BRADY* Chairman, Templeton Emerging
The Bullitt House Markets Investment Trust PLC;
102 East Dover Street chairman, Templeton Latin
Easton, Maryland America Investment Trust PLC;
Director 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 of
the board of Dillion, Read &
Co Inc. (investment banking)
prior thereto; and director or
trustee of other Templeton
Funds.
MARK G. HOLOWESKO President and director of
Lyford Cay Templeton, Galbraith &
Nassau, Bahamas Hansberger Ltd.; director of
President global equity research for
Templeton Worldwide, Inc.;
president or vice president of
the Templeton Funds; and
investment administrator with
Roy West Trust Corporation
(Bahamas) Limited (1984-1985).
MARTIN L. FLANAGAN Senior vice president,
777 Mariners Island treasurer and chief financial
Blvd. officer of Franklin Resources,
San Mateo, California Inc., director, chief
Vice President executive officer and
executive vice president of
Templeton Investment Counsel,
Inc.; director, president and
chief executive officer of
Templeton Global Investors,
Inc.; director or trustee and
president or vice president of
various Templeton Funds;
accountant, Arthur Andersen &
Company (1982-1983); and
member of the International
Society of Financial Analysts
and the American Institute of
Certified Public Accountants.
Name, Address and Principal Occupation
Offices with Fund During Past Five Years
JOHN R. KAY Vice president of the
500 East Broward Blvd. Templeton Funds; vice
Fort Lauderdale, Florida president and treasurer of
Vice President Templeton Global Investors,
Inc. and Templeton Worldwide,
Inc.; assistant vice president
of Franklin Templeton
Distributors, Inc.; formerly,
vice president and controller
of the Keystone Group, Inc.
THOMAS M. MISTELE Senior vice president of
700 Central Avenue Templeton Global Investors,
St. Petersburg, Florida Inc.; vice president of
Secretary Franklin Templeton
Distributors, Inc.; secretary
of the Templeton Funds;
attorney, Dechert Price &
Rhoads (1985-1988) and
Freehill, Hollingdale & Page
(1988); and judicial clerk,
U.S. District Court (Eastern
District of Virginia)
(1984-1985).
JAMES R. BAIO Certified public accountant;
500 East Broward Blvd. treasurer of the Templeton
Fort Lauderdale, Florida Funds; senior vice president
Treasurer of Templeton Worldwide, Inc.,
Templeton Global Investors,
Inc., and Templeton Funds
Trust Company; formerly,
senior tax manager of Ernst &
Young (certified public
accountants) (1977-1989).
JACK L. COLLINS Assistant treasurer of the
700 Central Avenue Templeton Funds; assistant
St. Petersburg, Florida vice president of Franklin
Assistant Treasurer Templeton Investor Services,
Inc.; formerly, partner of
Grant Thornton, independent
public accountants.
JEFFREY L. STEELE Partner, Dechert Price &
1500 K Street, N.W. Rhoads.
Washington, D.C.
Assistant Secretary
_________________________
* Messrs. Johnson and Brady 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, Galbraith &
Hansberger, Ltd. are limited partners of Darby Emerging Markets
Fund, L.P. Messrs. von Diergardt-Naglo, Clarke, Ashton,
Fortunato, Millsaps, Hines, Macklin and Bennett and Mrs. Krahmer
are Directors who are not "interested persons" of the Fund.
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, based upon the assets of the Fund as of December 31,
1994, the Fund currently pays the independent Directors and Mr.
Brady an annual retainer of $10,000 and a fee of $800 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 for the fiscal year ended December 31,
1994:
<PAGE>
Aggregate Number of Total Compensation
Compensation Franklin from all Funds in
from the Fund Templeton Fund Franklin Templeton
Boards on Which Group
Name of Director Directer Serves
Harris J. Ashton $6,300 54 $319,925
John G. Bennett Jr. 8,300 23 105,625
Nicholas F. Brady 6,300 23 86,125
F. Bruce Clarke 8,300 19 95,275
Hasso-G von Diergardt
-Naglo 6,300 19 75,275
S. Joseph Fortunato 6,300 56 336,065
Andrew H. Hines, Jr.8,300 23 106,125
Betty P. Krahmer 6,300 19 75,275
Gordon S. Macklin 6,300 51 303,685
Fred R. Millsaps 8,300 23 106,125
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, there were 345,261,414 Shares of the
Fund outstanding, of which 89,954 Shares (0.026%) were owned
beneficially, directly or indirectly, by all the Directors and
officers of the Fund as a group. As of March 31, 1995, to the
knowledge of management, no person owned beneficially 5% or more
of the outstanding Shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Management Agreement. The Investment Manager of
the Fund is Templeton, Galbraith & Hansberger Ltd., a Bahamian
corporation with offices in Nassau, Bahamas. On October 30,
1992, the Investment Manager assumed the investment management
duties of Templeton, Galbraith & Hansberger Ltd. ("Old TGH"), a
Cayman Islands corporation, with respect to the Fund in
connection with the merger of the business of Old TGH with that
of Franklin Resources, Inc. ("Franklin"). The Investment
Management Agreement, dated October 30, 1992, was approved by the
Shareholders of the Fund on October 30, 1992, was last approved
by the Board of Directors, including a majority of the Directors
who were not parties to the Agreement or interested persons of
any such party, at a meeting on December 6, 1994, and will
continue through December 31, 1995. The Investment Management
Agreement continues from year to year, subject to approval
annually by the Board of Directors 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.
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.
The Investment Manager renders its services to the Fund from
outside the United States. When the Investment Manager
determines to buy or sell the same securities for the Fund that
the Investment Manager or one or more of its affiliates has
recommended for one or more of its other clients or for clients
of its affiliates, the orders for all such securities
transactions are placed for execution by methods determined by
the Investment Manager, with approval by the Fund's Board of
Directors, to be impartial and fair, in order to seek good
results for all parties (see "Investment Objective and Policies
-- Trading Policies" above). Records of securities transactions
of persons who know when orders are placed by the Fund are
available for inspection at least four times annually by the
compliance officer of the Fund so that the non-interested
Directors (as defined in the 1940 Act) can be satisfied that the
procedures are generally fair and equitable for all parties.
The Investment Management Agreement provides that the
Investment Manager shall have no liability to the Fund or any
Shareholder of the Fund for any error of judgment, mistake of
law, or any loss arising out of any investment or other act or
omission in the performance by the Investment Manager of its
duties under the Investment Management Agreement, or for any loss
or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of
the Fund's assets, or from acts or omissions of custodians or
security depositories, or from any wars or political acts of any
foreign governments to which such assets might be exposed, except
for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment
Manager's part or reckless disregard of its duties under the
Investment Management Agreement. The Investment Management
Agreement will terminate automatically in the event of its
assignment, and may be terminated by the Fund at any time without
payment of any penalty on 60 days' written notice, with the
approval of a majority of the Directors of the Fund in office at
the time or by vote of a majority of the outstanding Shares of
the Fund (as defined in the 1940 Act).
Management Fees. For its services, the Fund pays the
Investment Manager a monthly fee equal on an annual basis to
0.75% of its average daily net assets up to $200,000,000, reduced
to a fee of 0.675% of such net assets in excess of $200,000,000,
and further reduced to a fee of 0.60% of such net assets in
excess of $1,300,000,000. Each class of Shares pays a portion of
the fee, determined by the proportion of the Fund that it
represents. The Investment Manager will comply with any
applicable state regulations which may require the Investment
Manager to make reimbursements to the Fund in the event that the
Fund's aggregate operating expenses, including the management
fee, but generally excluding interest, taxes, brokerage
commissions and extraordinary expenses, are in excess of specific
applicable limitations. The strictest rule currently 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, 1994, 1993, and
1992, the Investment Manager (and, prior to October 30, 1992, Old
TGH, the Fund's previous investment manager) received from the
Fund fees of $29,634,284, $22,294,296, and $17,858,042,
respectively, pursuant to the Agreement and agreements in effect
prior to October 30, 1992.
Templeton, Galbraith & Hansberger Ltd. The Investment
Manager is an indirect wholly owned subsidiary of Franklin, a
publicly traded company whose shares are listed on the New York
Stock Exchange. 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 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
routine correspondence and other communications with
individual Shareholders;
daily pricing of the Fund's investment portfolio and
preparing and supervising publication of daily
quotations of the bid and asked prices of the Fund's
Shares, earnings reports and other financial data;
monitoring relationships with organizations serving the
Fund, including the Custodian and printers;
providing trading desk facilities to the Fund;
supervising compliance by the Fund with recordkeeping
requirements under the 1940 Act and the rules and
regulations thereunder, 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 tax-deferred
retirement plans providing for investment in Shares of
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 net 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
together may be higher than those of some other investment
companies. During the fiscal years ended August 31, 1994, 1993,
and 1992, the Business Manager (and, prior to April 1, 1993,
Templeton Funds Management, Inc., the previous business manager)
received business management fees of $4,138,659, $3,221,160, and
$2,925,761, 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, gross negligence or reckless disregard of
its duties and obligations under the Agreement. 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.
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 domestically, and
frequently abroad, do not actually 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 the transfer agents of the issuers of the
securities. Compensation for the services of the Custodian is
based on a schedule of charges agreed on from time to time.
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 and the Internal Revenue Service.
Reports to Shareholders. The Fund's fiscal year ends on
August 31. Shareholders are provided at least semiannually with
reports showing the Fund's portfolio and other information,
including an annual report with financial statements audited by
the independent accountants.
BROKERAGE ALLOCATION
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 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
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 the research services
provided lawful and appropriate assistance to the
Investment Manager in the performance of its investment
decision-making responsibilities, and that commissions
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 shall
be 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
include also shares of other companies registered under
the 1940 Act which have either the same investment
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 either of them, has any material
direct or indirect interest in any broker employed by or on
behalf of the Fund. Neither the Principal Underwriter nor
Templeton Global Strategic Services S.A. (see "Principal
Underwriter") has ever executed any purchase or sale transactions
for the Fund's portfolio or participated in commissions on any
such transactions, and neither has any intention of doing so in
the future. The total brokerage commissions on the portfolio
transactions for the Fund during the fiscal years ended
August 31, 1994, 1993, and 1992 (not including any spreads or
concessions on principal transactions) were $6,914,000,
$4,154,000, and $3,412,349, respectively. All portfolio
transactions are allocated to broker-dealers only when their
prices and execution, in the good faith 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."
Net asset value per Share is determined as of the scheduled
closing of the New York Stock Exchange (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
New York Stock Exchange is closed, which 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
New York Stock Exchange 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
New York Stock Exchange 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 New York
Stock Exchange is closed other than for customary weekend and
holiday closings, (2) trading on the New York Stock Exchange 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
Securities and Exchange Commission may by order permit for the
protection of the holders of the Fund's 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: (a) freeze the account and require the written
agreement of all persons deemed by the Fund to have a potential
property interest in the account, prior to executing instructions
regarding the account; or (b) 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 Internal Revenue Service 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:
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 receives the
participant's election on IRS Form W-4P (available on request
from Franklin Templeton Trust Company) 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
Individual Retirement Account. 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 Individual
Retirement Accounts are available through Franklin Templeton
Trust Company. Disclosure statements summarizing certain aspects
of Individual Retirement Accounts are furnished to all persons
investing in such accounts, in accordance with Internal Revenue
Service 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
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 Franklin Templeton Trust
Company.
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 Internal
Revenue Service. A "Section 401(k) plan" is also available.
Franklin Templeton Trust Company 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 Templeton Group (except Templeton Capital Accumulator
Fund, Inc., Templeton Variable Annuity Fund, Templeton Variable
Products Series Fund, Franklin Valuemark Funds and Franklin
Government Securities Trust) 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
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 Group (except
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, Templeton Variable Products Series Fund, Franklin
Valuemark Funds and Franklin Government Securities Trust) 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
rollovers): 1.00% on sales of $1 million but less than $2
million, 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.
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
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
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.
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.
Certain options and futures contracts in which the Fund may
invest are "section 1256 contracts." Gains or losses on section
1256 contracts generally are considered 60% long-term and 40%
short-term capital gains or losses ("60/40"); however, foreign
currency gains or losses (as discussed below) arising from
certain section 1256 contracts may be treated as ordinary income
or loss. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates as
prescribed pursuant to the Code) are "marked to market" with the
result that unrealized gains or losses are treated as though they
were realized.
Generally, the hedging transactions undertaken by the Fund
may result in "straddles" for U.S. Federal income tax purposes.
The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by a Fund on
positions that are part of the straddle may be deferred under the
straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences to
the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income
when distributed to Shareholders.
The Fund may make one or more of the elections available
under the Code which are applicable to straddles. If the Fund
makes any of the elections, the amount, character, and timing of
the recognition of gains or losses from the affected straddle
positions will be determined under rules that vary according to
the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the
recognition of gains or losses from the affected straddle
positions, the amount which must be distributed to Shareholders
and which will be taxed to Shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared
to a fund that did not engage in such hedging transactions.
Requirements relating to the Fund's tax status as a
regulated investment company may limit the extent to which the
Fund will be able to engage in transactions in options and
futures contracts.
The Fund may accrue and report interest income on discount
bonds such as zero coupon bonds or pay-in-kind securities, even
though the Fund receives no cash interest until the security's
maturity or payment date. In order to qualify for beneficial tax
treatment afforded regulated investment companies, and to
generally be relieved of Federal tax liabilities, the Fund must
distribute substantially all of its net investment income and
gains to Shareholders on an annual basis. Thus, the Fund may
have to dispose of portfolio securities under disadvantageous
circumstances to generate cash or leverage itself by borrowing
cash in order to satisfy the distribution requirement.
Some of the debt securities may be purchased by the Fund at
a discount which exceeds the original issue discount on such debt
securities, if any. This additional discount represents market
discount for Federal income tax purposes. The gain realized on
the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does
not exceed the accrued market discount on such debt security.
Generally, market discount accrues on a daily basis for each day
the debt security is held by the Fund at a constant rate over the
time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity which takes
into account the semiannual compounding of interest.
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 and on disposition of certain financial
contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of
acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These
gains and losses, referred to under the Code as "section 988"
gains and losses, may increase or decrease the amount of 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 a Fund must
distribute in order to qualify for treatment as a regulated
investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for
distribution. If section 988 losses exceed other net investment
income during a taxable year, 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
generally 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
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 Internal Revenue Service notifies the
Shareholder or the Fund that the Shareholder has failed to report
properly certain interest and dividend income to the Internal
Revenue Service and to respond to notices to that effect, or (3)
when required to do so, the Shareholder fails to certify that he
is not subject to backup withholding. Any amounts withheld may
be credited against the Shareholder's Federal income tax
liability.
Ordinary dividends and taxable capital gain distributions
declared in October, November, or December with a record date in
such month and paid during the following January will be treated
as having been paid by 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. Shareholders are advised to consult their own tax
advisers for details with respect to the particular tax
consequences to them of an investment in either Fund. U.S. tax
rules applicable to foreign investors may differ significantly
from those outlined above. In particular, Shareholders of the
Fund who are citizens or residents of Germany, the Netherlands,
Luxembourg or other countries are specifically advised to consult
their tax advisers with respect to the U.S. and foreign tax
consequences 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
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 attributable to Class I Shares)
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) payments 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, 1994, FTD incurred
costs and expenses of $10,638,858 in connection with distribution
of Class I Shares of the Fund, which amount was reimbursed by the
Fund pursuant to the Plan. FTD has informed the Fund that it had
no unreimbursed expenses for Class I Shares of the Fund under the
Plan at August 31, 1994. 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, 1994,
FTD spent, pursuant to the Plan, the following amounts on:
compensation to dealers, $7,901,514; sales promotion, $171,940;
printing, $676,706; advertising, $1,726,776; and wholesale costs
and expenses, $161,922.
The Underwriting Agreement provides that the Principal
Underwriter will use its best efforts to maintain a broad
distribution of the Fund's Shares among bona fide investors and
may sign selling contracts with responsible dealers as well as
sell to individual investors. The Shares are sold to the public
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. During
the fiscal years ended August 31, 1994, 1993, and 1992, Franklin
Templeton Distributors, Inc. (and, prior to June 1, 1993,
Templeton Funds Distributor, Inc.) retained of such discount
$5,682,478, $3,162,262, and $2,476,658, or approximately 16.12%,
22.30%, and 14.30% of the gross sales commissions, respectively.
The Principal Underwriter in all cases buys Shares from the Fund
acting as principal for its own account. Dealers generally act
as principal for their own account in buying Shares from the
Principal Underwriter. No agency relationship exists between any
dealer and the Fund or the Principal Underwriter.
The Underwriting 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 securities laws of the jurisdictions in which the
Principal Underwriter desires to distribute the Shares, and for
preparing, printing and distributing prospectuses and reports to
Shareholders. The Principal Underwriter is responsible 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 Underwriting 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
Underwriting 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
Underwriting Agreement, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its
obligations.
The Underwriting Agreement provides that FTD shall be
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. Noramco (Europa) A.G., whose office address is P.O.
Box 470, Aeulestrasse 5, FL-9490 Vaduz, Liechtenstein, is
principal underwriter for sale of the Shares in Germany,
Luxembourg, The Netherlands, Switzerland, Liechtenstein, and
Austria. Templeton Global Strategic Services S.A. ("Templeton
Strategic Services"), whose office address is Centre Neuberg, 30
Grand Rue, L-1660 Luxembourg, is principal underwriter for sale
of the Shares in all countries in Europe with the exception of
those countries for which Noramco serves as principal
underwriter. The terms of the underwriting agreements with
Templeton Strategic Services and Noramco are substantially
similar to those of the Underwriting Agreement with FTD.
Templeton Strategic Services is an indirect wholly owned
subsidiary of Franklin. During the fiscal year ended August 31,
1994, Templeton Strategic Services retained $445,047 in sales
commissions in connection with sales in its territories and
Noramco retained $1,311,876 in sales commissions in connection
with sales in its territories.
Franklin Templeton Distributors, Inc. 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,
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 average annual
total return for the one-, five- and ten-year periods ended
August 31, 1994 was 10.75%, 11.17% and 15.03%, respectively.
Performance information for the Fund may be compared, in
reports and promotional literature, to: (i) the Standard &
Poor'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 groups of mutual funds tracked by Lipper
Analytical Services, Inc., a widely used independent research
firm which ranks mutual funds by overall performance, investment
objectives and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an
investment in 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 distribution of the Fund's portfolio.
(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
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:
"Never follow the crowd. Superior performance is
possible only if you invest differently from the
crowd."
"Diversify by company, by industry and by
country."
"Always maintain a long-term perspective."
"Invest for maximum total real return."
"Invest - don't trade or speculate."
"Remain flexible and open-minded about types of
investment."
"Buy low."
"When buying stocks, search for bargains among
quality stocks."
"Buy value, not market trends or the economic
outlook."
"Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
"Do your homework or hire wise experts to help
you."
"Aggressively monitor your investments."
"Don't panic."
"Learn from your mistakes."
________________________
* 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.
"Outperforming the market is a difficult task."
"An investor who has all the answers doesn't even
understand all the questions."
"There's no free lunch."
"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 in the Franklin Templeton Group or the
dollar amount of fund and private account assets under management
in advertising materials.
FINANCIAL STATEMENTS
The financial statements included in the Fund's 1994 Annual
Report to Shareholders are incorporated herein by reference.
